We dedicated our October newsletter to covering financial products and habits that tend to do more harm than good. For November and in the spirit of Thanksgiving, we want to focus on good financial products that can be a vital part of your financial lives. There is no “one size fits all” approach; not everything on this list may be suitable for all people.
1. Term Life Insurance – We wanted to spend this month explaining why we value term life insurance. In order to do so, we must remember the main purpose why most people buy life insurance – to provide financial protection to the people that depend on the income you produce or will be financially harmed if you passed.
Term life insurance is not a permanent policy like whole life insurance. As the name implies, it lasts for a specific term then the coverage expires. Common term periods are 10, 20, and 30 years (although other options exist). Why do we prefer this? You’ll eventually get to the point where you build up enough wealth to self-insure which will make the insurance unnecessary. If you’ve built a solid plan to build wealth, why do you need to pay extra for a permanent insurance policy?
Another critical thing to consider – term policies are often 6 – 10 times less expensive each year than whole life policies. Use those extra savings to help pay off debt, invest, and build wealth.
2. Health Savings Accounts (HSAs) – This just may be the most tax advantaged account out there. Employers who offer High Deductible Health Plans can pair their health insurance plan with an HSA to provide a powerful means to save for medical costs.
Many people wonder if an HSA is essentially the same thing as an FSA (Flexible Spending Account). While both can be used for qualified medical expenses, HSAs have one very distinct advantage – unused funds can be carried over year after year while an FSA will only allow a $500 carry over in unused funds.
Why do we like the HSA so much? These accounts have a triple tax benefit associated with them:
- Your contributions are considered pretax and lower your taxable income in the year they are made.
- Many HSAs give you the opportunity to invest excess funds and grow your savings for future medical expenses. There’s another tax benefit here too – investment earnings and interest are protected and grow tax deferred.
- When the money is finally withdrawn to pay for qualified medical expenses, there’s no taxation on the withdrawals making it tax-free.
- Prior to age 65, withdrawals for non-medical expenses will have a 20% penalty associated with them in addition to having to pay your normal income tax rate. However, once you turn 65, you can then pull the money out for non-medical reasons without the penalty. You simply have to pay your standard tax rate on the withdrawal in the same way you would if you had pulled it out of your pretax retirement account.
3. Online Savings and Money Markets – After the Great Recession of 2008, the Fed started lowering interest rates in order to stimulate the economy. A major downside was that people with substantial balances in their local banks really suffered; they were no longer collecting the interest that had been previously available to them.
Online banking changed all of that. Online banks don’t have the same costs to run buildings and facilities that traditional banks have. People wanted more interest on their money, and online banks were able to meet that demand. Bankrate.com is a great resource that reviews what the top online banks are currently paying.
4. Budgeting Software: YNAB, EveryDollar, Mint – For many people, budgeting is about as popular as balancing their checkbooks; they simply would rather do anything else than budget. However, many don’t actually know what a budget really is and what it’s designed to do. In simple terms, it is a written plan by you where you tell your money exactly how it’s going to behave. Without this critical tool, money has a habit of leaking straight out of our pockets.
In the past, budgets used to be kept on a pad of notepaper. Thankfully times have changed and there’s now software such as YNAB (YouNeedABudget), EveryDollar (as offered by Dave Ramsey) and Mint that makes this process far easier. You simply connect your checking, savings, credit cards, loan accounts, etc., and upload your spending plan. The software will track your spending and categorize it so that you never spend too much. For example, say you set a grocery budget for $300. You use your debit card for a $60 grocery trip. The software will capture the transaction in real time and tell you that you have $240 left to spend. That’s a game changer.