ABC’s of Health Insurance: From HMO to PPO

With the spotlight on coronavirus, medical care and the means to pay for medical care become ever important. Just one visit to the doctor averages $200-$600, and hospitalizations cost anywhere in the tens to hundreds of thousands of dollars! Most people do not have that kind of money laying around, and even if you do, would you want to spend it all on medical bills? Health insurance allows you to pay only a fraction of the cost of medical care, while the insurance company pays the rest. Like any other insurance, you pay on a regular basis for the insurance, no matter if you are sick or healthy. But in the event that you require medical attention, the cost of care won’t become a huge burden to your finances.

The case for having health insurance can be a topic of debate, with some countries mandating universal health care through public funding and taxes and others leaving the decision up to the individual. Given the cost of medical care nowadays, the case for having health insurance seems like an easy choice. What’s not so easy is deciphering the language of health insurance, especially when deciding which insurance plan to choose. Use the glossary below to help you “talk the talk” of health insurance!

Glossary

  • Coinsurance: The percentage (%) you owe for medical services. If your coinsurance is 20%, you pay $50 of that $250 medical bill (or 20% x $250).
  • Copay: The fee per doctor visit. A $25 copay for an office visit means you only pay $25 for the visit, instead of the full rate. Some insurance plans use a copay for urgent care visits and ER visits too.
  • Deductible: The amount you pay before insurance benefits kick in. For example, if you have a $1,000 deductible along with 20% coinsurance on a medical procedure that costs $5,000, you pay a total of $1,800 = $1,000 deductible + $800 coinsurance ($4,000 remaining x 20% coinsurance). Ever hear of high-deductible health plans (HDHP)? That means the deductible is higher than normal, usually starting in the thousands of dollars.
  • EPO: Exclusive Provider Organization, or EPO, is a type of health insurance plan that restricts all medical benefits to network providers and hospitals. Any care sought outside of the network will not be covered.
  • HMO: Health Maintenance Organization is another type of health insurance plan that adds more restrictions, but offers lower medical costs like little or no deductible and lower coinsurance. The main difference between an HMO plan and EPO/PPO plan is that the HMO typically requires a referral from your primary doctor to see anyone else for a medical problem. In an effort to keep costs low, it is rare that you will ever be referred out-of-network, so when choosing an HMO, make sure you are comfortable with the network of providers and hospitals.
  • HSA: Health Spending Account, or HSA, allows you to save money from your paycheck to be used solely for medical expenses (cannot be used for premiums). The benefit to using an HSA vs. paying from your own pocket is that money saved in an HSA never gets taxed. For instance, if your income tax is 13%, only $1 of every $1.15 earned goes in your pocket. Fifteen cents ($0.15) goes to taxes. Putting that money in an HSA means you get to keep the entire $1.15, but only spend it on health care.
  • In-Network: These are the preferred providers for your insurance plan. In-network providers and hospitals charge a lower copay or coinsurance than out-of-network options. With HMO and EPO plans, your benefits may not even extend beyond in-network providers, so seeking care outside of the preferred provider directory would mean paying for medical expenses on your own.
  • Out-Of-Network: Health insurance companies require you to pay more to see out-of-network doctors and hospitals. In the case of HMO or EPO, you will likely pay the full rate to seek out-of-network care, since no insurance benefits apply.
  • Out-Of-Pocket Max: Once you spend the out-of-pocket maximum for the year, the insurance will take over all expenses beyond that limit. Let’s say your out-of-pocket max is $3,000 in a given year, once you have paid $3,000 in medical expenses that year, the insurance will pay any remaining or future medical expenses for the year.
  • PCP: Primary Care Physicians, or PCP, are the doctors who provide general care like conducting annual physicals or treating common colds. They refer you to other doctors, or specialists, when the medical issue is beyond their scope. HMO plans usually require selecting a PCP, so all care must either be performed by or referred by the PCP.
  • PPO: Preferred Provider Organization, or PPO, is a type of health insurance plan that allows you to see any provider you choose, no referral necessary. It costs less to see in-network doctors compared to out-of-network doctors, but you have freedom of choice. This choice comes at a higher cost to you, which becomes noticeable in the deductible or coinsurance. If the PPO plan carries a low deductible or low copay and coinsurance amounts, you will likely pay a higher premium for that plan.
  • Premiums: The premium is what you pay on a regular basis for health insurance. If your employer offers health insurance, they usually pay a significant portion of the premium, and you are left with a smaller chunk of the premium. That is why when people leave or lose their jobs and elect to keep the health insurance plan (otherwise known as COBRA), they notice a spike in insurance premiums. The insurance company is not charging more. It’s just the combined cost of paying both employee and employer premiums.

Homework: What type of health insurance do you have? HMO, EPO, or PPO? Become familiar with the deductible, copay and coinsurance. How does the plan suit your needs?

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Diversification

Ever hear the saying, “Don’t put all your eggs in one basket?” Just like eggs, your money is fragile. If the basket drops or breaks, you’re out of luck. That is why you need diversification. Essentially, diversification means spreading your money (eggs) into more than one investment (basket). This way, if one of your investments loses money, at least you have other investments.

What “baskets” can you choose from? First, you need to decide on a type of investment for each basket. The types of investments can be exhausting and some types even offer derivatives, so let’s just keep it high-level: cash, stocks, bonds, real estate. We previously covered these types of investments in the lesson on Compound Interest. So many choices! With diversification, you don’t have to choose just one, in fact, you should spread your money across them all.

“Baskets” are not to be confused with accounts. You can have one account with many investments inside. For example, your retirement account may have a blend of stocks, bonds, and other investments.

There’s more to diversification than deciding what type of investment to place your money in. Diversification extends to the sector you’re investing in as well. Let’s use stocks, which carry a lot of variety. You could invest in telecommunications, medicine, entertainment, finance, and the list goes on. So instead of choosing just one sector, invest your money in different sectors to allow for the best outcome if one or more of your sectors hits a rough patch.

If you are an employee of a publicly traded company on the stock market, your company might give the option to purchase company stock at a discount or they may offer company stock as one of the choices for investing within the 401(k) plan or you can simply choose to invest in the stock in your own brokerage account. It’s tempting because it’s an easy choice. Be very careful when choosing to put money into company stock. While it’s fine to invest in the company you work for, after all it’s a show of pride and support for your work, you don’t want to place a lot of “stock” in one place (couldn’t help the pun!). Think of it this way. What if the company takes a tumble on the stock market and as a result, lays off a bunch of employees, including you? Now you’ve lost both your salary and savings, if you invested your savings in company stock. So again, while it’s ok to invest in your company, limit your investments there, and remember to diversify!

Diversification is a timeless strategy that you can use for investing, but it becomes particularly useful when markets are taking a dip. That is because you may see a lot of your investments lose money, but if you diversify, some investments may trend the other direction, up. It’s important to diversify your investments across as many possible areas, so that you can brave the roller coaster of investing like a pro!

Homework: Choose 3 stocks from different sectors to follow over the course of one week. How did they perform compared to each other? If they all lost money, expand your stock selection to 10 stocks the following week. Was there one sector that did better than the others?

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America Saves Week: February 24-29, 2020

Next week marks an annual campaign that started in 2007 and continues this year 2020: America Saves Week. Even if you do not live in the United States, it’s a neat way to keep savings top of mind. Each day — February 24 to February 29 — is a new savings focus. And the great thing is, we already covered the topics in past lessons! Next week is a great time to refresh your understanding and act on your knowledge! Here is the focus for each day of America Saves Week and links to past lessons that match the daily focus.

Monday, February 24: Save Automatically

Tuesday, February 25: Save with a Plan

Wednesday, February 26: Save for the Unexpected

Thursday, February 27: Save to Retire

Friday, February 28: Save by Reducing Debt

Saturday, February 29: Save as a Family

One of the best ways you can embrace this challenge is to set a simple savings goal. Baby steps are easier to achieve and when done over a period of time, add up to BIG savings. For instance, increase your retirement 401(k) savings by 1%. Or ask your family to skip one day of buying coffee each week and put that money towards a savings goal. Add an extra $20 each month to your rainy day fund. Whatever you decide to do, be proud that you are taking a huge step by making savings a priority!

Learn more about America Saves Week by visiting https://americasavesweek.org/

Homework: There is one day missing from America Saves Week — Sunday. What savings tagline would you give that day? What simple savings goal did you come up with?

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Paying For College: Ways To Save

Last week, we examined how decisions play an important role in paying for college. This week, we look at ways to pay for college. While parents usually assume the responsibility of funding their kids’ education, kids can also be involved in saving for their own education. Let’s look at the ways to save and pay for college.

529 Plan

One of the most popular ways to save for college is through a 529 plan. Named after Section 529 of the IRS tax code, you guessed it! There are tax benefits to saving in this type of account. The main tax benefits are that your savings grow tax-deferred, and your withdrawals are tax-free if used for qualified education expenses. Depending on the state you live in, contributions to the 529 plan may be deductible for state tax purposes, but are not tax-deductible on federal taxes. Not all states offer a 529 plan, but you can still open a 529 plan offered by another state. Keep in mind that a 529 plan is like the flower pot we reference time and time again. You choose the “seed” investments that go in the account, so you can gain or lose money, depending on how your investments perform. We’ll take a deeper dive into the 529 plan in the future, but there is a good introduction provided by the U.S. Securities and Exchange Commission.

Prepaid Tuition Plans

We won’t spend much time on Prepaid Tuition Plans because only a few states offer this option. If you live in a state that offers this option, the plan allows you to buy future credits at today’s tuition prices. As an example, if one course credit costs $1,000 today, but doubles to $2,000 by the time you go to college, you essentially got a 50% discount on education. Think of it as locking in tuition at today’s prices. The downside to this plan is that you are pretty much stuck with choosing a participating in-state college. Although your state’s Prepaid Tuition Plan may offer some portability to other in-state and out-of-state colleges, the penalties and reduced benefits of choosing non-participating colleges make other savings options more viable.

Non-Qualified Account

If you want the most freedom and flexibility, then a non-qualified account will be your best choice for college savings. This can be through a bank savings account or a brokerage account (which allows for investments beyond cash). Like a 529 plan, your savings can go up or down, based on what you invest in. Unlike a 529 plan, your earnings don’t receive any tax benefits, so taxes take a bigger chunk out of savings. However, you can use the money however you choose, even if it’s not for college. The previous options are not as forgiving when withdrawing money for other non-education expenses, charging an extra 10% withdrawal penalty, in addition to taxes on withdrawals.

Financial Aid

We mentioned last week that scholarships are worth a try, since they are essentially free money that does not have to be paid back. Grants are also free money, but not everyone qualifies for grants because they are based on a family’s financial need. Another need-based option is work-study, where students are given a part-time job to earn money while attending school. Finally, if there is not enough money to pay for college upfront, you can borrow money in the form of student loans. While you are required to pay back the money with interest, the interest rates on student loans are relatively low compared to other types of loans, and you usually have a grace period after graduation before repayment begins. Both parents and children need to be involved when it comes to financial aid – scholarships, grants, work-study and loans. The other options begin years in advance, sometimes as early as birth, so parents typically shoulder the responsibility of saving. On the other hand, financial aid planning happens the year before college, so children have reached an age where they can and should be involved in financial decisions.

As a reminder, college decisions are just as important as saving for college. That’s why both parents and children need to be educated (excuse the pun!) when it comes to paying for college!

Homework: Students, test your business skills by giving parents a presentation on 3 different colleges and how you would pay for each one. Whatever format you use to present, be prepared for Q&A at the end!

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Paying For College: Decisions, Decisions

At a recent speaking event, I was asked by a concerned parent, “How do I prepare financially for my kids to go to college?” As important a role as parents have in funding college, the kids have an equal if not greater role in the cost of college education. That is because the kids are the ones applying to schools and deciding where they apply and ultimately where they attend. This question inspired me to answer with a two-part post on Paying For College, with this post intended for future college students and the next post intended for parents or whoever will be paying for college.

Kids have a lot to consider when deciding where to attend college. Let’s weigh the financial impact of those decisions.

State school or private school? When we hear names of private universities like Harvard or Stanford, we all know they come with a hefty price tag. Based on those two colleges, $50,000 a year seems to be the going rate as an undergrad. Is it worth paying all that money to go to them? Maybe. But if you can’t readily afford $50,000 a year, will you be earning enough money after college to pay back your student loans? Do you even want student loans to eat a portion of your paycheck after college? US News & World Report calculated in-state tuition to be 73% less than private colleges. Imagine your favorite gadget or clothes at 73% off. That’s a hard deal to pass up! If your heart is still set on being an Ivy League grad, perhaps it’s worth considering a transfer after you have attended a year or two at a state college. Just remember, there is more than one path you can take.

Live at home vs. dorm/apartment? Another reason to consider an in-state college is to save on living costs. Living away from home can be pretty expensive. Not only do you have the cost of boarding, but you also have to think about food, laundry, dorm/apartment goods and travel to/from home. These are conveniences you didn’t have to worry about when you were in high school. Are you moving your car with you to college? That’s another bundle of expenses, from gas to parking. Living costs are probably as big a decision as college tuition itself.

To work or not to work? In addition to studying and partying, you will probably end up working during college. How else do you afford your college lifestyle? While a job teaches valuable lessons and can propel your future career, it can detract from your time and attention. Keep this in mind before you choose a college with a price tag that requires you to work. On the opposite end of the spectrum, there is the option to take a year off to gather working experience and build savings before continuing education. Some employers even offer to pay for a portion or all of your education expenses. Only you know what options are right for you, but the point is — you have options.

Scholarships and financial aid? Just like you apply for colleges, you can also apply for financial aid. Don’t be afraid to try for scholarships and financial assistance. You’re already filling out forms and writing essays for college applications. What’s another application? You might need some help from a parent to fill-out financial aid forms, but otherwise, this falls in your ballpark. You have to make the effort to apply!

These are some important considerations that not only impact your college decision, but also impact the rest of your life. So even if you’re not the one paying for college, your decisions matter!

Homework: Time to do some research! How much is tuition at colleges you like? What would your living situation be, and how much would it cost?

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Insurance: The Safety Net

What sad news this week with passing of legend Kobe Bryant. Then we hear about all the deaths from the new coronavirus. If you haven’t already, take time to cherish your loved ones. Life is precious.

Events like this make us stop and think: What would happen if something devastating occurred to you or one of your family members? How do you keep up with living expenses? Would you be able to keep your home? Your car? These are all valid concerns, but they don’t have to be concerns at all — with the help of insurance.

You work so hard to build all this wealth, but what’s your safety net to protect it? Especially if you’re still dependent on a paycheck (or Mom’s & Dad’s paychecks), what would you have to give up if you lost that income? Luckily, insurance allows us to buy a safety net for everything we depend on or value, at a fraction of the cost.

There are many types of insurance, but they fall in three main categories, followed by some examples:

  • Family – Life, Travel, Pet
  • Self – Medical, Dental, Vision, Disability Income, Long-Term Care
  • Assets – Homeowners/Renters, Auto/Car, Umbrella

We’ll eventually take a deeper dive into the different examples, but the point is to consider what you need to protect, and make sure you have insurance to cover it. Best case scenario, you never have to use it. But you’ll have peace of mind, knowing that you are taking care of what you love and who you love.

Homework: Take some time to list everything that is important to you, and don’t forget your family members! Do you or does your family have insurance to cover all of the things you value? How does your family protect itself in the event of losing a source of income?

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Do You Need A Rainy Day Fund?

Rainy day fund. Emergency fund. Cash reserve. Call it what you prefer, but the important thing is to have one. What is a rainy day fund? It’s money set aside to weather unexpected “storms” in your life. For instance, did your car break down, and you need money for a repair? Lost your job and need money to survive until you find another job? Have a big medical expense that came out of the blue? When you suddenly need money, you’ll be thankful that you have a rainy day fund.

To build your own rainy day fund, you need to save towards it. Make it one of your savings goals, just like any other big purchase you wish to make. As you accumulate money in your rainy day fund, you may decide to cap it after a certain amount. If you earn steady income, you may find that an amount equivalent to 3 months’ expenses is a sufficient target goal for your rainy day fund. If your income fluctuates from month to month, you may feel more comfortable with covering up to 6 months of expenses through your rainy day fund. Some people choose to continue saving towards their rainy day fund even after they reach a comfortable amount. That way, if they ever need to break into the rainy day fund, they already built in a way to replenish what was spent.

Young savers probably don’t have a reason to save for a rainy day fund. After all, Mom or Dad is the rainy day fund. Kids can break from this mentality by having something to be responsible for. What is a possible sudden expense that can hit? Maybe it’s a vet bill for your pet. Or perhaps a replacement for a broken cell phone. It might even be new cleats for soccer. If kids are given the responsibility, they will more likely build a habit of saving for that rainy day fund.

Why make a rainy day fund a savings priority? Let’s play out the scenario without a rainy day fund. You could tap into savings for other goals to pay for this expense. But that means giving up or delaying those other goals. Some goals, like college or retirement, don’t have much room to postpone. If no savings exists, you would need to borrow money. Borrowing money requires that you pay back the loan, with additional interest, and that payback eats away at the money you earn. Not to mention if another unexpected expense occurs, even more money goes into paying debt. To prevent debt from taking control, put that rainy day fund first!

Regardless of what other financial goals you have, a rainy day fund should be at the top of your list. If it suddenly rained, wouldn’t you rather have an umbrella? That is exactly how a rainy day fund works!

Homework: What is the right amount for your rainy day fund? If you do not have one already, how much can you devote from monthly savings to build your rainy day fund?

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The Case For Non-Qualified Accounts

If you have money in an account, chances are that you have at least one non-qualified account. What does it mean to be “non-qualified?” Don’t let the name fool you into thinking it’s a bad thing. Being non-qualified simply refers to “not qualifying” for any tax benefits. Any money you place into a non-qualified account has already been taxed, and any growth on your money is taxed too. While there are no tax advantages, there are good reasons to use non-qualified accounts.

Because non-qualified accounts do not receive tax benefits, there is no limit to how much you can place in these accounts. You also have the freedom to withdraw money as you please, when you please. On the other hand, qualified accounts, such as 401(k) plans or IRAs or 529 Plans, trade tax advantages for restrictions.

There are many non-qualified accounts, but the most common ones are checking or savings accounts at the bank. If you prefer to invest your money, you can use a non-qualified brokerage account to place all your investments (i.e. stocks, bonds, mutual funds). These are just a few examples of non-qualified accounts.

When it comes to qualified vs. non-qualified accounts, it really depends on how you plan to use that money in order to decide which account is right for you. If you need flexibility to withdraw money at any time, non-qualified accounts offer that flexibility. If you have time to allow your money to grow tax-deferred, then a qualified account might be more appropriate. Neither is good nor bad, and you can even use both at the same time!

Homework: Non-Qualified or Qualified? Take a look at your own accounts, and determine which is which. If you have non-qualified accounts, does it make sense for your money to stay in those accounts? What about your qualified accounts?

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The Secret To Smart Investing

The old adage “Buy Low, Sell High” works great … if you have a crystal ball for every investment you make. In reality, no one can predict with absolute certainty the best time to buy or sell an investment. How do you know that a stock is at its lowest price when you buy? How can you tell that a stock price won’t climb higher after you sell? Stop stressing over things you cannot control. That is why you should remove one word from your investment vocabulary: timing.

Now replace that word with something else: dollar-cost averaging.

Dollar-cost averaging is a method of investing the same amount of money on a consistent basis, so that your overall price tag ends up an average rather than the highest point or the lowest point on the scale. Why does this work in your favor? Because you are investing the same amount of money each time, you’re buying more shares when the price is low. That’s smart! You managed to scoop up a good deal. And when the investment price goes up? You naturally buy less shares with the same amount of money.

Think of it like your favorite pair of pants. When they’re on sale, maybe you buy more than one pair. But when they go back to retail price, you stick to just buying one pair. The difference between investing and buying clothes is that with investments, nothing will advertise that they are on sale. That’s where dollar-cost averaging helps you out. This method automatically buys more at a low price.

How do you get started? Chances are if you have a 401(k), you’re already dollar-cost averaging. That is because you already apply the same amount on a regular basis to an investment. But you can do the same without a 401(k). If you have a sum of money, rather than investing it all at one time, consider dollar-cost averaging instead. Let’s use a sample stock purchase to illustrate this strategy.

Dollar-Cost Averaging Example

Investment Amount: $300 per month

Shares of Stock Purchased:

  • January @ $10 / share = 30 shares
    • Average price @ $10.00 / share ($300 paid for 30 shares)
  • February @ $15 / share = 20 shares
    • Average price @ $12.00 / share ($600 paid for 50 shares)
  • March @ $20 / share = 15 shares
    • Average price @ $13.85 / share ($900 paid for 65 shares)
  • April @ $16 / share = 18.75 shares
    • Average price @ $14.33 / share ($1,200 paid for 83.75 shares)
  • May @ $15 / share = 20 shares
    • Average price @ $14.46 / share ($1,500 paid for 103.75 shares)
  • June @ $20 / share = 15 shares
    • Average price @ $15.16 / share ($1,800 paid for 118.75 shares)

Remember when we talked about timing? Can you predict what the price of the stock will be next? You can try to guess, but would you bet all your money on it? Now you understand why timing the market is not such a great idea.

As you notice in the example, the actual price of the stock took a bumpy ride, sometimes jumping $5 up or down between months. But thanks to dollar-cost averaging, you enjoyed a much smoother ride, with the biggest swing being a $2 difference in average price between January and February. Most people cannot pay every second of attention to investing, let alone stomach the bumpy ride. Dollar-cost averaging makes for a much smoother ride. If you were on a roller coaster, wouldn’t you want one with smooth turns, rather than jagged cliffs? That is why smart investors choose dollar-cost averaging!

Homework: Make dollar-cost averaging a new year’s resolution, whether it be through a 401(k) or an investment account. Consider tracking the average price paid per share every month for the next 6 months to see how dollar-cost averaging works.

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The Silent Partner: Cash Flow

Last week we learned that building net worth is a top goal for your personal finances. How do you accumulate net worth? Since net worth relies on assets, the key to growing net worth is to grow assets. Assets like investments help because they grow in value, but what if your investments take a downturn? Then the only way to grow your assets is to add more money. For that reason and to make investment purchases to begin with, you need cash flow. What is cash flow?

Cash Flow = Income (-) Expenses

Income

Income accounts for all money coming in, hence “in” “come.” This could be anything from working wages to monetary gifts to investment growth (take bank interest, for example).

Expenses

Expenses take money out of your wallet. If you need to pay for it, and it does not go back in your wallet, then it’s an expense. Rent, groceries, shopping, pet care are just a few examples. If you calculate cash flow on a monthly basis, remember to include any annual income (such as a bonus) and annual expenses as a monthly amount.

Cash Flow Sample Calculation

Monthly Income ($3,200):

  • $3,200 Paycheck (gross or before taxes and deductions)

Monthly Expenses ($2,800):

  • $1,500 Rent
  • $ 500 Taxes
  • $ 200 Car Loan Payments
  • $ 200 Groceries
  • $ 150 Health Care Insurance and Medical Costs
  • $ 150 Auto (Gas, Maintenance, Vehicle Registration)
  • $ 100 Personal Spending

Monthly Cash Flow = Income (-) Expenses = $3,200-$2,800 = $400

Positive or Negative?

As with net worth, the key to cash flow is to stay positive! Limit expenses to no more than your income in order to live within your means. Not living within your means will require borrowing money, which ends up costing more (sometimes much more) than the paid price. And paying back debt eats away at your income too. So if you encounter negative cash flow, consider lowering expenses or increasing income to get to a positive cash flow.

For those with positive cash flow, the remaining amount is probably used for savings, right? But are there enough savings to reach your goals? Rather than looking at cash flow as available savings, consider subtracting savings along with necessary expenses, and then treat what’s leftover as your spending allowance. Here’s a better equation to follow:

Discretionary Spending = Income (-) Savings (-) Necessary Expenses

Net worth combined with cash flow are a great starting point if you’re figuring out where you stand financially. Anyone can be a financial ace with a bit of math and some money!

Homework: Calculate your cash flow. Is there anything you need to adjust? How are you doing on savings and expenses?

Winter Break: Ace Academy will skip the next two weeks’ lessons and be back in session during the first full week of January. Happy Holidays to all!

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