Flexible Spending Account = Awesome

I know a lot of people know what a Flexible Spending Account is, but for those who don't, here is a brief rundown. You can allocate a set amount of money (up to $2000) to come out pre-tax to be used for qualified medical expenses. The glorious part of this is that you can use all of the money all at once because it is coming out of your regular paycheck for the entire year.

Some of the downsides of the FSA is that if you don't use it, you lose it. Also, they have been implemented in various ways -- most involving manually sending in receipts to your insurance provider to be processed as a claim.

In a previous post, I talked briefly how Aetna handles their FSA claims. Basically, you don't have to do anything to get a claim processed. If a provider sends in a bill, they look to see if you paid a copay. If you did, they check your account to see if you have funds available, and if you do, automatically send a check to you. This gets even better when you get a perscription filled. The pharmacy AUTOMATICALLY GETS PAID at the point of sale. This means that if you have funds available, you don't pay ANYTHING to pick up your scripts. This, is absolutely awesome :).

To top it off, Aetna has probably the tightest integration between their business systems and online presence that I have ever seen in an insurance company. EOBs notifications are sent via email at the time of processing and are availble the same day in your online account. Similarly, anything that is processed through your FSA generates the same kind of notifications and you can view your balance onlne in realtime.

How does this tie to getting out of debt? I'm glad you asked! :). Basically, if you know what your medical expenses are going to be (a year of having small children will let you know that pretty quickly), you can consider that a sunk cost -- a cost you are going to have regardless. By using the FSA, you can make that cost a dedcution, lowering your overall taxable income and thus paying "less" for the medical expenses incurred. It isn't a TON of money you'll save, but when you are fighting to climb out of the pit of debt, every little handhold helps :).

June Update

It has definitely been an interesting couple weeks to say the least. The good news is that my wife was able to start working part time again to bring in some extra money. That, and we're going to be able to pay off one of our credit cards this month. The BAD news is that the added expense of lunches and gas for her to go to work we have to eat until she gets paid. I'm on a bi-monthly pay cycle, so we have been in an interesting funk waiting on paychecks to come, while being in the middle of extra expense.

With the amount of hours she will be able to pick up, we could theoretically pay off the Van in about 4-6 months if we can push all her money onto it. Again, there is the extra expense of gas for her to commute and lunch (whether she buys it or takes it), but I think we can make a pretty good dent into things.

I did, however, manage to reduce our monthly outlay by about $100 so far. I canceled my Rhapsody service, and re-negotiated terms on an unsecured loan I have. I'm going to be forcing that excess into the snowball to get it rolling. All I need is to get some traction and this is going to take off.

I also got something interesting in the mail today from Chase. They are trying to get me to refinance my 2nd mortgage. I've got multiple accounts with them, so the rate is going to be about half what I have now, and thus the payment will be about half (freeing up more money for the snowball). The only problem is that my current 2nd has a pre-payment penalty if it is paid off in less than 5 years. I've technically got 4 years left on that loan, so I would essentially be borrowing money to help pay off other debt -- which is never a good idea. I'm sure the percentage is fairly low (still need to look it up), but combined with the $44,000 loan, that could add up to be quite a bit. I still need to do the math on it, but if the savings in monthly outlay could pay the penalty in under a year, I may go that route to free up the cash to help the snowball. After I get just one of these larger loans paid off, I'm really going to make headway.

I'm looking into some other ideas on how to generate some extra income as well, so maybe I'll hash some of those out on here later, but for now I'm off to get some much needed sleep.

Until next time... :)

Is it worth it to pay off debt?

I recently got into a few lengthy discussions about whether you should pay off your house or use that money to invest in a retirement fund. The scenario we were talking about was if you had a lump sum drop in your lap, would it be better to get out of debt or simply invest the money at a higher rate than the debt you were carrying.

All of you Ramsey fans out there would know he would ask "If you were debt free, would your take a loan out on your house to invest for retirement?" -- which is what I asked during my discussions.
Surprisingly, the answers I got back were in favor if investing the money. Even with the risk of the stock market, those involved in my discussions were willing to invest the money (to varying degrees of enthusiasm).

Their arguments basically hinged on the fact that mortgage rates are fairly low, and investment returns are rather high. So, based on this, I decided to crunch some numbers to see exactly how this would break down.

The hypothetical situation is as follows:

You have a $150,000 mortgage at a rate of 5%. You have an investment that will give you 10%. You have $150,000 cash on hand... what do you do?

The first scenario is to keep the house and invest the money over the 15 years. First off, paying a 15 year fixed mortgage at 5% on $150,000 would result in a monthly payment of $1186.19. Over the lifetime of the loan, you would pay back $214,054.20 in principle and interest. Now let's take the $150,000 and invest it at 10%. Without adding any money to it and letting it build over the 15 years, you would end up with $446,274 after taxes (at a 28% tax rate). So, to summarize, we have the following:

• $150,000 Mortgage, 15 year fixed at 5%
• $1186/month payment
• Cost of $214,054.20 over 15 years

• $150,000 Invested for 15 years at 10% with a 28% tax rate
• Gain of $446,274

So, after you subtract out the cost of your house from the gain of your investment, you have netted $232,219.8, not a bad little investment.

Now, let's examine the second scenario. This time, you take the $150,000 and pay off your home. However, instead of pocketing the house payment, you put it into that same investment at 10% for 15 years. After the 15 years and 28% tax rate, you end up with $378,339. The first thing you should notice is that this number is substantially less than the $446,274 you gained in the investment in the first scenario. However, after you subtract out the cost of your mortgage, you have actually GAINED $146,119.20 after paying off your house. To summarize:

• $1186.19/month invested over 15 years at 10% with a 28% tax rate
• Gain of $378,339
• Net Gain in Scenario 1: $232,219.8
• Difference in Scenraio1 vs Scenario2: $146,119.20 in favor of Scenario 2
  

So, by paying off your house with $150,000 and investing your would-be house payment, you end up almost $150,000 ahead of where you would have been if you had gone with the first option. Notice that this is essentially the principal that you were initially thinking of investing. Just at looking at the value of the two choices (aside from investing revenue), option 2 gives you a 100% return over option 1.

Sure, you could find an investment that was over 10% and make the numbers work. However, the risk involved with such any investment that returns a steady rate above 15% would far outweigh the potential gains you would have.

I think the numbers speak for themselves :)

Shopping Around Pays Off

I just wanted to drop in a quick update on the playset. Turns out, with more shopping around, we found a source for a decent sized kit and a source for wood that is substantially less than we had budgeted for the project. The grand total is going to come in around $530 (with me building it all, of course), so the rest of the money can be put toward debt.

This, along with our upcoming budget restructuring should give us some traction to help get things paid down (and to handle the upcoming medical bills).

The Torrent Continues

Well, I thought I was out of the woods until I got an EOB from Anthem today. Piper was in the hospital for three days, and amassed a bill of around $2400. Thankfully, I'm now on my company's insurance so things like this shouldn't happen. Until then, I think I'm going to have to set up payment terms with the hospital. I'm curious to see how much I can spread it out without getting a loan. I would love to be able to make payments on this without dipping into any of my emergency fund.

On a brighter note, I wanted to talk a little about my new insurance. I went ahead and signed up for a flexible spending account with the new plan. Based on last year's expenses, I was pushing 3k in expected outlay. The limit is only 2k, so we will see how long that lasts, but I have a feeling I'll burn through it pretty quickly.

Our insurance is through Aetna, and they have a pretty cool system for the flex spending account. Basically, they try to keep all the paperwork out of it for the members. When they receive a claim from a provider, they look to see if you paid a copay. If you did, they look in your flex spending account to see if you have a balance. If you do, they cut you a check along with the provider -- and you don't have to submit any claims. Things get even cooler at the pharmacy. Since everything is electronic with checking for benefits, the system AUTOMATICALLY PAYS the pharmacy out of your flex spending account and you get your prescriptions for "free".

All in all, after the tax breaks I should net out to having about the same take home pay as I had before when paying for private insurance.

In the mean time, when I get the bill from the hospital I'll be sure to post what I managed to talk them down to. Until then, I'm going to grudgingly wait for the bill to show up.

Crisis Averted

Good news! Yesterday I got a escrow overage check from our mortgage company out of the blue that was for about twice what our medical bills were for. So, not only do I have the money for the playset, I have extra money to use to pay down debt, or to put toward a couple projects we have been saving for. I still need to look to see where it would be best served, but this really excites me.

Between this and some extra work I've been able to pick up, this summer may actually turn out pretty nice :).

Oh well, off to enjoy the rest of my Sunday :)

The Bane of Medical Bills

This always ALWAYS seems to happen. You decide to purchase something large, so you start saving up. You plan, you save, you plan, you save. Finally, you get to the point where you can make the purchase, and BAM -- something unexpected pops up.

For us, this always seems to be medical bills. Granted, with as much as our kids have been in and out of doctor's offices, I should be used to the cycle -- but it still surprises me on occasion. Most of the time, it is more of a "This cost HOW much to get checked??"

We had been saving up for a fairly large playset for the backyard. Our children are starting to get old enough to where one of these would make sense, so we had been planning for about a year. We've had the designs picked out and just had to pick the final level of accessories. Enter new Bills.

All and all, they total of the bills is just shy of what the playset would have cost. On the one hand, it is good that we had the money around and didn't have to get into our emergency fund to pay them off. On the other hand, it is annoying because now I have to start re-saving for the playset.

Ahh, the joys of being responsible.