Tales from the Wallet: The Easy Way to Save $10k

The Easy Way to Save $10K || CorporetteWhen it comes to money, the true savings are never in the tiny things — they’re in the big things like your healthcare plan and your investments. My old friend Sue is a master at all of this hard personal finance stuff — I’ve asked her to share some of her knowledge with us today. You can follow her on Twitter at @suziedonuts if you want more great tips! – Kat. (Pictured: Boje Designs Paradise Lace Essential Wallet, available at Endless for $34.)

Yes yes, you know how to clip coupons and shop sales. But there are two problems with this approach: First, it takes too much time for not enough payout, so you’re practically doomed to failure before you begin; and second, you’ve heard it all before, so if you’re not doing it by now, you’re not going to do it tomorrow. Plus, being frugal requires constant vigilance. I’m not saying it’s not worthwhile, because it is; but especially when you’ve got a healthy cash flow coming in, you have to put dollars before cents.

First you need to make sure you are fully maximizing your savings the big stuff, and not necessarily the stuff you read about. The big savings can be found in your workplace benefits and your investment accounts. The tips below will help you shave up to $10,000 off your expenses.

(Note: For simplicity’s sake, we’ll assume in these examples that you are making $150,000, are married filing jointly with one dependent, and are living in New York state.)

Saving at Your Work: $3,576+

Whenever you start a new job, HR gives you a giant info packet. Grab a cup of coffee and dig in. A good benefits package is worth its weight in gold. At a large company, the benefits might include perks such as:

- Free admission to major museums in your city

- Discounted rates on mobile phone service, banking, childcare, and insurance

- Health Advocate services (I can’t say enough good things about these guys)

- Flex spending accounts

Sure, the museum and gym perks are nice, and I’ve used them. A lot. But the real savings for me has been in the boring stuff.

Let’s say you are spending $500/month on groceries, and you cut your food spending by 50% by shopping sales and using coupons. That’s $3,000 a year. And it’s a pain in the neck to do. Believe me, I’ve done it. I’ve got the coupon organizer and the deep freezer and the stacks of sales circulars. I even wrote up a grocery price book, although that’s a whole other post. Suffice it to say, there’s a reason that most of the women on Extreme Couponing are stay-at-home moms.

Alternately, you can save almost $3,500 a year just by finding tax-advantaged ways to do the same stuff you’d do anyway – namely, by using the flex-spending accounts that your company may already be offering. In our example, you’ll save 34% by using flex accounts:
- $1,700 savings: Flex Spending Account for medical out-of-pocket ($2,500/year per worker @ 34%) – just be sure to “use it or lose it” each year
- $1,876 savings: Commuter Spending Account for mass-transit passes or parking ($2,760/year per worker @ 34%)
- BONUS ROUND: $1,700 savings: Dependent Care Spending Account for daycare or preschool ($5,000/year per household @ 34%)
Source: Bankrate.com 125 Cafeteria Plan Calculator

During Benefits Season in November, set up your flex accounts for 2012. Then take the afternoon off and visit your local museum on the company’s dime; you deserve it.

Saving with Your Investments: $6,721

With all that extra cash, you can front-load a 529 plan, which can be used for educational spending for yourself and then handed off to your children when the time comes. In New York, you can deposit up to $10,000 a year state-tax-free into the New York 529 College Savings Program Direct Plan, which is administered by Vanguard. In this example, maxing out the 529 will save you another $738 in taxes this year. Not to mention, the money grows tax-free. If that $10k sat in the 529 for 18 years, growing at 7%, you’d save $5,497 in taxes versus using your regular brokerage account.

Source: Bankrate.com 529 College-Savings-Plan Estimator

There have been countless books written on investing. I’m not going to tell you how to invest, but please, make sure you pay as few fees as possible. I’m a Boglehead myself. I make a regular contribution to an index fund every month; if the market tanks, I increase my contribution as much as I can stand it. Since I put in relatively small amounts each time, I want to minimize my commission fees (the price you pay per trade) and my expense ratios (the % the fund charges annually for maintenance). So I stick to index funds from discount brokerages like Vanguard or Schwab, which have very low expense ratios. You can open a brokerage account at Schwab with as little as $100. (Vanguard’s minimum is $3,000.) You also should never have to pay a commission fee when buying an index fund.

Schwab’s expense ratio for its Total Stock Market Index Fund (SWTSX) is 0.09% as of this writing. The Morningstar industry average is 0.38%. If you invest $500 a month with Schwab, you save $174 a year in fees.

You can also link your Schwab brokerage account to its High Yield Investor Checking account, which is truly free checking – Schwab even reimburses all ATM fees. At two, $3 trips a week, that’s $312 a year in fees.

The Long View: Break a Million Without Breaking a Sweat

Based on the above examples, a married couple with children could save as much as $6,500 a year. What does that get you in the long run?

Let’s say you’re 30 now. If you invest that $6,500 in an index fund making just 7% annually (because that 10% figure you always see thrown around is so 2007), you’ll be a millionaire by age 65. All without clipping a single coupon.

Source: Bankrate Simple Savings Calculator

Readers, are you maximizing your money with all of these big picture items? What are your best tips with the big picture items?

(L-2)

Comments

  1. I’d also add that employees should see if their employer offers an HDHP (high deductible health plan) with an HSA (health savings account). Unlike the FSA, you don’t have to spend HSA funds within the year. The high deductible plan will have a much lower premium, which will reduce your monthly health insurance costs. Most large employers will make a contribution to your HSA to roughly equal the amount of money they are saving on your lower premium. In my case, I end up with about $1000/year in tax savings by using my HSA. Plus, I have chronic medical conditions, so it’s nice to have tax-free money in savings that I can use if an unexpected medical expense arises.

    Other than that – I can only wish I had a household income of $150K, but the rest of your suggestions seem sound.

    • Whoops, didn’t mean to be anon – I’m a regular poster.

      • Big yes to the HSA. My last job had a high-deductible plan, and the HSA came with a $1,000/year bonus for signing up. By the time I left the company, I’d saved over $6k. I rolled it into a free account from http://www.americanchartered.com over a year ago and I still haven’t spent it all.

    • You say you have an HSA with chronic medical conditions. I thought those plans only benefited people who were typically healthy and needed them for unexpected emergencies. Do you get prescription coverage with it and regular doctors visits for your chronic conditions covered?

      • Mine included Rx coverage, flu shots, and annual checkups (OB/GYN, pediatrician well-child visits, and a general physical). There is a Federal cap on how much out-of-pocket you can pay per year, around $12k for a family.

      • Yes, I get the same coverage as the lower-deductible PPO plan. The difference is that I have to pay a $1,500 deductible, with a 20% co-pay thereafter up to an out-of-pocket maximum of $3,000. The PPO plan my employer provides has a $300 deductible and out-of-pocket max of $600. However, at my workplace, the employee portion of the PPO’s premium (which is the amount you pay monthly just to have the health insurance) is around $70 higher than what I pay for the HDHP. So I save about $840 a year on premiums, plus significant tax savings on the money I put in my HSA. With those savings, it works out that the HDHP with HSA is much cheaper than the PPO despite my having to pay the $1,500 deductible. The maximum you can contribute to your HSA in one year is $3,000, the same as my out-of-pocket maximum, so I am able to pay all of my medical expenses tax free. Any expenses over $3,000 would be 100% covered by my insurance.

        Additionally, all preventative medicine such as annual physical, annual blood tests, annual gyno exam, vaccinations, mammograms, colorectal screening, etc are covered at 100% regardless of whether I’ve met the deductible.

        My provider is Blue Cross Blue Shield.

        • By the way, I could get the same tax savings using an FSA, but if I went with that option my monthly premiums would be much higher and I would have to spend all the money within one calendar year. Also, with an FSA you have to decide at the beginning of the year how much money to put in. With the HSA, you can make deposits at any time and take them as deductions when you do your taxes.

          • You can actually do BOTH a FSA and an HSA at the same time, with the catch being that the FSA money is limited to vision, dental, and post-deductible expenses (health expenses over and beyond the $1200? level required for a health plan to be considered high-deductible). That way, if you know you are going to have certain medical expenses during the year, you can FSA those, and still max out your HSA and let that roll over into the next year.

      • They tend to work very well for people at both ends of the spectrum — either pretty healthy and may have a visit or two for emergencies, or people who regularly would spend thousands each year on health care. I’m someone in the middle — with allergy & dermatologist appointments each year, plus a few medications, it wasn’t a good option for me, as I’d essentially end up paying out of pocket for everything and not reaching the 100% coverage level.

  2. MissJackson :

    I fully agree with everything here.

    I missed out on health FSAs my first couple years at the firm simply out of lack of knowledge (and really having no experience as to what my out-of-cost medical expenses might be), but am now pretty much obsessed. The other advantage (that’s not savings related) is that the entire yearly contribution is available for you to spend on January 1 (or whenever your year starts). That means that if I have a $2k medical emergency at the beginning of the year, I’m covered.

    I didn’t realize that you could “hand off” a 529 plan that is in your own name to your child. (I knew you could transfer to a sibling of the original recipient, but hadn’t thought about a parent-child transfer). Very interesting — I was wondering if there was a way to start saving for the kids college tax free before they exist – it sounds like this would do it.

    I’m a Boglehead, too. Yay, index funds! One “emotional trick” that I use to get over the whole “the market is tanking, I don’t want to invest” thing is to look at the low market investment as a way to decrease my cost basis. For some reason thinking about it in those terms really helps me.

    • SF Bay Associate :

      Love that wallet, Kat.

      Whether the entire yearly contribution is available to you as of Jan 1 depends on what type of plan your employer offers, I believe. I’m pretty certain mine doesn’t do that, but I can submit expenses in the early months to get paid back later in the year, once I’ve contributed enough.

      Another FSA tip is that nontraditional health expenses, if incurred because of a medical condition, can be covered by FSA. I have tendonitis (thanks doc review!) and use FSA to cover my personal trainer expenses, which I need to recover safely with specific strength training exercises, helping me avoid needing more physical therapy. My GP wrote me an Rx, and signed the 1-page official IRS form that my FSA company sent me, certifying that “but for my medical condition,” I wouldn’t need the personal training. My trainer now costs me 40% less because I can use pretax dollars.

      • MissJackson :

        Ah — I didn’t realize that FSAs varied in this way. I guess this is the one instance where my firm benefits don’t completely blow?

        • The IRS changed the regulations on this. Prior to 2011, you could just use your FSA or HSA for non-prescription treatments. Now, you can only do so with a prescription, even if you wouldn’t need the prescription otherwise. My allergist had to write me an RX for over-the-counter Zyrtec.

          • MissJackson :

            Yep. You used to be able to stock up on OTC meds at the end of the year if you had left over funds, but now you need an Rx.

            You can, however, still buy certain non-Rx stuff. For example, contact solution (I think).

            I didn’t realize that all FSA didn’t make the full benefit available on Jan 1 (as my plan does).

          • MissJackson – I think the employer has to make the entire health FSA election available upfront. Reading through the IRS’ publication (#969) on the subject indicates to me that for a Health FSA, you have the ability to take the entire about up front, regardless of how much you have contributed in deductions. The same isn’t true for the child care or individual premium reimbursement ones though.

          • This was a little known part of the new health car law. The other part is that beginning in 2012 the limit will be $2500 instead of the current $5000.

      • If its a true health FSA where you, the employee, are having you own money put aside tax free, I think you are legally entitled to the whole thing upfront (according to my reading of the IRS’ Pub 969). If its child care FSA or individual premium reimbursement, not so much.

        You might have a different situation (I obviously don’t know all the details), but it sounds different than the FSA’s I’ve dealt with.

      • I do the same thing for massages – I’ve had several conditions and rounds of PT, and my doctor fills out the form to note that massage helps with pain management and reduces my need for pain meds. I’ve never had a problem getting reimbursed.

    • How much do people put into their FSAs? I put in $500 this year (my first year using it) and will definitely spend it all on co-pays. Next year I am having a baby and could see the expenses being much higher, but am not sure how to estimate the right amount.

      • I think it would definitely be worth it to investigate the costs associated with a new baby so that you can get the most possible out of this benefit.
        I typically put $1500-$2000 in my FSA and use it all before the year is up. I spend the money on Rxs and MD visit copays. I have never had a baby but understand that it’s a pricey undertaking :)

      • I put $1200/year. I have a couple of regular prescriptions, plus then $$ that I figured would end up going toward copays at some point. One of the lucky things about wearing glasses and contacts is that I can always stock up on those if I end up with extra funds at the end of the year.

        • MissJackson :

          In 2010 I put in $1,000 and used it all easily when I ended up needing a root canal. This year, I upped my contribution to $1,500 and I have about half of that left right now. I also wear glasses/contacts, so I am thinking about using the leftovers + part of next year’s contribution to get lasik during my “grace period” (my plan allows for about 10 weeks in 2012 where you can use your 2011 funds — but your 2012 funds are also available to you). In the past I’ve done the same as brooke and used any left-over funds for glasses/contacts.

          NYC: I would definitely talk to your doctor to try to estimate costs for labor/etc. He or she should be able to take a look at your insurance and give you a pretty good idea.

      • I’m in this same boat – with the obgyn visits alone this year I’m pretty close to maxing out my $500. With a child I’m sure I’ll want much closer to $2k at least – well visits/immunizations/etc. can add up!

      • Be sure and remember that normally you and the baby will both have an out of pocket deductible for your insurance. So as soon as the baby is born, he/she will incur charges for nursery services, dr visits and all kinds of other stuff. I think my total cost last year was about $6000 for a C-section and 3 days in the hospital. Then the baby will have a lot of dr visits the first year. I planned pretty good with my FSA and only had to spend a little of out of pocket. Be sure and take a good look at your policy and also be prepared for those extra 3 days if you have to have an unplanned C-section like I did.

      • I would expect that you will have to pay your total deductible for the baby. When I had my baby last year, I had to pay our $1,000 deductible for both him and me, but then everything was covered 100% after that. I’m pregnant again, but due in 2012, so my doctor’s office is going to let me pay whatever I have left in my FSA in December and then pay the rest in January out of my 2012 FSA funds.

      • Every year during open enrollment (November) I pull out all my health care receipts for the last year. I divide them into FSA eligible ones and non-FSA eligible ones. Then I see which of them are recurring expenses (mammogram, dermatologist, eye doctor) and I contribute that much. Plus, I consider whether there is any additional medical care that I know will need in the upcoming year. If so, I contact my doctor and insurance company to get an estimate of how much my share will be (people are generally happy to do this if you explain why). Tip: Don’t forget ALL providers. A couple years ago I had a wisdom tooth extracted: oral surgeon, anesthesiologist, surgi-center, recovery meds.

      • Ask the pediatrician or your insurance company about co-pays. I just had a baby and I’ve only paid 2 co-pays. They just don’t charge them each time when you’re coming so often.

        • This.

          I did not have to pay anything for well visits or immunizations, not even a co-pay with my plan. In the first year we only had one sick child visit once he started daycare and immediately got a cold so we essentially paid 1 co-pay at the pediatrician’s office. We had 3-4 specialist appointments with a pediatric urologist and had to pay for these from the HSA.

          It’s generally safe to assume you will have many sick child visits if your baby is in daycare, especially if s/he starts in the winter. We were unbelievably lucky with such a healthy baby but I have a friend who was at the doctor’s office at least once a month, typically more frequently, for the first year.

  3. Baby DC Attorney :

    My job doesn’t have a 401K or any plan I can contribute to until January 2013. I’m thinking of opening up a traditional IRA (my income precludes contributions to a Roth). Any advice for which company to go through? I did some research and learned that Etrade has good ratings, as does Scotttrade. But I’m totally open to any and all suggestions.

    • I have a checking account and brokerage account through Fidelity, which I love. They have a free checking account that you can link to your brokerage account, which makes it very easy to move money between the checking account and the brokerage account. They also offer IRAs, although I don’t personally have any experience with them.

      And FYI about the checking account – they don’t have ATMs they will actually reimburse your ATM fees from any ATM, anywhere. It’s so liberating.

      (I don’t work for Fidelity, I promise!)

      • I have mine through Vanguard and they’ve been pretty easy to deal with. They also don’t charge a fee if you get your statement electronically, or keep a certain balance level per fund.

        I haven’t used Schwab for an IRA, but I have my brokerage account through them. The checking/brokerage account is very similar to Fidelity’s. Fiona, you’re right — it’s amazingly freeing to not worry about ATM fees on either end.

  4. This is a great post! It’s refreshing to see someone cut to the chase and focus on the big things, because she’s right– no matter how zealously you clip coupons, if you screw up the big things, the losses there (or lost opportunities) would outweigh whatever gains from the little things.

    A bit of a digression here:
    I do observe that a lot of the socialization women get is to “think small” — clipping coupons, chasing a free shipping coupon code, etc, whereas men are socialized to think “big picture”. A lot of this is Victorian, and even older dogma– that women should not get too big for their britches (or hoop skirts and crinolines), and should focus small-scale on the home because our minds are supposedly too puny to be troubled with anything else while BIG STRONG MEN (TM) fight the grand battles and carry the weight of the world.

    There are benefits to being able to think big and to think small, and it’s interesting to see that there are still vestiges of the gender roles, and that the socialization is still there- for one group to think small and another to think big, almost on a mutually exclusive basis.

    Finally:
    Yay for Bogleheads! I do need to dust off my Burton Malkiel classic _Random Walk on Wall Street_ and re-read it. Despite being about investing, it’s a fairly easy read with lots of great anecdotes about market history and market bubbles.

    • It’s not just women who try to save on small things. My husband buys the sale item at the grocery, or rejects the thing he wanted at the sale price, but finds out is not on sale. He’s a successful professional and does not need to behave this way! Early training, I guess.

      • My husband is the penny pincher, too. He insists he do the grocery shopping because, in his opinion, I buy the ‘expensive’ laundry detergent. He also goes through the Sunday paper for coupons. And I’m absolutely fine with him getting all the groceries!

      • No, it’s not just women who try to save on small things, but there seem to be more women who do that than men.

        Here’s a Nielsen report on who uses coupons and it makes for interesting reading.

        It’s also a bit scary how much data advertisers and retailers collect on us!
        http://blog.nielsen.com/nielsenwire/consumer/the-coupon-comeback/

  5. One thing my FATHER taught me is to do the 401k stuff, but MORE importantley, to do the commuter stuff. He says that I get the metrocard on a PRE-TAX basis, rather then on a POST-Tax basis.

    This means that you do NOT have to pay tax on the card when you buy it. In NYC where I live, he says I am in the 35% bracket, since I have to pay alot to the state AND the City, in addition to the IRS.

    So have your company sign up, like we did, since the manageing partner is also saving alot of money with this plan.

  6. LOL at 10% annually. Still LOL at 7%. Let’s get real with the last 2 years most people losing >10%.

    • Yeah, I wanted to comment on this, too. I finally talked my hubby into investing and we both read the Bogleheads book and invested in a range of low fee Vanguard funds. The market has been just terrible. I am fine with it – it is easier for me to take the long view, having had some experience with investing in the past. But the hubs is just so discouraged! Any advice for helping someone weather the storm (it will clear, right??).

    • It’s assumed that one saves for retirement over a period of 40+ years, not over 2 years only.

    • My reaction exactly. I’ve lost about 15% in the last six months alone.

  7. I’m confused as to why this exampled married person making 150k a year still needs a 529 to spend on their own education? Presumably, they’ve already completed their education, hence the paycheck?

    • A married couple working in finance could easily clear 150K a year with bachelors degrees alone under their belts, so if either is looking to go back to school for an advanced degree, I could see how a 529k would be useful.

    • I think it’s the dependent:
      “(Note: For simplicity’s sake, we’ll assume in these examples that you are making $150,000, are married filing jointly with one dependent, and are living in New York state.)”

      With the assumption that said dependent is a kid who’s going to go to college one day, rather than a sick elderly parent.

    • Not true, I am grateful this post brought up 529′s, because I am planning on a career change in a few years that will involve more education. I knew about 529s to save for a child’s education, but had no idea I could grow money for myself that way. Even with a six-figure salary, I’m not above avoiding capital gains tax if I can.

      Whether I can count on my index funds to be up in 3-5 years might be another story, but I’m glad I’m now aware of the option… presumably if the market is too bad for me to want to withdraw the funds for myself at that point, I just transfer them to my kids. I’m going to look hard for a downside here, because it seems too good to be true.

    • Anonymous :

      I don’t see how this is improbable at all. I knew quite a few married couples in law school where spouse 1 was the student and spouse 2 was working to provide them with some income, but planned to go back to school later. If spouse 1 goes on to work in Biglaw, the couple’s combined income would easily be over $160k during those years after spouse 1′s graduation and before spouse 2 goes back to school, during which time the couple has enough income to actually build up savings for spouse 2′s future degree (as opposed to meeting basic living expenses and possibly still relying on loans during spouse 1′s law school years).

      • I know that the tax benefits on growth may not be great for adults saving for grad school, but the state-specific benefits can be hard to beat. We’ve since moved from NYC, but since my husband still works there we’ve kept our New York State 529 because Jersey’s can’t beat the state tax writeoff. See what your state has to offer. You also can use another state’s plan if it has better terms, but you won’t get any state resident benefits.

        Also, a 529 plan can be used for *any* educational expense, including books, room and board … it’s more flexible than you’d think.

  8. Good tips! Much more bang for the buck than clipping coupons. And I’m an Economist!

    One thing that did work for me to save money, and is more of a day-to-day thing, is that my partner and I made a pact to stop eating out so much, to buy food in smaller quantities, and to waste less food, such as throwing away vegetables that we didn’t cook until it was too late. We didn’t clip coupons but we saved HUNDREDS of dollars each month, and also ate healthier – thereby saving on health-care expenses in the long-run.

    Another point about saving on taxes is that it can be very advantageous from a tax perspective to both have a job and do consulting work on the side. You can contribute the entire profit of consulting work to some types of individual retirement accounts if you want, and it opens up the possibility to deduct a number of legitimate business expenses – such as keeping a home office – that are not available to people who only have a traditional job. If you keep a home office anyway, I personally think you should be able to deduct it even if you are employed – but if you do consulting work, then the government agrees with me…..

    I have a high deductible plan and an HSA. I think that works especially well if you do not tend to use traditional medical care…a lot of my medical expenses are herbal remedies, which aren’t covered by insurance but can come out of an HSA. It was killing me paying so much money for health insurance that I never used, but I want something as a safety net in case of a catastrophic event.

    • Yes, I did freelance on the side for years, and my husband is a consultant now. It’s amazing how much you can write off. Thanks for mentioning that!

    • Ha I just threw out about $50 worth of food yesterday and spent a half hour cleaning the mess that a leaky pork roast left in my fridge. This is a huge way to save, I just have to work on the execution

    • karenpadi :

      A high-deductible plan can really hurt if you get pregnant with your first child. Until you have the child, contributions to the HSA are limited to the “single” amount. But once you have the child, you suddenly owe 2 deductibles (or the family deductible).

      If you plan to have a first child, check out a PPO or HMO if those are options.

      • Well, when you add the additional coverage for the child, you are entitled to a prorated increase in the amount you can contribute to the HSA, right? And some HDHP plans have an embedded option, where you only have to meet the “single” deductible before that person’s expenses begin to be covered by insurance, instead of having to pay the whole deductible before anyone gets the benefit of insurance coverage.

  9. Another easy way to maximize your investment is to pay attention to what your employer will match on your 401(k). Even if you are not sure that you have the money to set aside for your retirement, if you don’t take advantage of the match you are leaving behind a guaranteed return on your money. There aren’t that many investment guarantees these days, so don’t pass one by when it’s available.

    • I’d go so far as to say you should add that match to your salary package when considering a job offer. You may switch from a job with no match / 50% on 4% match, to a job with a 100% on 6% match and profit sharing. That’s an enormous bump, one that it’s easy to overlook.

  10. Great tips – thanks! I must admit the FSA option confuses me a bit. Not sure why…I probably just need to sit down and make myself learn about it! But I’ve always been intimidated by financial decisions/options, so I put it off.

    I have a somewhat related question: my husband and I have been pinching pennies big time trying to save for a house downpayment. We had been saving in mutual funds that were doing fairly well, even during some of the market decline. However, over the last four months, we’ve lost about 1/5 of our downpayment savings. About three months ago, we stopped putting anything into the mutual funds and started to save for our downpayment using our basic bank savings account – it’s not making anything there, but at least we’re not losing money either.

    My question is what to do with the money that is currently in the mutual funds. Should we take our money out before we lose any more? Should we leave our money there and wait for the market to stabilize? I realize I probably need to make an appointment with our financial planner to discuss this in detail, but I was curious if any of you had any suggestions. It’s so frustrating to work so hard to save and then watch our money slip away almost as fast as we’re able to save it. I told my husband last night that I feel bad complaining because we’re fortunate in the sense that we’re not watching our money for regular expenses slip away – at least we’re on stable ground unlike so many Americans right now. But still…it’s really frustrating to see our dream of home ownership getting further and further away with each monthly statement.

    So how about those of you who are saving for a short term goal (3-5 years)…where are you saving that money? And how are you mitigating your losses considering the market right now?

    • I was worried about putting short term savings in accounts that were market-dependent, so I only really looked at savings and money market accounts. (I’m much more of a risk-taker on longer-term investments.)After looking around, I realized that the best return I could get in the current market was in a rewards checking account at a local bank. The rate has dropped since I opened the account, but I’m still earning 2.21%. It’s not great, but better than most of the other options and I know that no matter what, the amount in the account is increasing, not decreasing.

      • Where are you getting 2.2%? That seems like a fortune nowadays.

        • Anonymous :

          I currently get 3.97% up to $15,000 (up until some point this spring, it was on balances up to $25,000). The good rewards checking accounts are definitely out there, but they’re at smaller, regional banks. I happened to find out about mine because it was introduced at the bank my parents had used for over a decade, but I think you can search bankrate.com for banks in your area. You can also look at the Finance forum on Fatwallet–last time I was there, there was a stickied thread on finding the best rewards checking accounts. Just beware that some of the banks you’ll find are not FDIC insured (or at least these accounts within that bank aren’t), so assuming that’s important to you, make sure you look for that when evaluating banks.

        • I’m using farmersandmerchants.biz. They are strictly local (can’t open an account, change your address, etc., without coming into a branch location), but if you’re in western Virginia, it’s worth it. I spent a while looking into every option before I found this. I don’t think it was listed on bankrate (although I do recommend them as a starting point). I just had to ask around and look at every financial instituion I could find.

    • What a bummer. I wish I had the solution. We have our emergency fund and short term savings just in an ING orange account, which makes basically nothing. Only longer term savings go into index funds.

    • I think for a three to five year horizon, I might do roughly half the savings in an online savings account (I’m making 0.85% plus a 10% quarterly match for over $10k in the account) and then maybe half in a short term or intermediate bond fund. Several fund managers (Fidelity, Vanguard, etc.) have GNMA funds, which are government guaranteed mortgages. Last time I checked, the fund was paying 3.2% dividends and the principal is pretty stable (US government credit risk… I know, not all that comforting any more). You can still take mark-to-market losses, but I would think the fund would be much less volatile than a broad market equity index fund. Might be worth a look for you…

      • Soho: where are you getting the 10% quarterly match? Please do tell.

        • Missy — Capital One offers the 10% quarterly match. If you sign up through Costco you can get a bonus for opening the account, too.

          AnoninDC, I don’t have a good answer for you. In the short term I don’t think your money will recover; if you had a longer timeframe you could dollar-cost-average and keep putting money into it, which would eventually help it recover faster. But with short-term savings like a downpayment I personally wouldn’t take the risk. At minimum, I’d exchange the brokerage account funds to something similar (e.g. if you are in the S&P 500, go to a Total Stock Market index — Google “wash sale rules”) and take the writeoff next spring. If it helps you sleep better at night and you expect to buy a house in the next year or two, cash out.

          • Yep, Sue’s got it- Capital One gives the 10% quarterly match. Note that it matches 10% of the interest you’ve earned (not your principal). So the total interest you get is 85 bp + 0.1*(85 bp) = ~93.5 bp (I’m not taking compounding into account, but since the numbers are so small it doesn’t really matter much). It’s still a pretty paltry interest rate, but it’s one of the best I could find with FDIC insurance (up to $250k) and ability to take my money out whenever I want.

    • Did you tell your advisor what you were saving for, and how far out you were thinking? Investing in mutual funds is better for long-term returns (decades). I’m no expert, but municipal bonds or a money market account would be better. If you did explain that you were saving for a down payment on a house in 3-5 years, and your broker put the money in a mutual fund, I’d start to look for a new broker. JMHO

      • MissJackson :

        Agree 100% on the get a new broker if you told him/her that you were saving short-term.

      • Don’t get a broker! You don’t need a broker. Research mutual funds on your own and invest in low-cost index funds.

        You should only invest in stocks if you have at least a 10-year time horizon (number is made up, but you get the gist). Honestly, for something this short-term, I’d go for close to 100% savings account, or money market or something like that. Bonds might be good too, I’m not sure – but definitely not stocks. You can go aggressive in your 401K to balance it out, since you probably have a few decades before you’ll need that money.

  11. Also, not to nitpick, but I think that $1700 “savings” for the FSA should be an $800 savings.

  12. Sigh. This is a great post, but as a single woman making less than half the assumed $150K, I can’t help but find this all a little depressing!

    • Anonymous :

      Add in someone working at a very small firm that doesn’t offer any of these perks, and this is incredibly frustrating. The other associate and I asked if we could institute a transit check policy at least, and they said it was too expensive. That sounded like a crock to me, but who knows.

      • I started a TransitCheck at the tiny law firm where I was an assistant. There were three lawyers, three full time assistants and two part time assistants. It was not that expensive, and can be made cheaper by ordering quarterly rather than monthly. (I’d even go bi-yearly if your office was really stable staff-wise.)

        Some payroll companies will do transit check as part of payroll (which is a slightly higher fee). But I did it myself, you just order on the website, they charge a percentage of the order and a processing fee. By ordering quarterly, I was able to keep the processing fee down (as well as have extra cards on hand if somebody lost one or an order didn’t come in right on time — which was never a problem).

        Do any of the partners drive their own cars? Because Transit Check can be used to cover parking costs. (Though I’m not 100% on the details since none of us did that.) Also, for regional trains like Metro North and LIRR. Most people think it’s just subway cards, but maybe if you show how they can save money it will help tilt the balance.

        Give it to a go-getter assistant. Then they can “spearhead the implementation of new HR policies.”

    • Yep. Reading that made me a little jealous of the hypothetical family. And… we have our annual reviews today and I am dreading the benefit cuts that we will be informed of. I don’t think my health insurance deductible can go up much more, so that might be safe. But I have a feeling the Sep IRA is going to be given the boot and raises are out of the question. Needless to say, my tummy hurts.

      • Except that premiums for a family far exceed the premiums for a single person. My firm pretty much covers the repmiums for individuals, while the family coverage (for me, plus spouse and baby) is definitly more than three times the single person.

        Which brings me to, if you do have a family, consider whether your spouse and or child should be on your insurance or your spouses and in what combination. My old firm covered premiums up to a certain amount. My husband’s insurance was much better coverage, and much cheaper, so I used the firm’s reimbursement to pay for my husband’s insurance (after tax) premiums. Another friend is on the firm insurance, but his wife and kid are on her insurance (employee plus one, as opposed to “family” coverage). So the out of pocket is lower.

        Just check out the different options.

    • Underpaid :

      This!

      • Yeah, I know the $150k is optimistic. I was having trouble settling on a single example since this blog gets a wide range of incomes. But I wanted to be able to pin down a Federal/state tax rate for the calcs. A lot of these calculations assume two incomes (and two FSAs, etc.), so they’ll work just as well at other incomes. In fact they might work out better, because these changes don’t depend on itemizing your deductions.

  13. Anyone have any good strategies for those of us whose money is going almost entirely to student loans? (Well, that and DC rent but I don’t see a light at the end of that tunnel other than get a roommate or move waaaaaay out into the burbs.) Last time I looked into consolidation it didn’t seem like a great option, but maybe there have been recent developments or something on that front?

    • What are your interest rates like? What’s your payback plan–10 years, 20 years?

      • 10 years (I think one low interest loan for a relatively small amount is on a 15-year repayment), interest rates are all over the map ranging from 2% to 6.8%. I’m about two years into repayment.

        • If you aren’t making enough to pay off your loans on the ten year plan AND save for retirement and an emergency fund, I would put any loans below 4.5% on a twenty year plan and save more aggressively. With any below 3% that seems like a no brainer because of inflation–it’s practically interest free when you account for inflation.

          • Thanks! I’m saving 9% for retirement and $200/bi-weekly paycheck for emergency fund and other expenses, but it makes things awfully tight and I know ideally more would be going to retirement. I hadn’t though about that interest issue at all, which makes a ton of sense when you say it that way. I’ll have to sit down and work out those numbers.

          • I think 9% for retirement is great–I don’t think you need to worry about going too much higher than that if it means not paying your loans the way you’d like to. I wish I were saving that much but things are very tight for me right now. Good luck!

    • If you feel like you are treading water and barely getting ahead, it might be time to get that roommate or look at ways to earn extra cash on the side. I suggest checking Craigslist gigs. The reality is that the student loans need to be paid off and your best bet is to bite the bullet. Decide to pay either the smallest loan first or the loan with the highest interest rate first. Minimum payments to the rest. Snowball your payments.

      • Student loans are certainly terrible, and I’d like to be saving more than I am, but I’m not running that close to the edge – I was more wondering whether there are money-saving strategies related to them like some of the other strategies in the post.

        • Sure. I don’t know if there is anything more to do than just pay them off. It seems like most of the strategies just prolong the length of time you’re paying loans and increase the amount of interest you pay in the long term. Unlike an asset you can sell to payoff the loan (unless you’re underwater), student loans won’t go away until you simply pony up the cash.

          • Related issue: refinancing your mortgage. I have refinanced a few times over the 15 year life of my mortgage. Each time the same loan (30 year fixed), but each time at a lower rate and, thus, lower monthly payment.

            Just today (at the ripe age of 45) I locked a rate for a 20 year fixed rate mortgage. It will increase my monthly payments by rouhgly $150/month. But in 20 years (when I am 65), my loan will be paid off and I will have paid $106,000 in interest from now on. If I stay with my current 30 year (or take out a new 30 year with a slightly lower rate and slightly lower monthly payment), in 20 years I will still have $135,000 of principle left to pay and I will have paid $150,000 in interest from now on. Wow. Now that I have seen these numbers (ask for the amortization chart, which shows each monthly payment for the life of the loan, and how much of it is principle and how much interest), I sort of can’t believe I didn’t think of this before.

        • There was a post about this before, if you can find it.
          One thing recommended there, and one thing that I have always found useful, is to round up your payment. So e.g., if you are paying $760/month, round up and pay $800, with excess going to principal. It’s likely not going to make a huge impact on your monthly expenses, and it will help pay off those loans faster in the long run.

          Also, call your lender and make a list of all your loans. Aim to pay the higher interest ones first.

          As for consolidation, as far as I know no one is really consolidating now, so it’s not even much of an option (I don’t think).

        • MissJackson :

          Unfortunately, if you are not running “that” close to the edge, you’re probably also making too much to be able to deduct student loan interest from your taxes. That’s the only benefit.

          If you owned a home (and had equity in that home), you could consider paying off your student loans with a home equity loan or line of credit. That only helps (assuming that your HELOC would be relatively low interest rate) because you get to deduct those interest payments (there is no income cap that I am aware of — but I’m totally not a tax expert) whereas you make too much to deduct your student loan interest. I note that there are risks here, too, and you should talk to someone who actually knows what they are talking about if you are thinking about doing this.

          I considered the strategy above, but decided that I would rather “snowball” and pay back my loans as quickly as possible. There are some at 2.11% that I will not pay back early, but even those I did not put on an extended payment plan. I could earn more interest in a CD now than that 2.11%, but I’d prefer the security of having them paid off (on a 10 year plan) and being able to take a lower paying job someday. This is the ultimate YMMV.

          • Good call on the HELOC. I considered this strategy, but I’m currently throwing every extra penny at student loans. My stretch goal is to pay them off by the end of 2012. I’m very much looking forward to having them GONE.

          • MissJackson :

            I’m all over this thread, I know. I’m a personal finance junkie and can’t help it.

            Walnut: I’m jealous! My husband and I (double-JD household) are on-par to be student loan free by the end of 2013 if we continue to be super aggressive. Mint tells us that 52% of our spending this year has been on student loans (much of that being extra payments, obviously). I daydream about how easily we’ll accumulate savings after these suckers are all paid off! I can’t wait!

          • Yeah, I make too much to deduct interest, unfortunately, and don’t own a home. It sounds like just plugging away at them is the way to go.

            Maybe a sort of snow ball does make sense – right now I’m paying them all off on a 10-year cycle; perhaps I should be putting the low interest ones on a longer repayment plan and throwing the extra at the higher interest ones.

            Thanks, all! This stuff makes my head spin.

          • I have to second the HELOC recommendation. That is what I did and the savings (and flexibility) are incredible! My student loans totaled about 95K and, at 6-7%, they were not going to be paid off anytime soon. The HELOC we used to pay off The Man is at a much more doable 2.25% which allows me to make a much larger dent in the principal each month by paying the same amount. When I first considered doing this, I was a little worried about not being able to defer payments in the event that I became unemployed; however, given that the minimum payment for the first 10 years is interest only, it would not be difficult to cut other expenses to make sure the HELOC gets paid. Low interest + aggressive repayment = student loan freedom in 2-3 years and thousands upon thousands in savings (or so says Mint).

            In a nutshell: I absolutely recommend paying off higher interest student loans with a HELOC if you can.

          • Anonymous :

            re student loan repayment, everybody should look into the relatively new program for federal loans that provides Income Based Repayment – this is a great website that will sort out whether your income qualifies and how to consolidate to the necessary federal holder – http://www.ibrinfo.org/

            In a nutshell, if you work for a government or nonprofit, after regular payments for 10 years, all remaining federal loans will be forgiven. If you don’t work for a nonprofit, you need to make regular payments for 25 years before all is forgiven. FORGIVEN. Your 10/25 years of payments need not be consecutive, either. Granted this is only federal loans, but much of grad school (law school for me) is in GradPlus loans which totally qualify.

    • Consolidation was so crappy last year that my parents paid my brother’s loans off with a home-equity loan and now he pays the bank for the home equity (he does NOT pay my parents). Legally, when they’re done, my brother will own part of their house (I think). Maybe not a possible solution for you, but a reminder to think outside the box.

      Also, get a roommate.

      • Oh, that’s interesting. I hadn’t thought about that – not sure how my parents would feel with it, but it’s an interesting idea to play with.

        I know I sound like a princess with the roommate thing, but the truth is, when I’ve looked at 2-bedroom apartments around me, I’d only end up saving $200 or so a month if I moved into one and got a roommate and that’s a lot of freedom/ability to be a slob I’d be giving up, plus there’s the transaction costs of moving and the fact that roommates tend to up and move out with little notice, leading to potentially more costs. Just not something I’m interested in right now, which makes me feel kind of guilty, but there it is.

  14. I will never do an FSA again.

    It took me three rounds of appeals (written during three weekend mornings) to get reimbursed for my medical costs. The provider kept sending me letters containing crap excuses like they “couldn’t read” the Explanations of Benefits I sent them.

    NEVER AGAIN!!!

    • Hardhat Lawyer :

      I am experiencing the same frustration with my current HSA – they give you a debit card to use, but then you still have to ask for invoices from the provider and send one for every single charge. I use a limited FSA very efficiently for only large items (one charge) – braces last year and hopefully laser vision correction next year. Mine was luckily the kind where you can spend the whole year up front, so I got 12 month interest-free financing on my Invisalign.

      • You know, you can switch banks for your HSA. You don’t have to use the one your employer automatically sets up for you. I have a Mellon HSA and my debit card works just like any other Mastercard. I don’t have to send statements at all.

      • Your HSA requires proof that services are qualified medical expenses? I thought you only had to keep documentation in case of an IRS audit. I also have a debit card attached to my HSA account – but have never had anyone ask me for documentation for the charges.

        I know some health FSA’s have a debit card option – and I could see them requiring documentation.

        • Yeah, rereading what she says, I think she may have confused things – I would think it’s her insurance that requires proof, not the HSA. Probably she has to submit receipts to her insurance company in order to have that amount applied to her deductible.

    • One tip that makes it easier – I get a full annual report of prescription costs printed out from Walgreens at the last prescription pick-up of the year and just do one submission for FSA reimbursement. Easy to deal with, and hard for the provider to argue that they can’t figure out the Walgreens report.

    • MissJackson :

      My FSA also sometimes denies my claims for reasons that are truely baffling. This has improved since we got a debit card — now I just use the debit card, and need not submit anything unless they request it, which means that most of the time they request nothing, and it just goes through automatically.

      I agree that it’s an enormous PITA, but I still think it’s worth it for the tax savings.

      • My worst FSA rejection story: a teenaged boy on the phone of my FSA administrator (OK, he was probably in his 20s) told me that he “knew” that my IUD was not covered as a prescription because if it were a prescription I would have picked it up at the pharmacy and inserted it myself (instead of having the manufacturer send it to my OB-Gyn’s office so that she could insert it). Needless to say, I kept at it and it was covered.

    • Anon for this :

      I am a fan of FSA, but have had so many annoyances this year — they asked for receipts for 4 different expenses, all of which showed up as ____ Women’s Care on the receipts. Really? How likely is that to be a fraudulent charge — especially after you approved the previous ones? And to make it even more inconvenient, they froze the debit card until they finished processing the receipts each time… because, you know, it’s so unlikely that anyone would have a series of medical costs in quick succession.

      Also, my company went through a merger (completely unexpected from where I sit, and announced and completed within a month). The FSA account became inactive upon merger completion, and the money is currently trapped. Supposedly we’ll be getting a check, but that was a few months ago now.

      Grumble.

  15. blackanon :

    I’m glad see to a post that concentrates on the bigger-yield items, instead of excoriating people for enjoying a latte at Starbucks a few times a week. For some people, their coffee drink break is a mini-vacation.

    It also has to be recognized that a lot of hardworking people aren’t making $150,000 with great benefits. But that’s for another blog or another day.

    • Amen. I will scrounge pennies in many places before I give up my couple times per week coffee. I spend money on things that matter to me (coffee) and don’t pay for things I don’t prioritize (cable/satellite TV).

      Also, I can afford to spend my money on coffee, because I chose to buy a smaller house with a smaller payment than other people. When I’m paying ~$500-$1000 less a month in mortgage, property taxes, maintenance, etc., then I don’t feel guilty spending extra on a coffee.

      • I completely agree that the way we spend/save is deeply personal. One person’s $40/wk starbucks habit is another’s regular mani/pedi is another’s personal trainer etc. etc. It’s all about what you feel is “worth it” and adjusting accordingly.

  16. I realize for simplicity’s sake that this scenario makes several assumptions. I would like to point out that one needs to pay attention to their tax bracket before they use a FSA. We used one for childcare a year or so ago, and it was a mistake. We ended up having to pay a tax bill of several thousand dollars that year (the FSA was one of two factors). For us, it’s better to be taxed on the childcare costs up front, and then use the childcare expense deductible when filing for taxes. Makes tax time much less painful.

  17. This is a great post! I find it interesting that so many personal finance sites focus on the little things (which, admittedly, can add up). I love that this post focuses on the big things that require a little research/knowledge instead! I was inspired to look through my benefits package for upcoming open enrollment. Turns out I’m not eligible for the dependent care FSA (boo) because my employer’s health care reimbursement exceeds $5k/year (guess I can’t complain too much about that)! On to Health Care FSA research. (I am expecting my first child next year, so I’ll be incurring new/unusual health care and child care costs.) Fun!

  18. This post makes me want a financial planner and a great accountant so I don’t have to worry about all of this stuff. I care about it, but it makes my head spin.

    • Same! I do have a pretty good accountant, but I feel like an independent financial planner would be awesome — someone I could trust implictly, who could also maybe come do my filing.

      • Haha. I know that I need to get the financial house in order, which means I need help. I should probably ask around and try to find some good people to assist me so I don’t feel like I’m just wandering around a Suze Orman book with no reference point…

    • This is why I have a stockbroker for my retirement savings. Yeah, I could save money by doing it myself, but I’m just too plain lazy to educate myself on how to do it well as well as I don’t want to spend the time doing it myself. Plus, I like not having to think about it too often.

      • I’m so glad that I’m not the only one that feels this way. I didn’t take any econ or business classes in college and I have zero desire to learn all that it takes to manage the different aspects of my financial well-being.

  19. I just want to share that I FINALLY signed up for a retirement thingamajig (not a 401k, some other concoction of numbers and letters) AND that I have the name of a financial planner. A good one. So, yay first baby step into financial literacy.

    • Good for you! I keep meaning to find a good financial planner. With a baby on the way I think its time to bite the bullet.

  20. Anyone have good recommendations for a financial planner in New York City?

  21. Or a good financial planner in New Jersey?

  22. Anne Shirley :

    Where are you finding a 7% annual return?

  23. One easy way to save some money that is particularly relevant for a lot of the higher earners who read this blog, as we get into the last few months of the year, is saving what was going towards social security tax. Each paycheck 4.2% of you salary goes to social security (6.2% in most years but Obama lowered the rate this year as part of his economic stimulus plan) up to $106,800.

    After you’ve made $106,800 you are done paying for the year and your paycheck will be higher for the remainder of the year. You should be able to painlessly save this ‘raise’ for the last few months of the year. If you make $150,000 a year, you should have been done paying SS tax by August and noticed a $525 bump in your pay in September.

    I’ve also been having the extra 2% that we’re getting this year b/c of the Obama plan directly moved to a savings account each month. It slowly adds up and that way I’m not getting used to the higher pay check that may go away next year. For anyone making above $106,800 this year, total savings as a result of this stimulus is $2,126 for the year, not bad!

  24. wow, there 30 y/o people that earn 150k? I have an MD and a PhD and am not even making a third of that!

    • I think it’s 150k combined for a married couple. Not totally unreasonable for a professional couple. DH and I make almost that, and I work part time (at a professional job).

      • Big Law pays $160k for first year associates, so yes. But most of course have huge student loans that offset it for quite some time.

    • MissJackson :

      Yes, there are.

      A JD is a three year degree, so those who went straight through from undergrad were in the workforce at age 25. BigLaw NYC starting salary is more than 150k, before bonus.

      (I don’t mean this in a snotty way – I’m just trying to genuinely answer your question. This income bracket is certainly not the norm at age 30, but it’s far from impossible, especially in the legal field — and there are a lot of lawyers who read this blog!)

    • My bf makes about 250 and has for several years. He is 32 and has an MBA.

    • Anon for this :

      I have only a bachelors degree, am still a couple years shy of 30 and a couple 10k shy of 150, but I will probably be making that by 30. So will my husband (though he finish his MBA by 30). No student loans. Military paid for school and trained us for lucrative post-military careers. Best decision ever.

    • This seems an odd question. MD’s (after residency) commonly make $150 in many parts of the country.

      • yes you are correct, not during residency though. And if you decide to go the science way (where I am) forget it. You will not be seeing a 6 figures salary until you are long into your career. I have no loans (luckily) and together w my boyfriend, who is further along in his science career, we make a little over 80k. I don’t complain though. I have a great life and everything. I am just kind of dissappointed in the system I guess, where with the same effort and contribution to society there is such a disparity in income…

  25. I want to see how anyone can make 7% with an index fund over the next few years…

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