Question: I always struggle with how much to set aside in my Flexible Spending Account. For the last two years, I've had about $700 of medications annually. I'll have at least two doctor visits a year at a co-pay of $25 each, but it's always possible I could have more.
I would like to get the full benefit, but my insurance plan no longer covers as many over-the-counter items so I'm kind of hesitant to go much beyond the $750.
Plus, I'm doing better with my health, so it's possible that some of my medications might be discontinued.
What's a good measuring stick, so to speak, to use in trying to decide the way to get the most benefit out of FSAs?
Answer: A Flexible Spending Account is part excellent tool and part insanity. The excellent part is you can contribute money pre-tax and then use the money to pay for qualified health care expenses not covered by any insurance, escaping all income taxes.
The insane part is if you do not use all of the money in your FSA each year, it is taken from you. Yes, taken. Money you put into an account for your use is taken from you simply because you did not spend it all.
I have never understood how this made sense to policy makers. It simultaneously discourages saving for large, unplanned heath care expenses while encouraging spending every last penny in the account even if the items bought are not "needed." Plain silly.
Unfortunately, I do not have any ground-breaking advice. The standard answer — and perhaps only answer — is what you are doing. And that's putting in what you are certain you will spend, or at least your best estimate, and then a bit more to cover unexpected expenses.
From there, just be happy for the limited tax break it provides and ponder why policy makers sometimes do silly things.
Q: My husband and I recently paid off all of our debt, with the exception of our house (mortgage balance of $186,000).
We were considering refinancing into a 15-year loan, which would give us an interest rate about 0.5 percentage points lower than our current rate.
Several people we know said we should focus on putting more money into short-term and long-term savings and not worry about paying off the house since that is a debt that most people always have. We both have pensions through our employers and both contribute about $175 per pay check to a supplemental retirement plan and are 31 years old.
Also a new kink is that we are expecting our first child. Do you have any thoughts on this?
A: Congratulations on having your finances in such good order that you can even consider paying off your home early. And most of all, congratulations on expecting.
I really like the idea of paying a house off and owning it outright. Many financial advisers would suggest not paying down a mortgage early because the money could be used to invest elsewhere and likely get a higher rate of return. And their "math" is correct.
That said, there is an intrinsic value in owning something outright. After paying off all other debt, saving at least 10 percent of your income for retirement, and having an emergency fund of three to six months of expenses, paying the mortgage off is a solid idea.
Personally, I intend on paying my mortgage off early, even though I know I will give up some potential return.
That being said, I am not sure refinancing is what I would do for a couple of reasons. First, a reduction in interest rate of half a percentage point will not amount to an incredible amount of money. And to get it, you have to pay closing costs for a new mortgage.
It would probably take you three to four years to recoup the cost from interest saved. If you happen to move before then, you would actually lose money.
Second, you can almost have your cake and eat it too by pretending your current mortgage is a 15-year mortgage (or shorter) and paying more than your normal payment each month.
Right now, you can always pay more on your mortgage but if an unforeseen expense pops up or your family's income drops, you are not tied to making the higher payment that would come from a 15-year mortgage. You will pay a bit more in interest this way, but you are buying flexibility — not a bad thing for a growing family. Diapers are not cheap.
Given that you and your husband are already showing yourselves to be models of keeping a financial house in order, I suspect that either way, you will have your house paid off early and a growing nest egg.
Your new little bundle of joy is very lucky to have such responsible parents — now just make sure you instill the same into the next generation, along with lots of love and kisses.