The financial sector is one of the darling sectors on Wall Street for good reasons. Financial stocks are known for steady, reliable growth that outpaces the rate of inflation. At the same time, the sector comes with some of the best dividends on the market.
Perhaps that’s why two of the largest holdings in the legendary value investor Warren Buffett’s portfolio are in the financial sector.
But what exactly are financial stocks, what are the pros and cons of investing in them, and how much of your investment dollars should you allocate to the sector? Read on to find out!
What Are Financial Stocks?
The financial sector is a broad category of companies that work in the financial services industry. The sector includes:
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Retail and Commercial Banks and Lenders. Banks and lenders offer deposit accounts like checking and savings accounts and loans like mortgages and auto loans. Two of the most popular companies in this subcategory include Bank of America (BAC) and Wells Fargo (WFC).
Asset Managers and Investment Banking Services. Brokerages, investment banks, and other companies that provide services surrounding the management of assets fall into this subcategory. Some of the most popular players in this corner of the financial sector include JPMorgan (JPM) and Morgan Stanley (MS).
Credit Card Companies. Credit card companies, also known as card issuers, offer revolving loans that can be accessed at the point of purchase using a credit card. Some of the most popular players in this space include Citi (C) and American Express (AXP).
Fintech Companies. Fintech companies blend finances with technology to provide services that make managing your finances easier. Some of the most popular fintech players include Block (SQ) — previously Square — and PayPal (PYPL).
Insurance Companies. Insurance companies that provide health, life, auto, home, and other forms of insurance fall into the financials category. Metlife (MET) and Humana (HUM) are some of the most popular insurance stocks.
Pros & Cons of Financial Stocks
As with any other sector, there are advantages and disadvantages to investing in the financial sector. Although the sector is known for stable growth and dividends, it’s not the best option if you’re looking for market-leading price appreciation. Some of the most important pros and cons to consider before investing in the space are detailed below.
Pros
The financial sector offers a relatively low-risk way to access stable growth and dividends, but that’s not the only perk of investing in the sector. Some of the biggest advantages of financial stocks include:
Lower Risk. The financial sector comes with lower risk than some other sectors like technology and health care. This stability has improved significantly in recent years. According to Davis Funds, the largest U.S. banks are now holding record volumes of cash on their balance sheets thanks to lessons learned during the financial crisis of 2008. Stock prices tend to be more stable in the sector as well.
Dividend Income. Financial stocks are known for providing strong dividend payments. As of mid-2022, the sector produced a 3.11% average dividend yield, according to Dividend.com.
Strong Growth When Interest Rates Rise. Banks make more money when the Federal Reserve increases the Fed funds rate. As inflation rises, the Federal Reserve has hinted at steady increases throughout the foreseeable future, which suggests bank stocks are worth your attention.
Outpace Inflation. Historically, financial sector investment returns have significantly outpaced the rate of inflation, making them a great inflation hedge.
Cons
Although there are plenty of reasons to consider diving into financial stocks, there are also a few big drawbacks that you should consider before taking the plunge.
Financials Aren’t Strong Growers. Financial stocks are known for steady growth, not necessarily strong growth. If you’re looking for growth stocks, you may find a few in the fintech space, but growth investors will be better served by stocks in the tech sector.
Lower Earning Potential When the Fed Funds Rate Is Low. Although the Federal Reserve has hinted at increasing its rate ahead, the rate is currently below 1%. This low rate means companies in the sector, particularly lenders, have limited revenue potential.
Lack of Excitement. The best investments are educated investments, meaning you need to research opportunities to be successful in the market. Unfortunately, the financial sector isn’t sexy like technology and biotechnology is for most people. The research process to evaluate financial companies may be daunting for some investors.
Should You Invest in Financial Stocks?
Financial stocks fit well into most investment portfolios. Even aggressive investors who seek to beat the market find them useful as a means of diversification. Nonetheless, there are some investors who won’t find diversification with these assets beneficial.
You might be a great candidate to invest in financial stocks if:
You’re an Income Investor. The financial sector is known for providing some of the strongest dividends on the market today. So, income investors benefit from the outsize dividend yields that come with investments in some of the most established companies in the industry.
You’re Risk-Averse. If you have a low to moderate appetite for risk, financial stocks may be a great home for your investment dollars. These stocks are known for relatively low volatility when compared to stocks in other sectors, and most banks have beefed up their cash and cash equivalent holdings since 2008, making them a force to be reckoned with on the financial stage.
You’re an Aggressive Investor Who Needs Balance. If you’re an aggressive investor who wants to beat the market, chances are you’ll want to invest most of your assets in other sectors. However, you can use financial stocks as a way to diversify your holdings and reduce the overall risk in your portfolio.
You’re a Beginner. If you’re a beginner investor, it’s best to stick with large, safe companies that you know and do business with before venturing into other investments. Financial institutions often fit this bill. In fact, one of the best first investments you can make is often an investment in the stock of the bank you use. That is, as long as you work with a major financial institution.
How Much of Your Portfolio Should You Allocate to Financial Stocks?
The amount of allocation you should direct to the financial sector is heavily dependent on your goals and risk tolerance. Here’s how you should decide how much to invest in financial stocks:
Your Goals. Your goals play an important role in determining the best style of investing. If your goals include producing slow, yet meaningful and stable gains while generating income from your investments, the financial sector is a great place to start. Consider allocating a large portion of your stock portfolio to stocks in the sector. However, if you want to produce market-leading gains and you’re not so concerned about income, minimal allocation to financials is best.
Your Risk Tolerance. Financial stocks experience less volatility than stocks in other sectors and are known for maintaining a hefty sum of cash on their balance sheets. As a result, they’re relatively low-risk plays. If you have a low-to-moderate risk tolerance, a large allocation to financials fits the bill. However, if you have a moderate-to-high risk tolerance, you may want to keep allocation to the sector to a minimum.
Your Need for Investment Income. Financial stocks are a great option for retirees because they’re known for high dividend yields. Financial stocks are a great option if you depend on the income your investments generate. So, if you’re a retiree, a heavy allocation to this sector is warranted.
Don’t forget your safe-haven allocation. Fixed-income investments, gold, and other safe havens protect you from significant losses when stocks take a dive. So, always keep safe havens in mind when determining your portfolio’s asset allocation.
Consider Financial ETFs
If you don’t know how to research and maintain a balanced portfolio of stocks or don’t have the time to do it, you have another option. You can invest in financial exchange-traded funds (ETFs).
These funds collect investment dollars from a group of investors to purchase financial stocks and other securities. When the stocks rise in value, investors share in the price appreciation. Moreover, when the stocks held in the fund’s portfolio pay dividends, shareholders receive their share of dividends based on the number of ETF shares they own.
The best part is that financial ETFs are managed by professionals yet very inexpensive to tap into. With a little research on the best performing funds in the financial sector, you can take a largely hands-off approach to financial sector exposure.
The best financial ETF for you depends on your investment goals. Popular financial ETFs on the market today include the Financial Select SPDR Fund (XLF), the Vanguard Financials ETF (VFH), and the SPDR S&P Regional Banking ETF (KRE).
Final Word
Financial stocks are a great addition to just about any investment portfolio. If you’re an income investor or a risk-averse investor, you’ll enjoy the relatively stable price appreciation and meaningful dividends in the financial sector. If you’re a more aggressive investor who’s interested in growth, financial stocks are a great way to bring balance to your portfolio through diversification.
It’s no wonder that nearly every investing mogul from Warren Buffett to George Soros seems to have at least some allocation to the sector.
Financial stocks tend to do best when economic conditions are positive and interest rates are on the rise. As of mid-2022, that seemed to be the case. Consumer prices are rising, and the Federal Reserve has hinted at coming interest rate hikes that will bode well for financial corporation profitability. This suggests financial stocks will head up moving forward.
However, not all stocks in the financial sector are created equal. Some grow while others fall. Some pay dividends while others don’t. Simply put, some are winners and some are losers. Always do your research and get a good understanding of what you’re investing in before risking your hard-earned money.
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Joshua Rodriguez has worked in the finance and investing industry for more than a decade. In 2012, he decided he was ready to break free from the 9 to 5 rat race. By 2013, he became his own boss and hasn’t looked back since. Today, Joshua enjoys sharing his experience and expertise with up and comers to help enrich the financial lives of the masses rather than fuel the ongoing economic divide. When he’s not writing, helping up and comers in the freelance industry, and making his own investments and wise financial decisions, Joshua enjoys spending time with his wife, son, daughter, and eight large breed dogs. See what Joshua is up to by following his Twitter or contact him through his website, CNA Finance.
While student loan forgiveness may be up in the air, the administration has taken steps to reform debt relief programs that already exist. The Department of Education revamped the Public Service Loan Forgiveness (PSLF) program, which was started under the Bush administration in 2007. The program is designed to reduce student debt for graduates who go on to work in a range of government, nonprofit and healthcare jobs; see below for a list and more details.
Announced last October, the new rules include a limited requirement-waiver that allows eligible borrowers to have payments that were previously excluded counted toward loan forgiveness. The waiver ends October 31 of this year. To see if you qualify, go to studentaid.gov/pslf/ to use the PSLF Help Tool, which will generate the form you need. And make sure to have your old W-2 forms on hand. To see if your employers—past and present—qualify as an eligible or ineligible employer you will have to enter the employer’s tax identification number which is in box b of your W-2. For more information on the tool and how to use it, go to studentaid.gov/articles/become-a-pslf-help-tool-ninja/.
The waiver seems to have worked as it’s supposed to for at least one now-former debtor. Ricardo Maldonado of New York City recently tweeted how roughly $139,000 worth of his federal student loans (connected to a graduate degree) was forgiven thanks to the PSLF waiver. Maldonado applied for forgiveness back in November 2021. After applying he got letters updating him about the process and received official notice of forgiveness on May 31, 2022.
Maldonado says that the PSLF form was easy to manage for himself thanks to having one employer for the past 15 years, but more importantly “[It] was useful seeing folks say that [forgiveness] was possible,” he said via a direct message on Twitter.
What Went Wrong with Public Service Loan Forgiveness?
People with student loans who work in qualifying non-profit or government jobs may have their loans forgiven after ten years of qualifying payments to a qualifying loan program. These payments may be adjusted in consideration of the borrowers’ income level.
The first borrowers would have been eligible for forgiveness in October 2017 (remember, the program was launched in 2007). But four months before that, the Consumer Financial Protection Bureau reported problems: “Borrowers report that servicers delay or deny access to loan forgiveness through wrong information about their loans, flawed payment processing, and bungled job certifications.”
One major complication involves how federal student loans originated. Prior to 2010, federally backed student loans were issued by financial institutions and not directly by the federal government. PSLF applies only to direct student loans, or those issued by the federal government. Earlier loans could be consolidated into direct loans, and payments made after that consolidation would apply toward PSLF.
Who Qualifies for Public Service Loan Forgiveness?
The PSLF program covers a wide range of jobs, including virtually all direct government employment (whether federal, state, local or tribal). Many jobs at nonprofits as well as public health work also qualify. Some exceptions include Labor unions or partisan political organizations. Members of Congress are also specifically excluded. The program also has provisions that work must be full time (at least 30 hours a week), though this can be through multiple jobs with qualified employers.
Positions include:
Emergency management
Military service: service on behalf of the U.S. armed forces or the National Guard
Public safety
Law enforcement: crime prevention, control or reduction of crime, or the enforcement of criminal law
Public interest law services: legal services provided by an organization that is funded in whole or in part by a local, state, federal, or tribal government
Early childhood education including licensed or regulated child care, Head Start, and state-funded prekindergarten
Public service for individuals with disabilities and the elderly
Public health including:
Nurses
Nurse practitioners
Nurses in a clinical setting
Full-time professionals engaged in health care practitioner occupations, health support occupations, and counselors, social workers, and other community and social service specialist occupations as such terms are defined by the Bureau of Labor Statistics
Public library services
School library or other school-based services
More detail is available at: https://studentaid.gov/manage-loans/forgiveness-cancellation/public-service/questions.
Affording dental work can be tough if you’re an older American on Medicare.
That’s because Original Medicare — which covers a majority of beneficiaries — doesn’t include routine dental care.
Congress is considering whether to add dental coverage to Medicare as part of a $3.5 trillion social spending package — but progress has been slow.
For now, older adults are mostly on the hook when it comes to paying for their own oral health care.
Here are seven ways to get free or reduced dental care. We’ll also explain what limited dental benefits Medicare coverage provides, along with other options like private insurers and Medicaid.
7 Places to Get Cheap or Free Dental Care for Seniors
Medicare beneficiaries who use dental services spent an average of $874 a year out-of-pocket, according to an analysis by the Kaiser Family Foundation.
That’s a lot of money, especially if you’re on a fixed income.
Here are a few tips and tricks to save big on oral health.
1. The Dental Lifeline Network
This program by the American Dental Association offers free, comprehensive dental treatment to specific groups, including people ages 65 and older.
You can use this tool on the Dental Lifeline Network website to learn about the specific program details in your state.
Heads up: Due to long wait lists, several states and counties are no longer accepting new applications for the Dental Lifeline Network program. When we did a quick search, states like Texas, California and Kentucky weren’t accepting new applications.
2. Community Health Clinics
Federally funded community health clinics provide reduced-cost or free dental care services to people with low incomes.
Many operate on a sliding scale system while others offer flexible payment plans.
Wait lists can be long, so it’s important to reach out to your local clinic early.
Follow this link to find the nearest community health clinic near you.
3. Dental Schools
Some dental schools offer low-cost cleanings and other routine care to members of the community.
Most of these teaching facilities have clinics that give dentists-in-training an opportunity to practice their skills while providing care at a reduced cost.
You can search for a program in your area by visiting the American Dental Association website.
There’s no guarantee that a dental program in your area currently offers free or reduced dental care. You’ll need to contact each program individually to see what’s available.
When you call, make sure to ask about any fees up front.
4. NeedyMeds.com
This website offers a comprehensive list of dental offices with sliding scale payment options, community health center locations and dental school clinics.
It does a great job breaking down requirements and eligibility (if any) for services in your area, and provides contact information for each service.
Just enter your zip code into this search tool to get started.
5. Talk With Your Dentist
It might be difficult to ask for help, but being honest with your dentist about your financial situation can help.
Your dentist may be able to offer a less expensive treatment, help you set up a payment plan or provide a sliding scale payment option.
Ask if you can receive a discount for referring a friend. Or, see if it’s possible to knock off a few bucks in exchange for a positive online review of the dentist office.
6. Sign Up for a Dental Savings Plan
Dental savings plans aren’t dental insurance, but they may still be able to save you money.
Here’s how it works.
With a dental savings plan, you pay an annual fee, then get a 10% to 60% discount on most dental services such as exams, cleanings, fillings, root canals and crowns.
The plan contracts with dentists who agree to reduce their fees, then you pay the participating dentist directly using your discount.
You’ll still pay out of pocket for those services, but the idea is that you won’t pay as much as you would without the plan.
But let’s be clear: Dental discount plans aren’t free. The average cost for plans in Orlando, Florida, for example, ranged between $135 to $170 a year.
You can visit DentalPlans to find a plan in your area.
7. Shop Around
Dentists can charge widely different prices for the same exact procedure.
When you’re paying out of pocket, it pays to shop around.
You can find average prices in your area by using FAIR Health, a national nonprofit organization. The site lets you search by specific procedures, so you get the average cost for a root canal or teeth cleanings in your area.
Armed with knowledge, call around to different dentist offices for quotes. Ask about senior discounts.
You can also look for discounted dental care on sites like Groupon.
A quick search on Groupon for dental services in Houston, Texas, showed numerous x-ray, exam and cleaning packages for $25 to $50. One office even offered $700 toward dental implants for just $40!
If you live in a high cost-of-living area, driving to a less expensive area is another smart way to save money.
Getty Images
Does Medicare Cover Dental Care?
Yes and no.
Original Medicare doesn’t provide coverage for routine dental, vision or hearing benefits.
Original Medicare will only cover dental work if it’s deemed medically necessary, i.e. you were hospitalized after a traumatic injury that also affected your jaw, teeth or mouth.
Here are the other dental services covered by Medicare Part B:
Dental services that are critical to a larger procedure like facial reconstruction after an accident.
Tooth extraction that is needed to prepare for radiation treatment.
Oral exams that are done to prepare for a kidney transplant or heart valve replacement.
So if you’re looking for standard dental care like teeth cleaning, X-rays, fillings, extractions, dentures and more — the cost comes out of your pocket.
Medicare Advantage
Medicare Advantage plans are administered by private insurance companies. They must provide the same basic coverage as Original Medicare, but plans may offer additional benefits, such as dental.
About 94% of private Medicare Advantage plans provide some dental coverage, but the amount of coverage varies by plan.
According to the Kaiser Family Foundation, nearly all Medicare Advantage plans that include dental offer coverage for oral exams, cleanings and x-rays.
But benefits for more advanced dental work like root canals, implants and dentures can carry substantial copays, depending on the plan.
Medicare Advantage plans almost always impose restrictions, including annual dollar caps and how often you can get certain benefits, such as dental implants.
The average annual limit on dental benefits among Medicare Advantage plans that offer more extensive benefits was about $1,300 in 2021, according to KFF.
If you’re in a Medicare Advantage plan, it’s important to check the plan’s summary of benefits or evidence of coverage to see exactly what dental work is covered. It can vary widely from plan to plan.
Other Dental Insurance for Seniors
About half of all Medicare beneficiaries — 47% — did not have any form of dental coverage in 2019, according to the Kaiser Family Foundation.
Besides Medicare Advantage plans, other sources of dental coverage for seniors include Medicaid and private plans, such as employer-sponsored retiree plans and individually purchased dental plans.
Private Dental Insurance for Seniors
A standalone dental policy for people 65 and older is typically $20 to $50 a month, according to AARP. These dental insurance policies usually come with an annual deductible of $50 to $100.
Dental insurance plans usually cover checkups and cleanings 100% but you will probably owe 20% to 50% for other services, such as tooth extractions or dentures.
The devil is in the details with private dental plans: It’s important to shop around and carefully compare benefits to make sure you’re getting the best deal.
Here are a few other things to keep in mind about private dental insurance plans:
You can’t enroll in a dental plan through the federal ACA Marketplace if you’re already enrolled in Medicare.
Private dental policies usually don’t charge higher monthly premiums if you’re over 65 or in poor health.
An insurance company may require you to undergo a waiting period before you can get expensive procedures.
Some plans won’t cover pre-existing dental conditions you had before enrolling in coverage.
You may be restricted to an in-network dentist, so check to see if your dentist is on the list.
Medicaid
About one in five Medicare beneficiaries is also enrolled in Medicaid, sometimes referred to as being “dual enrolled.”
Medicare usually pays as your primary insurance when you’re dual enrolled. But if you need dental work done or even a yearly cleaning, consulting your Medicaid handbook is a smart move.
If you meet Medicaid low income requirements in your state, you may be able to receive free or low-cost dental care for certain procedures and services.
But it’s not a guarantee. While most states provide at least some emergency dental services, only 36 states and Washington, D.C. offer limited or comprehensive dental benefits for adults, according to the National Academy of State Health Policy (NASHP).
Even if your state Medicaid program includes dental, it may not pay out much. Of the 36 states with routine dental care coverage, only 23 states offer an annual expenditure cap of $1,000 or more.
Adult Medicaid recipients in Arkansas, for example, only receive up to $500 of dental services a year. So if you need a $3,000 root canal and you’re dual enrolled with Original Medicare, you can expect to pay $2,500 out of pocket in that state.
According to Medicaid’s national website, “States have flexibility to determine what dental benefits are provided…There are no minimum requirements for adult dental coverage.”
To find the Medicare office contact information for your state, click here.
Rachel Christian is a Certified Educator in Personal Finance and a senior writer for The Penny Hoarder.
Save more, spend smarter, and make your money go further
Creating a budget can offer you peace of mind and give you more confidence in managing your finances. A budget can help make you more aware of how you spend your money, and the places where you may be spending too much, so you can figure out how much to save.
So, what is a budget?
A budget is essentially a summary of how much money you bring in and how much money you spend on a monthly basis. The idea of creating a budget might be intimidating, but it actually doesn’t have to be all that complicated. You just have to calculate the amount of money you make and compare it to your expected expenses. A basic budget is one of the most important things you need to take charge of your money—and help achieve more of your financial dreams.
In this series, we’ll be answering important questions like “What does budget mean?”, “Why is Budgeting important?”, and more. This is the first chapter of our budgeting series, and we will go over the basics of what budgeting is and how to create one. To learn more about budgeting, continue reading, or use the links below to jump to a section of your choice.
Intro to Budgeting: What is a Budget?
So before we get into any more details about budgeting and how to create one, let’s first answer the question of: What is the meaning of budget?
A budget is a financial outline designed to measure and guide your income and expenditures for a certain period of time, such as one month, a quarter, or a year. With an understanding of the budget basics, you can track the amount you’re making compared to what you’re spending and saving.
Why do I want a budget? Consumer.gov says making a budget can help you determine your spending plan and in turn, show you where you should limit your spending and what you can afford to spend more money on.
There are many ways you can maintain a budget — with a spreadsheet, paper and pen, or through a budgeting app.
Whether you’re new to managing your own finances, never learned how to budget, or are tired of living paycheck to paycheck, this post is for you. In our Budgeting 101 guide, we’ll go over some budgeting basics, show you how to create a budget, teach you how to avoid common budget-related mishaps, and ultimately, give you a budget calculator and some budgeting tips to create a budget that’s efficient and functional for your lifestyle.
Who Needs to Use a Budget?
Any person who wants to take control of their finances and feel more financially secure could benefit from a budget. A budget isn’t just for people who want to cut back their expenses and save money. A budget can be for anyone! Even if you’re comfortable with your income and your expenses, you can still benefit from being aware of how and where you spend your money.
A budget is especially beneficial for people who need to save money for various reasons, like if you need to budget for your wedding or save for a down payment on a house. Having a budget can also be helpful for people whose income is unpredictable or who are going through a career change and need to be more aware of their finances.
To make a financial plan, you need to have a budget. A financial plan is a great way to organize your financial situation and figure out your goals and how you can achieve them. Without a budget, there’s no way to find out how much money you’re saving vs spending, which is imperative in achieving your personal and financial goals.
Everyone’s budget will look different, but generally speaking, a budget will include your various living expenses, like how much you spend on rent, groceries, transportation, healthcare costs, and loans.
You might overlook some things when it comes to your expenses, but having a budget can really help you hone in on how you spend your money. Your living expenses can easily add up, so it might be helpful to do things like calculate your monthly grocery budget so that you can figure out exactly how much you have to spend.
Living expenses will also differ for every person depending on where they live, but you can use a cost of living calculator to help figure out if it’s possible to maintain your current standard of living based on your income.
Why Is Budgeting Important?
There are countless reasons why having a budget is important and how it can positively impact your finances, such as:
It Helps You Control Your Spending
Without a budget, you would have no idea if you were spending beyond your means. A budget will help you control your spending by making you more aware of how much you spend on a daily basis in comparison to how much you’re bringing in. It also might be a good idea to try a more minimalist lifestyle so you can cut back on unnecessary costs.
It Helps You Figure Out Your Long-Term Goals
We all have different long-term goals that we want to achieve, and creating a budget can help you achieve them. For instance, if one of your goals is to retire by 50, a budget can help you figure out how much you need to save for retirement each month. There are various tricks to help you save so that you can feel like your long-term goals are actually attainable.
It Can Make You Feel More Financially Secure:
There’s nothing worse than feeling overwhelmed with your finances. Fortunately, having a budget can make you feel more confident and secure in your financial health, so you’re always prepared for any unexpected expenses.
It Can Help You Get Out of Debt
There are a lot of different things that can put you in debt: credit cards, medical bills, college loans, unpaid taxes, the list goes on. Being in debt is terrifying, but one way you can get out of debt is by budgeting. Budgeting can help you save part of your paycheck so you can put that towards paying off your debt.
It Keeps You Organized
It’s easy to get disorganized when it comes to your finances, but having a budget can help you manage and organize your monthly bills, debt payments, and other expenses.
It Helps You Save Money
One of the main benefits of budgeting is that it helps you save money. Rather than living pay-to-paycheck, budgeting helps you stay ahead of the curve so you can save money for the present and future. You can also increase your income streams at home and make even more money to put towards savings.
How to Create a Budget: 5 Actionable Steps
To plan your budget, you’ll need a few key pieces of information. With these basic components, you’ll have a foundation for your budget that you can tweak as the months go by and as your financial circumstances change. To get you a step closer to your financial goals, let’s go over how to create a budget step-by-step.
1. Calculate your monthly income after taxes
An accurate monthly income is the cornerstone of a successful budget. Without figuring out how much money you actually have in your wallet, it’s pretty hard to allocate funds towards saving, spending, and settling outstanding debts. But calculating your monthly income takes a little bit more effort than glazing over your monthly paychecks.
To find out how much you’re actually earning, you’ll need to do a little bit of simple math—don’t worry, we’ll walk you through the entire way.
Calculating your monthly income as a salaried employee
One of the benefits of being a salaried employee is knowing exactly what to expect on your paycheck—month in and month out—and this pay structure will serve as an added perk when you’re building a monthly budget. To calculate your pre-tax monthly income as a salaried employee, all you need to do is divide your annual salary by 12.
Let’s look at an example:
Laura is a salaried employee who makes $60,000 a year. To calculate her pre-tax monthly income, she would divide $60,000 by 12, which equals $5,000 gross monthly pay.
Now that you have your gross monthly income figured out, you’ll need to deduct taxes and other expenses that may dock your pay—such as medical benefits and contributions to an employer-sponsored retirement plan. We’ll show you how to estimate this number in just a moment, but first we’ll go over how hourly employees can calculate monthly income.
Calculating your monthly income as an hourly employee
If you’re an hourly employee, your monthly income isn’t always as consistent as you might like it to be, but with the proper budgeting technique you can definitely nail down a budget that maximizes your monthly income and gets you closer to meeting your greater financial goals. Here’s how to figure your monthly income as an hourly employee:
Let’s take a look at an example:
Keith is an hourly employee who makes $15 an hour working 40 hours per week, making his gross weekly income $600. Keith multiplies this number by 50 to reflect the weeks he plans to work throughout the year (minus his two-week vacation). Then, he divides by 12 and estimates that his gross monthly pay is $2,500.
Remember, this number does not factor in the deductions that may impact his take-home pay, so now he’ll have to subtract these from his gross monthly income to get an accurate picture to build his monthly budget.
Subtract taxes and other deductions from your gross monthly income. If you’re unsure of where to find this information, one place you can look is your employer-provided pay stub. You’ll be able to see how much is deducted by checking the net pay that’s deposited to your checking account.
To get the most accurate picture of your monthly take-home pay, you’ll need to subtract taxes and other deductions from your income.
Federal Taxes: To find out your federal tax liability each month, refer back to your annual gross income that you calculated before. Then, compare your income to the federal income tax rates to find out what percentage of your income will go toward your federal income taxes. Once you’ve found this number, divide by twelve to estimate your monthly tax liabilities.
State Taxes: Calculating your state income taxes is essentially the same as finding your federal tax liability, but this time, you’ll need to refer to your state’s income tax rates. Multiply your annual income by your tax rate, then divide by twelve to see how much you’ll owe in taxes each month.
Social Security and Medicare Taxes: According to the IRS, the federal withholding rates for FICA are: -6.2% for Social Security -1.45% for Medicare
Misc: Depending on your financial situation, you may have other deductions to consider when calculating your monthly take-home pay. Use previous paychecks to help you determine how much money will be withheld to account for 401k contributions, benefits, etc.
2. Identify fixed and variable expenses
Once you have a clear picture of how much money you’re actually working with each month, it’s time to figure out how you’re spending it…or how you should be spending it. There are two main types of expenditures you need to account for as you build your budget: fixed and variable expenses. The difference between the two is that fixed expenses tend to cost you the same amount each month while variable expenses…vary.
You can look for payments toward your living expenses on your monthly bank statements and credit cards.
Fixed expenses
Your fixed expenses like rent payment, groceries, transportation, and health care costs are likely to absorb a large chunk of your budget, which makes them all the more important to track as the months go by.
To determine how much of your budget is going towards fixed expenses, start by creating a list of your regular expenditures. Here’s a list of common fixed expenses to help you get started:
Rent
Mortgage
Car payments
Student loans
Once you’ve built a complete list, calculate a monthly estimate for each one, so you know how much of your income should be dedicated to it. If you’re not sure how much something costs, review previous bills and credit card statements to see what you’ve spent in the past.
Variable expenses
Whether you belong to a gym, go on a weekly date, or make a purchase on a shopping app, make sure you account for these costs in your budget. As opposed to fixed expenses that stick to relatively the same cost each month, these miscellaneous items may change month over month.
Some examples of variable budget expenses include:
Entertainment
Groceries
Dining out
Gas
Clothing
Dating
Ride-sharing
Utilities
Determining how much you spend on variable living expenses each month can be tricky since it may be rarely consistent, but it’s important to get a close estimate so that you can determine whether you can maintain the same spending habits or if you need to cut back in certain areas. Use your monthly bank statements to help you estimate your variable expenses, and in turn, set limits for each category.
How to factor expenses into your budget
If you’re using one of our free budgeting templates, simply input the values of these fixed expenses into your budgeting spreadsheet to help plan out your financial strategy each month. In the Mint app, you can connect your bank account to easily identify recurring expenses, or enter in your own budget for fixed expenditures.
3. Set savings and debt payoff goals
As you saw in step two, if you have student loans and credit card balances, you’ll want to attribute part of your monthly budget to paying them off. Each month, allocate a certain amount to these monthly payments. The sooner you pay off debts, the less interest you’ll pay overall, and the closer you are to meeting your greater financial goals.
When creating a personal budget, include these types of debts into your planning:
If you’re all caught up on your bills and want to stow away funds for retirement or save up for a new car, it’s helpful to establish concrete goals, then break them down into achievable bite-size chunks. Having trouble coming up with realistic, meaningful financial goals? Take a look at these short-term and long-term examples:
Short-term financial goals
Long-term financial goals
Establish a retirement budget to build a retirement account
Pay off your mortgage or student loans
Start your own business
If you’re using the Mint app, you can set up custom goals for your savings in the budgeting section. Simply add a budget, define a dollar amount, and monitor your progress.
4. Record your spending
You know that feeling when you’re checking out at the grocery store, the cashier announces your total, you swipe your card, and by the time you’re loading your grocery bags into your car, you realize you didn’t even register the total amount you paid. It’s a concerning, out-of-body experience—but we’ve all been there.
This is why tracking your spending is so important. It’s easy to become complacent about the amount of money you’re spending and end up with revolving debt ruling your finances. Depending on the budgeting method you choose—budgeting app, pen and paper, or online budgeting tool—you can pick a way to record your spending that best suits your lifestyle.
Here are a few tips to make expense tracking easier and more efficient:
Ditch the Cash: Stick to card payments if you have trouble keeping tabs on how much money you spend each month. This way, you can refer to your online bank statements to easily monitor your spending.
Check Yourself Before You Wreck Yourself: Make it a point to analyze your spending habits on a weekly basis. Collect any receipts or statements you have and check to see if you’re on budget or if you need to reel in your spending for the rest of your budgeting cycle. Budgeting will help monitor your spending so you are able to keep living within your means.
Go Old-School: If you’d rather skip the technology and take a more tactile approach to budgeting, a pen and a checking book will do just fine. Just be sure to make a habit of recording your expenses as soon as you’ve swiped your card.
Try the New-School Way: If you can’t be bothered to whip out a pen and paper each time you check out at the register, automated expense tracking might be a better alternative. Using the Mint app, you can connect your bank account to effortlessly record your spending and monitor transaction trends.
5. Track your budgeting progress, review, and revise
Creating a basic budget is a huge financial victory. It helps you ensure you can cover your expenses and reach for exciting milestones, like buying a house or paying off your student loans. As you continue to budget, make adjustments as you see fit. Your income, expenses or lifestyle might change, and it’s important to ensure your budget keeps working for you and your future.
Set up a budget schedule and make it a point to review your budget on a regular basis—each week, every month, or at least every quarter to see if any major changes, or milestones have taken place. Not only will this help you recognize and celebrate your successes, but it will also encourage you to reevaluate and tailor your strategy as needed.
Budgeting Breakdown for Beginners
Now that you know how to make a budget, it’s time to discuss best practices and budgeting basics to ensure your budget works for your money and your lifestyle.
How to Choose the Budgeting Style That Works for You
Here’s the thing about budgeting. There’s not really a one-size-fits-all approach that works for every individual. Depending on your spending habits, financial goals, lifestyle, and your relationship with money in general, one budgeting tactic might make more sense for you than another. Let’s take a look at a few budgeting methods you can try.
Starting simple with your bank statements
One easy way to start budgeting is to take your previous month’s bank statements and create a budget using the deposits as your monthly income and categorize all the withdrawals on the bank statement for:
Living expenses
Food
Auto
Housing
Health
Other expenses
Then you can see what last month’s budget looks like to be able to make adjustments to this month’s spending. This allows you to better accomplish your life goals and ensure you’re placing money where it needs to be in order to make progress.
Keep tabs on transactions with the envelope method
The envelope system is a simple budgeting approach that involves spending with cash instead of plastic.
If you budget $100 for eating at restaurants, put that amount into an envelope. When the money’s gone, you have to wait until next month to eat out again.
If you budget $200 for groceries</span id=”anc6″>, put $200 in a “grocery” envelope. If you’re at the checkout line and the total comes to $203, you’ll need to put something back.
The envelope method helps you be more strict with your budget. The pockets of cash are a visual and tangible reminder of how much money you’re dedicating to each area of your life.
Follow the 50/30/20 rule
Financial experts recommend the 50/30/20 guideline as a basic financial strategy, especially for young professionals. You can also use the new 50/30/20 budget calculator to help create your new budget.
The rule says that you should allocate a 50%, 30%, and 20% of your income to the following categories:
Personal Expenses: 30% -Entertainment -Dining out -Date night -Shopping for non-essential items
Savings: 20% –Emergency savings -Retirement account -Travel fund –Rainy day fund
50/30/20 Calculator
50/30/20 Budget Calculator
Here’s how much you have for:
Essentials$0.00
Wants$0.00
Savings$0.00
Consider a zero-based budget
With the zero-based budgeting technique, each month begins and ends with zero dollars. When you build out your zero-based budget, every dollar has a purpose. Let’s take a look at a sample budget using the zero-based method. If you make $3,500 every month, attribute each dollar to an expense. You might put $1,750 toward living expenses, $700 toward paying off debt, and $1,050 toward personal expenses like going to the movies or saving for vacation. At the end of the month, your balance is zero, because every dollar is accounted for.
Keep in mind, the zero-base doesn’t mean you’re spending every dollar that you earn, but rather, that each one is allocated to a different category—savings account included!
Selecting a Budgeting Tool That Suits Your Lifestyle
As we mentioned before, the one-size-fits-all methodology is a no-go when it comes to personal budgeting. Your financial situation is completely unique to you whether we’re talking about your income, expenses, or your financial goals, so it only makes sense to tailor your budgeting strategy to your individual preferences.
Here are a few tips to help you find a budgeting tool that makes sense for you:
Read reviews, or ask around: Although money can be considered a taboo topic, that doesn’t mean you need to tip-toe around budgeting techniques in your relationship or with your friends. You probably trust their opinions more than anyone else, after all. See which tools they use and ask what they like and don’t like about their current budgeting method.
Test it out: Before buying into any paid budgeting subscriptions, give the free trial a go. This way, you’ll be able to familiarize yourself with the features and decide if it’s a tool you’d continue using.
Consider compatibility: If you’d like to automate your expense tracking, make sure that the budgeting tool you want to use can be integrated with your bank and credit card issuers.
Use a template or tool tailored to your needs: Depending on your financial circumstances, you may need a simple budget, or one that’s specific to your income and expenses. Or perhaps you’ll need additional functionality like investment capability or the ability to make peer-to-peer transactions. According to a recent survey, 85% of people use either banking apps or online banking platforms.
As you select a budgeting tool, consider how you’ll use it and how the tool fits into your lifestyle and financial goals. Our budget templates include the following categories:
Common Budgeting Obstacles and Mistakes
Before you set sail on your journey towards better budgeting, it’s time to talk about some of the obstacles you may encounter on your way. Like most things in life (or the sea in this case), budgeting isn’t always clear-cut—there can be aspects that are difficult or ambiguous. Factoring in random, one-time expenses or calculating a part-time gig can complicate your budget, but trust us, your voyage can (and must) continue! Here are a few tips to ensure you have the most accurate budget—no matter the circumstance.
1. Estimating irregular income
If you’re a freelancer or work a side hustle, you likely have an irregular income that can be hard to predict. In these cases, it’s best to estimate a conservative (low) amount, so you don’t overspend. Review the past 3-6 months of income and watch for any patterns. Can you find an approximate hourly rate or weekly rate for what you bring in? If you’re new to a job, like being a waitress, ask a coworker how much they typically make in tips to help you forecast your monthly tip outs. Above all, do your best to create an income estimate—knowing you can tweak it along the way.
2. Paying for emergency expenses
Unfortunately, accidents and unexpected bills happen to everyone. From car troubles to job loss and medical expenses, emergencies can be expensive and having a backup emergency budget can help cut down expenses. An unexpected bill can throw off our budget, and set you back. If an incident does occur, try to factor the expense into your budget while paying your other bills. For instance, you may want to cut back on dining out for the month, or pick up an extra shift to help you cover a bill. If you can, build an emergency fund into your budget to safeguard your finances against future unexpected situations.
3. Forgetting one-time expenses
Items like annual memberships, vacations, and gifts for family and friends are often forgotten when creating budgets. If you can, set aside a small amount of cash every month for these extra expenses. You can estimate the expected cost for the year and account for them in your monthly budget. For example, if you typically spend $300 on Christmas gifts, set aside an extra $25 every month to account for these added expenditures. By the time December comes, you’ll have the cash available to spend on gifts.
How Often Should You Review Your Budget?
So now that you’ve learned how to actually create a budget, you’re probably wondering: How often should I review my budget?
It’s ultimately up to you, but you should aim to review your budget at least once every few months. Some people even prefer to do it each week or new month, so that they can ensure they’re always on top of their expenses.
You may want to consider checking in quarterly and doing annual budget reviews so you can see if you’re on track for your long-term financial goals. Budgeting isn’t just something you do one month and then never again. Budgeting is a long-term process, so it’s crucial to regularly review your budget to make sure you’re living within your means and not overspending.
A budget tracking template is a good way to keep your finances organized so you can create a reviewing system that works for you.
Key Takeaways: Budgeting 101
Creating a budget is really as simple as following these five steps:
Calculating your take-home pay
Estimating your expenses
Setting savings and debt payoff goals
Recording your spending
Tracking your progress
To find the right budgeting method and tools for you, consider compatibility, ask around, and try out different options
Avoid budgeting pitfalls by preparing for unexpected circumstances and tailoring your budgeting strategy as needed
Bottom Line: Budgeting Can Help You Take Control of Your Finances
So, now that you have a better idea of what a budget is and how to create one, you can answer the question: What is your budget?
Every person’s budget will look different, and creating a budget that works for you may take some time. So for help with your budgeting journey, you should continue reading this series which will cover budgeting tools, tips for managing your budget, and more. And once you have a good understanding of what a budget is, you can move on to the next chapter in the series, which covers what to include in a budget.
Sign up for Mint to help you stick to your budget and goals Let the Mint app do the heavy lifting for you. It can calculate your income, total your spending by category, and help you conquer your savings goals. Tracking expenses with the app is simple and accessible—no matter where you are.
Save more, spend smarter, and make your money go further
Mint is passionate about helping you to achieve financial goals through education and with powerful tools, personalized insights, and much more. More from Mint
Affording hearing aids is challenging if you’re an older American on Medicare.
That’s because Original Medicare — which covers a majority of beneficiaries — doesn’t cover hearing aids, fittings or hearing exams.
That’s right — not a dime. And hearing aids are expensive: The average cost for one pair ranges from $3,000 to $6,000.
About 1 in 3 people between the ages of 65 and 74 have hearing loss, and nearly half of people 75 and older have difficulty hearing, according to the National Institute on Aging.
For now, older adults are mostly on the hook when it comes to paying for hearing care.
In this guide, we break down what hearing aid coverage is available to both Original Medicare and Medicare Advantage beneficiaries.
We also explore other ways to save money on hearing care, including Medicaid and nonprofit programs.
Does Medicare Cover Hearing Aids and Exams?
Original Medicare doesn’t cover hearing aids or exams for fitting hearing aids. Some Medicare Advantage plans have hearing aid coverage, but it varies by plan. Some other services are covered under both, however.
Original Medicare
In some situations, Original Medicare coverage may pay for cochlear implants or hearing tests in emergency situations.
Original Medicare covers 80% of the cost of cochlear implants for those who qualify. Cochlear implants are considered medically necessary for the treatment of a severe to profound hearing impairment.
Medicare Part B will generally cover a cochlear implant if you recognize sentences while wearing your hearing aids only 40% of the time or less.
Medicare Part B will also cover 80% of a diagnostic hearing test and balance exams, but only if it is ordered by your doctor or health care provider during an emergency.
For example, a doctor may run these tests to diagnose the cause of dizziness or vertigo.
Need a refresher on how Medicare works? Check out answers to seven frequently asked questions.
Medicare Advantage
Original Medicare doesn’t provide hearing aid coverage, but many Medicare Advantage plans offer hearing health benefits.
Medicare Advantage plans are administered by private insurance companies. They must provide the same basic coverage as Original Medicare, but plans may offer additional benefits, such as hearing aids.
About 93% of Medicare Advantage plans provided some hearing aid coverage in 2021, according to the Kaiser Family Foundation.
But how much coverage each Medicare Advantage plan provides varies.
For example, the KFF analysis found that about 60% of enrollees are in plans that require cost sharing for hearing aids, which ranged from $5 up to $3,355 in 2021.
Most plans also include coverage limits and restrict you to a specific network of physicians.
Make sure you calculate your potential out-of-pocket costs when choosing a Medicare Advantage plan.
Remember: Even with a good Medicare Advantage plan, you may still face out-of-pocket costs, such as premiums and deductibles as well as copayments to see an audiologist for fittings.
6 Ways To Get Cheap Hearing Aids
Medicare beneficiaries who accessed hearing care services spent an average of $914 out-of-pocket in 2018, according to an analysis by the Kaiser Family Foundation. For many, that’s simply out of reach.
Some national organizations cover hearing aids for people with low incomes and limited resources. These programs often have strict eligibility criteria and may be difficult to qualify for.
There are other ways to get affordable hearing aids, including shopping around and asking your audiolist for sliding scale payment options.
1. Miracle-Ear Foundation’s Gift of Sound Program
The Miracle-Ear Foundation’s Gift of Sound program helps provide hearing aids for adults with hearing loss.
The program is available to individuals with significantly limited incomes under 200% of the federal poverty level who have exhausted all other financial resources.
You need to contact your local Miracle-Ear store before starting an application. Supporting documentation from a hearing care professional and an application fee of $150 is required.
You can find more information about the Gift of Sound program along with eligibility requirements here.
2. Help America Hear Program
The Help America Hear program provides hearing aids for adults with limited financial resources.
The program can provide both new ReSound behind-the-ear and receiver-in-canal digital hearing aids.
There are three qualifying tiers based on gross household income, personal assets and health insurance coverage.
Every applicant is required to pay a fee, which can range from $125 to $500 for one hearing aid, to $250 to $1,000 for two hearing aids.
The application process is extensive and requires medical documentation, proof of income and proof of health insurance (if any).
The entire application process can take two to six months, according to the organization’s website.
If you qualify, you are still responsible for the cost of the hearing evaluation, batteries, accessories as well as extended loss and damage warranties.
Click here to check out the Help America Hear program application.
3. Check Out Costco
Comparison shopping is important if you want to save money on hearing aids.
Wholesale clubs like Costco offer great deals on hearing exams, fittings and devices.
Costco’s private brand, Kirkland Signature, sells hearing aids for about $1,400 per pair — about half the price you’d pay elsewhere for a name-brand equivalent. They also offer free hearing tests.
Not every Costco location has on-site audiologists or hearing specialists and you’ll need an appointment. You’ll also need to sign up for a Costco membership, which starts at $60 a year.
4. Talk to Your Doctor
It never hurts to ask for a discount.
It may sound like a no-brainer, but simply asking your health care provider for a more affordable price can really help.
According to Consumer Reports, almost half of all hearing aid users in their survey who asked for a lower price on their hearing aids ultimately received a discount.
Most audiologists and hearing care professionals offer financing plans and some offer sliding scale payment options.
Wherever you go to purchase your device, try bargaining or asking for a lower-priced model.
The price of a hearing aid is sometimes “bundled” to include the device plus other costs, like the audiologist’s services for fittings, adjustments and follow-up care.
Asking your provider to unbundle their services and provide you with an itemized list of charges can help you save money because you’ll only pay for what you need.
5. Keep an Eye Out For Over-the-Counter Hearing Aids
Hearing aids may get much more affordable in the near future thanks to an FDA proposed rule issued in October 2021.
The rule would create a new class of over-the-counter (OTC) hearing aids available without an exam or fitting by an audiologist.
OTC hearing aids would be available from any seller — and at a fraction of the cost. Consumers could pay about $600 per pair instead of upward of $5,000 per pair, according to Harvard Health Review.
It would also cut the red tape many consumers face: Currently, patients must see a licensed hearing professional and obtain a prescription before they can buy hearing aids.
OTC hearing aids will be available to adults with mild to moderate hearing loss, and will be equipped with the same basic technology as traditional hearing aids.
The FDA is currently finalizing its proposed rule. OTC hearing aids are expected to hit the market by the end of 2022, according to The New York Times.
Local Organizations and Programs
Some local and regional nonprofit programs provide financial assistance or discounted hearing aids to those who qualify.
You can call United Way’s 2-1-1 social services number or contact your local Area Agency on Aging to see what’s available.
To find the contact information for your local Area Agency on Aging, enter your zip code into the Eldercare Locator tool operated by the U.S. government.
Other Hearing Care Insurance
Medicare coverage for hearing aids may be limited but Medicaid and VA benefits can help pick up the cost if you qualify.
Medicaid
About one in five Medicare beneficiaries is also enrolled in Medicaid, sometimes referred to as being “dual enrolled.”
Medicaid is a federally-funded health insurance program for people with low incomes. It’s administered at the state-level, so each state determines its own hearing benefits and limitations.
About half of states offer some hearing benefits and coverage for hearing aids.
What’s covered varies even among states with hearing aid benefits. In Florida, for example, you can receive a pair of hearing aids once every three years but in North Dakota, Medicaid recipients are entitled to hearing aids only once every five years.
In some states, like New Jersey and Massachusetts, hearing aids are only available with specific Medicaid plans.
You can see what benefits your state offers along with any limitations and requirements by visiting this comprehensive list from the Hearing Loss Association of America.
Or call and ask the Medicaid program in your state to see if you qualify.
Veterans’ Benefits
Veterans may qualify for hearing aids through the U.S. Department of Veterans Affairs (VA).
You must enroll in the VA Health Benefits program to qualify.
Once enrolled (or if already enrolled), you can schedule an appointment at an Audiology and Speech Pathology Clinic for a hearing evaluation.
If the doctor recommends hearing aids, you can receive the devices for free so long as you maintain VA eligibility for care.
The VA will also provide necessary maintenance of any hearing aids you receive, including replacement batteries, cleaning and adjustments.
If you live more than 40 miles from a VA clinic or if you can’t get an appointment for at least a month, you may qualify to see a private audiologist through the VA’s Choice Program.
The VA provides hearing aids to the following veterans:
Former Prisoners of War.
Purple Heart recipients.
Those rated permanently housebound or in need of routine care.
Those with any service-related disability.
Those with hearing loss resulting from a disease or medical condition for which they receive VA care or disability.
Those who have hearing loss severe enough that it hinders their ability to participate in their own medical treatment or daily living.
Even if you don’t use the VA for your other health care needs, it’s smart to use it for hearing aids. It’s one of the only programs that provides high-quality devices at no cost.
To apply, visit your local VA office, go online or call 877-222-VETS (8387).
Rachel Christian is a Certified Educator in Personal Finance and a senior writer for The Penny Hoarder.
These services are free to qualifying older Americans. It’s one of the only national programs that offers free eye exams for people on Original Medicare. Members of AAA and AARP can get the following discounts at LensCrafters:
Like Walmart, Costco eye exam costs vary, but you can expect to pay anywhere from to 0 for an exam.
Medicare Advantage plans also restrict the vision benefits they offer, including:
Finally, numerous local nonprofits offer free eye exams throughout the year. Call United Way’s 211 service to see if a program exists near you. Or Google “free eye exams near me.”
How Medicare Covers Vision
Plans are generally inexpensive — usually to a month — and premiums usually don’t increase with age like other types of health insurance. Medicare Part B covers 80% of the cost for:
Ready to stop worrying about money?
You can see if you qualify and apply for the program by filling out this form.
Original Medicare
The OneSight Vision Voucher program helps people in need receive free eyewear if they’re not able to cover the cost of eyeglasses with insurance.
Both retailers also offer a wide selection of eyeglasses in the to range.
Some diseases and conditions — such as lupus and shingles — can affect your vision even though they aren’t traditional eye diseases. Medicare Part B covers treatment for your eyes if you have one of the many conditions on this list from the U.S. Centers for Medicare & Medicaid Services.
Medicare Advantage
Original Medicare does not cover routine vision exams, eyeglasses or contact lenses. Lasik surgery isn’t covered either.
Retailers like Costco and Walmart offer optical centers with affordable pricing on eye exams and glasses.
Veterans can also qualify for free eyeglasses or contact lenses by meeting one of the following criteria:
how often you can replace glasses and/or contact lenses.
how often the plan will pay for eye exams.
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Older people with low incomes may also qualify for free or reduced eye exams at their local county health department.
Need a refresher on how Medicare works? Check out answers to seven frequently asked questions.
Medicare Coverage for Other Eye Treatments and Conditions
There is also a program that provides free eyeglasses to those who qualify — but be prepared to jump through some hoops first.
In states that do provide vision benefits, basic eye exams are covered. Prescription glasses with basic frames are also usually covered, but each state has specific caps. Rachel Christian is a Certified Educator in Personal Finance and a senior writer for The Penny Hoarder.
Students at optometry schools sometimes provide free or discounted eye exams during clinics.
Certain treatments for serious eye conditions, including micro-invasive glaucoma surgery.
Cataract surgery. Medicare will pay to implant a conventional intraocular lens. It will also cover one pair of standard-frame eyeglasses or a set of contact lenses after cataract surgery.
Detached retina treatment.
Treatment for certain dry eye conditions.
Eye exam for people with diabetes to detect glaucoma and diabetic retinopathy.
Annual glaucoma test for people at high-risk of developing the disease or with a family history of glaucoma.
Some tests and treatments for age-related macular degeneration.
An eye prosthesis (artificial eye) for patients with absence or shrinkage of an eye due to birth defect, injury or surgical removal.
Pro Tip
If you have an eye disease that causes low vision, such as macular degeneration or glaucoma, Medicare Part B will cover screening tests and standard treatment.
Here’s how it breaks down.
How to Save Money on Vision Care Costs
If you are also enrolled in Medicaid or Veterans Affairs health benefits, you may qualify for free or low-cost vision care.
Original Medicare does cover eye care related to illness or injury, including cataract surgery and glaucoma screenings. More on that shortly.
Many of these sites offer virtual “try on” features and come with convenient return policies so you can find frames and lenses that work for you.
How to Save Money on Eye Exams
If you have a serious eye disease like cataracts or glaucoma, Medicare Part B will generally pay for treatment.
You can use this tool to search for schools in your area — although the eye exams and care provided vary from school to school.
Discounts for AAA and AARP Members
To receive your AAA or AARP member discount, make sure to present your membership card at participating locations.
Buying eyeglasses online is a cheap alternative to paying hundreds of dollars for a fancy pair at your optometrist’s office.
30% off comprehensive eye exams.
50% off a complete pair of eyeglasses (frame and lenses) and prescription sunglasses. Valid in-store and online.
10% off disposable contact lenses.
30% off non-prescription sunglasses.
According to a recent survey from Consumer Reports, people who bought glasses online paid a median of , while those who shopped in-store spent 4.
$55 comprehensive eye exam at participating independent eye doctors (Use this tool to find a location near you).
$10 off best in-store offer on a complete eyewear purchase at Target Optical.
10% off contact lenses at Target Optical.
$10 off non-prescription sunglasses at Target Optical.
30% off a complete pair of glasses at Glasses.com (Use code RP_30OFF_GL at check out).
Medicaid will cover eye exams for adults ages 21 and older in most states — but not all.
Talk to your VA primary care provider or contact your nearest VA medical center or clinic for more information.
Here are the steps you need to take:
So how do you know, in your own case, what’s covered and what’s not?
EyeCare America
Its Seniors Program provides comprehensive eye exams and up to one year of followup care for any eye condition diagnosed during the initial exam.
The services above are covered whether you have Original Medicare or a Medicare Advantage plan.
Fortunately, several programs and organizations offer free or discounted eyeglasses and exams for older adults.
EyeCare America is the public service arm of the American Academy of Ophthalmology.
Be age 65 or older.
Be a U.S. citizen or legal resident.
Not belong to an HMO or have eye care benefits through the VA.
Not have seen an ophthalmologist in three or more years.
Medicaid is a federally funded health insurance program for people with low incomes. It’s administered at the state-level, so each state determines its own vision benefits and limitations.
By law, both Original Medicare and Medicare Advantage must cover the same basic vision services for eye diseases and chronic conditions.
Lions Club International
Check out OneSight’s website to learn more about its vision voucher program.
Research your specific state’s Medicaid vision coverage or contact your local Medicaid office for more information. Speaking with a local Medicaid office and your individual plan provider is the best way to understand your specific vision benefits.
Optometry Schools and Senior Discounts
If you’re enrolled in Medicare, routine vision care isn’t guaranteed.
Finally, to get these vision benefits, you will need to use certain eye care professionals and services within your specific Medicare Advantage plan network.
If you have VA health care benefits, the program will cover your routine eye exams and preventive vision testing.
At Walmart, eye exams average about , but prices vary by location.
Copays for eye exams with Medicaid are affordable, usually or less.
Here are some of the best ways to reduce your out-of-pocket costs on routine vision care when you’re enrolled in Medicare.
Getty Images
Where to Get Free or Cheap Eyeglasses
For more information, reach out to your local Lions Club chapter.
Just a heads up: This program does not cover the cost of eyeglasses.
OneSight Vision Voucher Program
Medicare may not be your only form of insurance.
Here are a few ways to keep more money in your pocket without forgoing important eye care.
Get a referral letter from a nonprofit organization verifying your visual and financial need for glasses. The letter must be written on company letterhead and include the Tax ID# of the nonprofit organization. Recommended nonprofits include churches, the Lions Club, Prevent Blindness, Red Cross and United Way.
You’ll need a valid prescription from an eye doctor. If you don’t have a prescription that is less than two years old, you can ask the onsite doctors at a Luxottica Retail location if they can donate a free eye exam.
Take your referral letter and prescription from an eye doctor to a participating Luxottica Retail location — which includes LensCrafters, Target Optical and Pearle Vision corporate stores — to get your free pair of eyeglasses.
Some privately administered Medicare Advantage plans cover eyeglasses and eye exams.
Cheap Online Eyeglass Retailers
Medicare beneficiaries can purchase private vision insurance to help offset the cost of eyeglasses and routine eye exams. According to KFF, medicare patients spent an average of 0 out of pocket on vision care in 2018.
The following groups can also qualify for free eyeglasses through the VA:
But that’s not the case for routine exams and eyeglasses.
You should carefully examine any private vision insurance plan benefits and costs before signing up. Make sure the plan actually saves you money on eyeglasses and routine exams.
Does It Make Sense to Buy Private Vision Insurance on Medicare?
But Original Medicare — which provides health insurance to about 37.7 million Americans — doesn’t pay for your new eyeglass frames or an annual vision exam. Privacy Policy
Another option is asking local vision care providers if they offer any senior discounts or in-house financing plans. Make sure to call ahead and ask before scheduling an appointment.
To qualify for the EyeCare America Senior Program, you must:
Does the VA or Medicaid Cover Eyeglasses and Eye Exams?
You’ll pay 20% of the Medicare-approved amount for these covered treatments and services after meeting your Part B deductible.
The national average cost of a comprehensive eye exam is , according to All About Vision and other sources, but the figure can vary from to 0.
Medicaid Vision Coverage
However, vision benefits are pretty modest — plans offer about 0 worth of eyewear and eye exam coverage a year on average, according to an analysis by the Kaiser Family Foundation (KFF). AARP members also receive these discounts through other providers:
These undergraduates are closely supervised by faculty members, so it can be a cheap way to score a routine vision test.
At least 42 states offer some coverage for optometrist services.
At least 33 states offer some coverage for eyeglasses.
Some online retailers, like Zenni Optical, offer single prescription glasses starting at just . You’ll pay more for special coatings, progressive lenses and other add-ons.
For example, 47% of Medicare Advantage plans limit beneficiaries to one pair of eyeglasses every two years, according to the KFF analysis.
However, private insurance monthly premiums, copayments and deductibles may not make it worthwhile.
Once you’re clear on your coverage, make sure your eye doctor accepts Medicaid before scheduling an eye exam.
VA Vision Coverage
AAA and AARP members can receive discounts at participating LensCrafters and other retail locations nationwide.
Affordable eyeglass lenses and frames are easy to find online or at large retail stores like Walmart and Costco.
You’re on the hook for the full cost unless you have a separate private vision care policy or secondary insurance like Medicaid.
Have a disability linked to your military service for which you’re receiving VA disability payments.
Are a former prisoner of war,
Were awarded a Purple Heart.
Receive benefits under Title 38 United States Code (U.S.C.) 1151.
Receive an increased pension because you’re permanently housebound and in need of regular aid.
Experience vision problems caused by another illness — such as stroke or diabetes — for which you’re receiving VA care.
Suffer from geriatric chronic illnesses (long-lasting illnesses that affect the elderly).
Eyeglasses and routine vision exams are pricey for Original Medicare beneficiaries.
Veterans with significant functional or cognitive impairments.
Veterans with a vision impairment severe enough that it interferes with their ability to participate in their own medical treatment.
Veterans who have service-connected vision disabilities rated 0%.
Whether you’re new to Medicare and wondering what to expect at your next eye exam, or you’re a long-time beneficiary trying to save money on glasses, our guide to Medicare vision coverage and affordable eye care is here to help.
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Most private Medicare Advantage plans provide some coverage for glasses and routine vision tests. Original Medicare does not. According to KFF: The Lions Club can pay for eye care and eye exams at local club locations and community events. Some locations also provide eyeglasses.
Nearly all Medicare Advantage plans — which are administered by private insurance companies like United Healthcare and Cigna — include some routine vision coverage.
Health savings accounts (HSAs) have grown in popularity since the COVID-19 pandemic caused millions of Americans to worry about getting sick. A recent industry report from Devenir reveals that the number of new HSA accounts increased by 8% last year, and this trend is only expected to continue. By the end of 2024, there will likely be more than 38 million HSAs, with assets topping $150 billion. It’s easy to understand why HSAs have increased in demand throughout the pandemic, since they are a great solution to help cover unexpected medical costs — like an unplanned hospital stay.
But HSAs are more powerful than most people realize. For example, Voya research reveals that only 2% of individuals are aware of the key attributes of HSAs.(1) With employers increasingly offering high-deductible health plans with an HSA option to their employees, chances are you already have an HSA or perhaps are considering opening one. Whether you are a pro when it comes to HSAs or just using one for the first time, we all can find value to reviewing ways that we can realize the full potential of these powerful savings, spending and investing vehicles.
Read these 10 tips to help maximize the benefits of your HSA.
Tip #1: If you switch jobs, your HSA comes with you
The pandemic-era trend known as the “Great Resignation” has led to a record number of people voluntarily quitting their jobs as many are changing course for a variety of reasons — increased compensation, greater flexibility or better workplace benefits, to name a few. In fact, a record 4.5 million Americans quit their jobs in March, according to the U.S. Department of Labor. Therefore, if you fall into this category and are considering switching jobs, there’s no need to worry about losing any of the hard-earned dollars you contributed to your HSA. If you leave your job (for whatever reason), your HSA comes with you — since you, not your employer, own the account.
Tip #2: You can change your HSA contributions at any time
Typically, when most people think about their workplace benefits, they may have “flashbacks” to their employer’s open enrollment period. For many, open enrollment can be a stressful time, having to consider all of your needs and making the right choices for workplace benefits for the following year. Interestingly, Voya research reveals that the majority of American workers (72%) indicated they would rather service their car, visit the dentist or prepare for tax season instead of reviewing their workplace benefit options.
Now, while you do need to enroll in an HSA during open enrollment, deciding how much to contribute from each paycheck is not something you need to stress over. What do I mean? While most employers will usually offer digital tools or calculators to help you estimate your health-related expenses for the upcoming year, at the end of the day, it’s still just an educated guess. A great feature of HSAs is that you can change how much you contribute at any time during the year. You don’t need a qualifying event — like getting married or switching jobs — to make changes, which is a typical requirement for most other workplace benefits. That’s a big relief and one less thing to worry about during open enrollment.
Tip #3: HSAs offer triple tax advantages
Perhaps the biggest benefit of an HSA is the triple tax advantages it offers: 1) contributions are pre-tax and reduce your taxable income; 2) your HSA contributions and any earnings grow tax-free; and 3) when used to pay for eligible medical expenses, HSA withdrawals are tax-free.
HSA contribution amounts are capped each year by the IRS. For 2022, the HSA contribution limits are $3,650 for individuals and $7,300 for family coverage. Individuals who are 55 or older are also eligible to make an additional $1,000 catch-up contribution. To help adjust for rising inflation, the IRS recently announced that it was boosting HSA contribution limits in 2023 — with the HSA contribution limit increasing to $3,850 for individuals and $7,750 for family coverage.
Tip #4: Your HSA dollars are not ‘use it or lose it’
It’s not uncommon for people to confuse HSAs with their cousin, flexible spending accounts, or FSAs. While their names might sound similar, the rules that govern these accounts are quite different. One of the biggest drawbacks surrounding FSAs is the “use it or lose it” rule. In most cases, you must spend all the tax-free funds you put aside in an FSA before the end of each plan year, or risk losing the money.
People often mistakenly think the same rule applies to HSAs. However, unlike an FSA, your HSA balance carries over each year, which can add up over time.
Tip #5: HSAs can double as emergency health care savings
The ripple effect of the pandemic shined a spotlight on a troubling reality: Most working families are not financially prepared to cover an emergency. Industry research shows that roughly 4 in 10 Americans would struggle to cover a $400 emergency expense. Faced with a short-term, unexpected need — such as a trip to the hospital — many people often dip into their retirement savings. In fact, Voya’s own customer data reveals that employees without adequate emergency savings are three times more likely to take a loan from their retirement plan.(2)
Fortunately, the dollars in your HSA can double as an emergency savings account. All HSA withdrawals used to pay for qualified medical expenses (even if unplanned) are tax free. Plus, you can choose to cover a medical bill out of pocket and then be reimbursed tax-free for that expense in the future. This strategy is another way HSAs can serve as a potential emergency savings vehicle for eligible health-related expenses. Just make sure to hold on to your receipts to verify all distributions.
Tip #6: HSA funds can be an investment opportunity
Once you reach a certain threshold in your account, your HSA funds can be invested. These investment options are similar to line-ups available in typical workplace retirement accounts, like a 401(k). And you don’t need a large HSA balance to begin investing the funds. In many instances, you only need an HSA balance of $1,000 or more. However, this threshold varies by HSA plan, so check with your employer.
Unless you plan to use your HSA money for planned expenses in the near future, investing can give your money an opportunity to grow over time. For example, if you invested the 2022 HSA individual contribution limit of $3,650 in your account every year for 10 years and didn’t use any of the funds, and your account earned an overall 6% of interest each year over that time period, you would end up with about $51,000. While you would have contributed $36,500 yourself, the remaining $14,500 would come from investment earnings.
Like with any investment, it’s important to remember there is always risk. That being said, HSAs can serve as an important vehicle to help grow your future savings over the long term. Plus, with inflation at a 40-year record high, investing your HSA dollars is another option to potentially protect the value of your hard-earned money and make it work harder for you in the future.
Tip #7: Your employer can help grow your HSA
To encourage participation in high-deductible health plans with an HSA, it’s not uncommon for employers to offer incentives or matching contributions. For example, some will offer their employees $100 just for enrolling in an HSA. Plus, they may offer additional contributions throughout the year as the employee visits their doctor for an annual check-up, completes a biometrics screening or participates in other financial wellness programs, for example.
It’s not required that employers offer incentives or matching contributions to help supplement their employees’ HSA funds, so make sure to check with your HR team. But if available, taking advantage of potential “free money on the table” is a smart way to help grow your HSA.
Tip #8: No required minimum distributions for HSAs
A required minimum distribution, or RMD, is an IRS-mandated amount of money that a retiree must withdraw each year from a traditional IRA or an employer-sponsored retirement account, like a 401(k). Recently, this topic has generated headlines, with lawmakers in the House overwhelming passing The Securing a Strong Retirement Act of 2022, or “SECURE 2.0.” In addition to other provisions aimed at helping American workers save for retirement, the bill proposes increasing the age to 75 when a retiree must withdraw RMDs.
While this is certainly good news, considering the current RMD age is 72 (and that was only recently increased), HSAs do not require minimum distributions — another benefit of this powerful savings vehicle. Therefore, retirees can use their HSA funds to help supplement their future retirement savings and withdraw their money when they need it. Plus, if their HSA funds are invested, it has the potential to keep growing well into their retirement years.
Tip #9: Use your HSA dollars how you want in retirement
When you reach retirement age at 65, HSA funds can be used for non-medical expenses without being assessed a 20% penalty. Therefore, you can use your HSA to pay for general living expenses — like housing, food or travel, for example. However, the distributions will be taxed like any normal distribution from a retirement account, like an IRA or 401(k). But, if you decide to spend your HSA dollars on qualifying medical expenses, you will still enjoy tax-free distributions.
The good news is that you now have greater flexibility to spend your money how you want in retirement.
Tip #10: HSAs can outlive their owners
When it comes to estate planning, taxes are something all of us should carefully consider to help ensure as much of our life savings goes to the people we love versus the IRS. Fortunately, HSAs can be transferred to spouses without any tax implications. Your spouse can also continue using the HSA funds for qualifying medical expenses and will receive the same tax-advantaged treatment.
1) Based on findings from an online survey conducted by Voya, in partnership with Russell Research, among 315 U.S. Consumers currently enrolled in an employer-sponsored health plan fielded from Sept. 2 – Sept. 6, 2020
2) Voya Financial internal data (Oct. 2020)
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
CEO, Health Solutions, Voya Financial
Rob Grubka is chief executive officer of Health Solutions for Voya Financial. In this role, he is responsible for product development and management, distribution and the end-to-end customer experience for Voya’s stop loss, group life, disability and supplemental health insurance solutions, as well as health savings and spending accounts, offered to U.S. businesses and covering more than 6.6 million individuals through the workplace.
Over the past few months, Americans’ concern over inflation has steadily increased. A Gallup poll coordinated in March noted that 17% of Americans believe the high cost of living and inflation is a significant problem, up from just 8% in January. For individuals who may be nearing retirement, there are planning considerations to be mindful of as prices continue to rise – most notable, given the significant cost to retirees, is health care.
While inflation may result in higher prescription and medical supply prices in the short term, health care costs typically outpace inflation over the long term, regardless of market conditions. This means soon-to-be retirees need to be forward-thinking and include health care costs in their broader financial plan.
Estimate costs
According to a model Vanguard developed with Mercer Health, even with Medicare, average health care costs can reach over $5,000 per year. In my work with clients, I typically focus on health care planning when an individual or couple is five to 10 years outside of expected retirement. This advanced planning can enable someone to develop a thoughtful approach to preparing for — and ultimately paying for, future health care costs.
A few years before retirement, start thinking about retirement timeline logistics. For example, if an individual is planning to retire at 62 but won’t be eligible for Medicare until 65, they’ll need to determine how they’ll cover health expenses for three years. For some, they might consider joining their partner’s health insurance plan (if the partner is not retiring at the same time), going with COBRA or finding a short-term insurance plan to cover the gap. Otherwise, it might mean tapping liquid assets or an HSA to pay for health care expenses before Medicare coverage kicks in.
Next, map out anticipated expenses early on and develop a corresponding savings plan to meet future objectives. Medicare.gov provides helpful information on eligibility and premium estimates. Vanguard also provides Personal Advisor Services clients, for example, with a Health Care Cost Estimator that forecasts health care and long-term care expenses.
Evaluate family history
Of equal importance to timeline logistics is health considerations, such as family medical history, longevity expectations, and current health status, as those factors could influence your Medicare coverage choice. Of course, the concept of planning for a potential health scenario can be emotional. However, a forward-looking approach, and one that is guided with a financial adviser, can limit the need to make abrupt and challenging decisions amid a health crisis.
An additional possible expense — not covered by Medicare — is the need for long-term care. The leading conditions that often spur the need for long-term care include dementia, stroke, Parkinson’s disease and osteoarthritis. Assess family history well before retirement and determine whether long-term care may be an expense worth accounting for.
The need for long-term care can be a financial “wild card” since some clients may not require it in their lifetime. I work with clients to think through hypothetical situations as it can determine proper health care objectives tied to a financial plan:
“Are you planning to relocate in retirement?” Some locations (such as the West Coast and Northeast) can have higher health care costs.
“Will someone care for you as you age?” If the answer is yes, that will offset costs. However, without a spouse or child’s support, it likely means the need for outside resources, which can be costly.
“Where will I feel most comfortable as I age?” That could be the difference between in-home nursing, a shared room at a nursing home or private resources at a more expensive facility.
Remember financial ‘trade-offs’
In addition to assessing family history and calculating potential future health care costs, it’s important to understand the financial trade-offs that will come into play throughout different decades. For example, many retirees in their 60s see a portion of their retirement income funding travel or newfound hobbies. As retirees age and this activity decreases, there is a natural trade-off in expenses – the money that was once funding a golf habit may now be allocated toward prescription costs. This financial give-and-take is important to keep in mind, as retirement income will naturally fluctuate through different seasons of life.
Health care is just one piece of the retirement planning puzzle. And, as prices continue to rise in this space, it’s critical to develop plans years before retirement to ensure long-term financial security.
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
Senior Financial Adviser, Vanguard
Julie Virta, CFP®, CFA, CTFA is a senior financial adviser with Vanguard Personal Advisor Services. She specializes in creating customized investment and financial planning solutions for her clients and is particularly well-versed on comprehensive wealth management and legacy planning for multi-generational families. A Boston College graduate, Virta has over 25 years of industry experience and is a member of the CFA Society of Philadelphia and Boston College Alumni Association.
Some parents fear leaving their children too much money. They talk about their friend’s child, who ended up doing little with their lives and abusing drugs and alcohol. Or they have an image of “trust fund babies” who sleep all day and party all night.
The good news is that the vast majority of children with inherited wealth do lead productive lives and would not fall into any of the above descriptions. Their parents set expectations, provided guidance and encouragement, and set limits when the children were growing up. No surprise their children turned out just fine.
Parents also fear leaving their children a significant part of their wealth because it could ruin their drive to live a productive life, fearing they simply might not feel the need to work. Or that the children will feel that any financial success they achieve will not be meaningful compared to their inheritance. So, they choose to leave a relatively small inheritance, enough to help but not eliminate the need to work. But parents often greatly underestimate the amount their children may need simply as a safety net, let alone to enhance their lives. Further, parents may not be aware there are certain controls they can put on the money they leave to their children that can assuage fears about misuse.
As parents grow older, learn about these controls, and start to realize economic conditions are different, many end up changing their minds about how much money they want to leave their grown children. Coming to this conclusion earlier rather than later can have its benefits.
Here’s how to re-think leaving money to your children.
Determine your goals
If a parent’s concern is that they will harm their child by leaving them too much money, they need to determine what dollar amount will cause that harm. The answer depends on what they want their children to achieve with the money. Then consider the what-ifs. For example, assume a parent wants to leave their child $500,000.
What if the adult child has a health crisis or they have a baby with a disability, incurring significant costs to the adult child and/or preventing them from being able to work?
What if the market sinks and the $500,000 becomes $250,000?
What if despite working hard, they or their employer are put out of business by a competitor, regulations or shifts in consumer taste?
While $500,000 may seem like a lot, if you take into consideration all the possibilities, it can be dissipated quickly on non-frivolous expenses. On the other end of the spectrum, some parents ask where the limit is. When is the line crossed from “enough” to “too much”? They want to help their kids, but they don’t want to give them beyond what they could possibly need.
These goals may change as the child ages and grandchildren are born. Once their adult child starts working, parents may want to help with rent so they can have a nicer place to live or groceries so they eat a healthier diet. When grandchildren enter the picture, the parents may want to help their adult children buy a big enough house in a safe neighborhood with good schools. Grandparents may want to help pay for the grandkids’ higher education (or even private school for K-12) or want to ensure they will be able to afford good health care.
Parents’ goals and perspectives change over time, and financial plans change along with them.
Learn about controls and family conflict
Parents can put controls on the wealth they leave their adult children by using trusts. Parents can choose a trustee to manage the trust so the kids don’t have full access or control. The trust can help them get an education, buy a place to live and start a business, but they can’t just live off the trust and sit around doing nothing. These controls can be different for each child. If parents know one child won’t lose their drive no matter how much money they have but another child will spend it all in a week, the children can be given different, access, controls and rights over their trusts.
These differences could cause conflict in the family, so parents need to keep an open line of communication with their children to explain their concerns and why they set the trusts up the way they did.
Teach your children about money
It’s up to parents to teach their children how fortunate they are to inherit anything, and that responsibility comes along with having money. Used properly, wealth can provide a safety net for unforeseen circumstances (which always arise) and provide a better lifestyle than a child might otherwise attain with his or her own income. Used wisely, having wealth can impact the children’s own communities if used to create jobs by starting or growing a business. Parents can teach their children that while they have a comfortable lifestyle, they can also use their money to benefit the world around them.
Parents may fear that leaving their children money will end up doing more harm than good, but if parents teach their children from a young age how to properly use their wealth and set expectations, it’s less likely the children will use it irresponsibly. And if parents are still fearful their kids won’t use their money properly, they can place controls on what they give. But parents’ goals will inevitably change as they get older and situations change, so leave room for flexibility.
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
Partner in Trusts & Estates, Kirkland & Ellis
David A. Handler is a partner in the Trusts and Estates Practice Group of Kirkland & Ellis LLP. He concentrates his practice on trust and estate planning and administration, representing owners of closely held businesses, family offices, principals of private equity and venture capital funds, individuals and families of significant wealth, and establishing and administering private foundations and other charitable organizations.
Senior Managing Director, NFP Insurance Solutions
Howard Sharfman, Senior Managing Director of NFP Insurance Solutions, is a leader in the insurance business, managing one of the premier and largest wealth transfer consulting and planning firms in the country. Mr. Sharfman’s practice is highly focused on servicing families with multigenerational wealth.
A health savings account is a tax-advantaged account designed to help cover out-of-pocket health care expenses. If you’re the account holder, your spouse and dependents may also use the HSA, even if they’re not covered by your medical plan. In 2022, you can contribute up to $3,650 if you have individual health insurance or up to $7,300 for family coverage. If you’ll be 55 or older at the end of the year, you can put in an extra $1,000 in “catch up” contributions.
More than 80% of large employers currently offer an HSA to their employees, according to a recent survey by benefits consultant Willis Towers Watson, but not everyone is eligible to contribute to an HSA. In order to participate, your health insurance plan must offer a high-deductible plan. Typically, the monthly premiums for a high-deductible plan are lower, but you’ll pay more out of pocket before insurance coverage kicks in. For 2022, the health plan must have a deductible of at least $1,400 for self-only coverage or $2,800 for family coverage.
The health plan must also have a limit on out-of-pocket medical expenses that you are required to pay. Out-of-pocket expenses include deductibles, co-payments and other amounts, but they do not include premiums. For 2022, the out-of-pocket limit for self-only coverage is $7,050; it’s $14,100 for family coverage. According to the IRS, only deductibles and expenses for services within the health plan’s network should be used to determine whether the limit applies.
The Benefits
The tax advantages of HSAs are threefold: You can contribute to them on a pretax basis, your savings will grow over time tax-free, and withdrawals are tax-free as long as they are used to cover qualified medical expenses.
HSAs also offer a lot of flexibility. Unlike a flexible spending account for health care, an HSA is not a “use it or lose it” account—the funds won’t disappear if you don’t use them by the end of the year. In fact, you’ll get a bigger benefit from an HSA if you use other cash to pay for current out-of-pocket medical bills and allow the funds in the account to grow. Many HSA plans allow you to invest all or a portion of your contributions in mutual funds, and that offers the potential for more long-term growth than you’ll get if you put all of your contributions in a money market fund or savings account. One strategy is to invest enough money in a low-risk account to cover your current year’s health insurance deductible and invest the rest in mutual funds for longer-term expenses.
Typically, account holders who contribute to HSAs through payroll deductions make regular, fixed contributions throughout the year. However, you’re allowed to change contribution amounts as long as they don’t exceed the maximum contribution limits. This flexibility distinguishes HSAs from flexible spending accounts and health insurance policies, which require you to experience an IRS qualifying event, such as getting married or divorced, in order to make a change during the plan year.
HSAs provide you with an unlimited amount of time after you pay for medical expenses to reimburse yourself. If you’re paying medical expenses with cash rather than tapping the account, hold on to the receipts, because you can reimburse those expenses with funds from your HSA at any time—even years after you’ve incurred the expense. In the interim, your funds will grow, tax-free.
Hidden Features
“HSAs help prepare for future health and wealth needs,” says Patricia Graves, knowledge adviser for the Society for Human Resource Management (SHRM). This is particularly true for retirees. You can’t contribute to an HSA once you sign up for Medicare (at least according to current law; there is legislation pending in Congress that may change that). But after you sign up for Medicare, you can still use the funds tax-free for medical expenses. (After age 65, you can withdraw money for nonmedical expenses without having to pay a 20% penalty, but you will pay taxes on those withdrawals.) Ideally, you should use the money for health care costs, which can be significant in retirement. And the list of eligible expenses is long. Along with deductibles, co-pays and other medical costs that aren’t covered by insurance, you can use the money for vision care, dental costs and hearing aids. HSA dollars can also pay a portion of long-term-care insurance premiums at various limits, depending on the age of the account holder.
HSAs can also help cover the cost of travel essential for medical care. Should you have to travel out of your state for a specific medical procedure, for example, you could use funds from your HSA to cover the cost of a flight or train, or to pay for gas, parking fees and tolls if you drive.
The Coronavirus Aid, Relief and Economic Security (CARES) Act enacted in 2020 in response to the pandemic expanded the types of HSA-eligible expenses, and these changes are permanent. Over-the-counter drugs purchased on January 1, 2020, or later are now HSA-eligible without a prescription. Those include pain relievers, cough suppressants, antihistamines and other drugs that treat issues from heartburn to acne. The law also added feminine-hygiene products to the list of expenses that are eligible for HSA funds.
Selecting a Plan
Some companies encourage employees to sign up for high-deductible plans by offering matching HSA contributions. The average employer contribution was $867 in 2021, according to Devenir, an HSA consulting firm. Not all employers offer HSAs, but as long as you sign up for a high-deductible plan, you can open one on your own with a financial institution that provides HSAs. You may also choose to shop around if your employer’s plan comes with high fees or mediocre investment options. (You can compare plans at HSAsearch.com.) But you may sacrifice some perks if you choose that path, says Rich Ward, managing director and head of health solutions at TIAA, an HSA provider. Using an HSA outside your employer’s offering may mean forgoing the convenience of having pretax contributions deducted from your paycheck, he says. In addition, you may not be eligible for matching contributions if you opt for an HSA that’s not offered by your employer.
If you have an HSA through an employer-sponsored plan and lose your job, the account is yours to keep, and you can still use the funds anytime, tax-free, for qualified medical expenses. Although health insurance premiums are typically not considered qualified medical expenses, there’s an exception if you use withdrawals to pay premiums for COBRA coverage (which lets you continue employer-based insurance for up to 18 months after you leave your job) or to pay for other health insurance premiums if you’re collecting unemployment benefits.
New Limits
Because of recent increases in the cost of living, HSA contribution limits will rise significantly for 2023. The annual contribution limit for self-only coverage will increase from $3,650 to $3,850, and if you have family coverage, the limit will jump from $7,300 to $7,750. Catch-up contributions for account holders who are 55 or older will be $1,000, the same as in 2022.