By Howard Hook, CPA, CFP®
Howard Hook is a fee-only Certified Financial Planner, Chartered Advisor in Philanthropy and CPA with the wealth management firm of EKS Associates in Princeton, NJ. He has been named to Medical Economics’ list of top financial planners for physicians for nearly a decade and is a member of the Forbes Financial Council and a contributor to that publication.
Things seem as uncertain now as they ever were. Much of the blame for this can be placed on the arrival of COVID-19 nearly two years ago. It made us reflect on our own mortality, which may have caught many of us by surprise having not expected to have to do so for many years.
Besides mortality, the pandemic also took a toll on many people’s finances. Businesses that only a few years prior were bedrocks in their local communities struggled to stay open, leaving business owners and workers trying to figure out how to make ends meet.
I do not think there is a single person who does not know someone affected personally by either the medical issues or economic issues caused by COVID-19.
The pandemic is not over yet, and while we remain hopeful the worst is behind us, it is instructive to begin to evaluate what happened and how we can be better prepared medically and financially if and when this happens again. The medical part I will leave in the capable hands of the doctors, nurses, and other medical professionals at SBH and hospitals around the country who risked their lives to treat as many people as they possibly could.
As for the financial lessons, take a look:
You Need to be Properly Insured
This starts with providing access to affordable health insurance for everyone. The Affordable Care Act went a long way to providing this, but in the end the removal of a compulsory requirement to purchase insurance several years ago likely resulted in fewer people being insured than could have been.
The above is not meant to imply that a mandate to purchase health insurance be put back into law. I will leave that up to policymakers to determine. Instead, hopefully, the message is that access to health insurance benefits not just sick people, but young healthy people as well, since they too can become ill.
More people insured allows doctors, hospitals, and clinics to provide services with the understanding they will be paid for the services they provide. These dollars can be used to build more facilities, hire more doctors and other medical professionals, and upgrade the quality of care for everyone.
Given the opportunity to purchase health insurance either through your employer or privately, you should take advantage of this – whether you are healthy or not.
Purchasing health insurance through your employer is tax advantaged, as the premiums you pay are tax deductible so when you receive your W-2 at the end of the tax year the premiums you pay are deducted against your taxable wages.
Privately purchased health insurance premiums are not fully tax deductible unless you own a business and then can deduct the premiums against the business income you report on your tax return. If that is not the case, then the premiums may be deductible as an itemized deduction, but you have to itemize your deductions and even then, a portion if not all of it may not be deductible unless the amount spent exceeds your Adjusted Gross Income for the year. One way to make insurance more affordable for many people would be to allow a full deduction for premiums regardless of whether purchased through your employer or privately.
In addition to health insurance, working folks should also have disability insurance. Disability insurance can replace lost wages due to illness or sickness. Unlike workers’ compensation, the illness or sickness does not have to be job related.
Typically, disability insurance replaces a certain percentage of your wages. The maximum amount that can be purchased is between 60 – 70 percent of your gross monthly wages. Like health insurance, disability can be purchased through your employer (most offer it) or privately.
Disability insurance can be expensive, especially for medical professionals. Covering as much of your gross wages as you are allowed to is the best way to insure against a possible loss of income. Disability benefits can be either taxable or non-taxable depending on whether you pay the premiums with pretax or after-tax money. Unlike health insurance, where you want to pay for it with pre-tax money, disability insurance premiums should be paid with after-tax money so the benefits are tax free when paid out. If you purchase the policy through your employer, you should ask that your portion of the premiums be paid with after-tax monies from your paycheck. If buying a private policy not through work, then you should pay for the premiums with after-tax money.
It should be noted that if the premium is paid for by your employer, then the benefits are taxable to you. Many employers pay a portion, and you pay a portion. Asking to pay your portion with after-tax dollars will result in a portion of the benefits being tax free.
Establish an Emergency Fund
Back in March 2020, many local economies shut down with the original intent to reopen in a few weeks. As we now know this was not the case. Many local economies remained closed longer, only allowing essential businesses to remain open. And, even once open, businesses found that their customers did not immediately return. Instead, people turned to large online retailers to provide them with items such as food and groceries.
Many businesses and employees could get through a two-week period with no income. But anything longer than that put the family finances in peril. While the government did step in, providing support through stimulus payments and forgivable loans, the timing for many took too long and many people wound up financially incapacitated.
Having an emergency fund to tap into has always been a top priority for financial planners to recommend to clients. It so important that it should be accomplished even at the initial expense of saving for retirement. The funds should be at least equal to six months of cash needs and should be easily accessible if and when you need it. Keeping it in a savings account that you can link to your checking account is the best place to keep your emergency fund.
Your emergency fund should not be part of your investment portfolio. The sole purpose of an emergency fund is to be readily available in the event you need cash for an emergency such as a job loss, a business shutdown, or a major repair to your home. It should not be to buy a car or go on a big vacation.
Rather than keeping cash in a bank account as an emergency fund, some people prefer using a Home Equity Line of Credit to access any cash needs. The thinking behind this is that it allows more money to be invested directly into an investment portfolio rather than sitting in a bank account earning practically nothing.
The problem with this thinking is the risk that the line of credit would not be available to you if you needed it. Reading the fine print of your agreement, you would see that the bank can pull the line if it wants to. Many people experienced this back in the mid 2000s during the housing crisis. Banks canceled this lines of credit, or reduced or eliminated the amount of available credit. This is seemingly unfair as the purpose of the line of credit is to access for emergencies, but if the emergency happens to affect a good portion of the world, the bank will reduce its risk and adjust your capacity to borrow.
Bite the bullet and build an emergency reserve in your bank account. You will enjoy the peace of mind it brings.
The pandemic touched two nerves: our health and our money. We have an opportunity to improve both so that the next time we can spend more time caring for friends and family who may be less fortunate than us since we know our own health and finances remain in good shape.