We all know that one of the most difficult parts of getting insurance is trying to figure out what kind of insurance deductibles that you need.  It would be nice to not have to pay much out of pocket if something were to happen, but on the other hand you want a low premium, so you would rather raise your deductible to save.

It really comes down to figuring out exactly how much you can afford and what your chances are of having to hit that deductible for any given amount of time.  Lets use an example:

I recently became self-employed and needed to get my own health insurance.  The plans that I was looking at ranged anywhere from $50 a month to $500 a month.  For starters, $500 a month was just too high for me.  I really don’t need that comprehensive of coverage.  After all, I am a single, young healthy male.  I only really go see the doctor if something is terribly wrong.  I looked at the cheaper plans, and noticed that my deductible would be $4k per year.  This means I would pay the first four thousand dollars of my medical expenses in any given year.  This doesn’t sound great, but you must remember how fast medical expenses can pile up.  I recently had to have knee surgery, and the total bill after doctor visits, physical therapy, surgery, etc. came to be around $20k.  I was out the $4k, but I saved a total of $16k just by having insurance.

My reasoning went like this:  I can afford to be out $4k per year.  That is the absolute worst-case scenario.  If something terrible happened and my hospital bill was a million dollars, my liability would be limited to $4k no matter what.  So I went with the 4k deductible plan.  I saved up $4k in my Health Savings Account, and just let it sit there, earning interest each month.  I have a very low monthly premium for my insurance ($67 for medical and dental), and I am covered in any worst-case scenario since I have the $4k ready to spend on my deductible.

Now, lets say I knew I would be going to the doctor a whole lot (chronic illness, planned pregnancy, etc.).  If I knew I would hit that deductible every year, it might make sense to pay a higher premium and get the lower insurance deductible.  It would make sense to see how much extra you are paying on your premium per year to have a lower deductible.  If you are paying $1k per year more to have a $1k lower deductible, it wouldn’t really make any sense…

Finally, you want to look at how much deductible you can afford.  I made the decision that I would always have $4k in my health savings as a just-in-case fund.  Worst case, I lose all the money in that account.  However, if you are scraping by, living paycheck to paycheck, you might not even be able to foot a $4k bill.  In this case, you might want to pay the extra couple bucks to give yourself a deductible that you can afford.  It doesn’t make any sense to have insurance if you are going to have to file for bankruptcy either way.

Choosing the right insurance deductibles may not be easy, but make sure you look at all the options and make an educated decision.

If you have a high-deductible health insurance plan, you should be eligible for a tax deductible health savings account.  What this means is that you can set up a savings account (yes, you get paid interest) to deposit money into each year.  Since I am single, I can deposit up to $2,800 per year before tax.  (If you have a family, I believe this limit is raised to $5,600 per year).  This means that I can put $2,800 into my health savings account and write that off.  I don’t even need to itemize for that year if I want to take the deduction.  The money sits in the account and earns interest tax-free until you need to use it for related medical expenses.

Here is an example of how this works.  I start my high deductible health insurance and tax deductible health savings account on January first, 2008.  I start the year off by depositing the maximum $2800 into the account.  Throughout the year, I end up incurring $2000 worth of medical expenses which I use my tax deductible health savings account to pay for.  At the end of the year, I have $850 left in the account (I made a few extra bucks because of the interest).  When it comes time to file my taxes, let’s pretend I made $30,000 in wages that year.  Well, since I made that $2800 contribution to my tax deductible health savings account, the government is only going to tax me on $27,200 rather than the full $30,000.

Ok, so I saved a bunch of money on my 2008 taxes, and I have also made a few bucks in interest for my tax deductible health savings account along the way.  Now it is January 1st, 2009, and I still have this $850 left in my account.  Any remaining balance rolls over.  This is just like a regular savings account; its not like a “Flexible Health Spending Account” where the unused balance at the end of the year is lost.  So I have this $850 still in my account on January 1.  So I decide that I want to make the maximum tax-deductible contribution again, and put another $2800 into the account.  Again, I get to write that $2800 off when I do my taxes, and now I have a whole $3650 in my Health Savings account that is just sitting around earning interest.

Remember that you don’t have to choose to throw in a whole $2800 all at once.  You can make as many deposits as you want into your account.  At the end of the year you total them all up, and you can write off the sum of them as long as it is not over the legal limit (for 2008, the limit is $2800 for single people and $5600 for families).

You can use the money in your tax deductible health savings account for a wide range of health purchases.  Not only can you use it to cover any medical bills that are not covered by your insurance (your deductible), you can use it to buy over-the-counter medicine, even diapers!

If you don’t have medical insurance, start looking online for something today.  My plan is only $50 a month and has already saved me well over ten thousand dollars in medical bills, not to mention having the tax benefits of the tax deductible health savings account.

One thing that I see constantly ruin people’s finances is buying a car that is way too expensive for them.  All you really need a car for is to get you from point A to point B in a timely, reliable manner with a side of comfort and safety.  How much time to you actually spend in your car?  An hour a day?  How much do you spend in your office chair?  8 hours a day?  Maybe you should spend thousands on a sweet office chair rather than your sweet car that you only use a little each day.

Your need for speed will quickly eat away at your savings.  Faster cars are usually less gas efficient, and your gas bill will simply increase.  You get a few tickets or accidents, and the expenses quickly add up.  You have to pay a few hundred for the ticket itself, take some time off work for traffic school, and also pay more for your insurance for the next three years.  Start buying some more performance parts and you are really starting to hurt.

If one of your hobbies is cars, and you actually have the spare change to lose on your interests, by all means, enjoy yourself.  However, if you are justifying buying a money-pit because you need a car to get to work, consider buying some used sub-compact.

If you have a high deductible health plan (HDHP), you may be eligible to create a Health Savings Account. Also known as an HSA, this is basically a special savings account that is used to pay for medical related expenses. The primary benefit of this account is that you can make contributions (or deposits) into your account using pre-tax income. The drawback is that you can only use money in this account for medical-related expenses. The definition of medical related expenses is pretty broad; I have even heard that you can buy diapers with your health savings account.

The tax savings works like this: Say you make $50,000 in one year, and you want to contribute $2,000 to your health savings account (There are yearly contribution limits, make sure you aren’t contributing more than your limit). You deposit the $2,000 in your account and you write the whole $2,000 off on your taxes even if you haven’t spent a dime in medical related expenses that year. Your savings account grows tax free and rolls over from year to year, unlike a flexible spending account. When you need to make medical related expenses (doctor bills, deductible, medicine, etc), just use the money from your health savings account. Piece of cake!

After spending a couple hours reading through my health insurance documentation, I finally figured out how to start my health savings account. The one thing that would have been nice is if my health insurance company told me that I wasn’t setting up the health savings account through them or with them. I could go to any financial institution that I wanted and set the account up there. I did a search on Google for HSA accounts and found plenty of places to sign up. The one credit union I ended up with offered the account with a visa debit card and a 5% interest rate. The only drawback is that they start charging a $1/month fee after the first year. However, all I need in the account is $240 and the interest will cover the monthly fee the entire time.

My health savings account ended up being really easy to get started. I just filled out some forms online, clicked the “I agree” button, sent them a couple bucks to start the account off, and now everything is set up. I didn’t have to do anything through my Health Insurance to get the account set up. After setting up your health savings account, just be sure to get itemized receipts for every single purchase that you make with your account. Save these receipts in case you need to show that all your purchases were health related. I will have to research exactly what expenses are included in “medical related expenses” so that I can take maximum advantage of all the tax savings. It will be great knowing that I can pay for cough drops tax-free!

When choosing the right car insurance, this question comes up all the time.  So, how much of a deductible should you have?  Well, there are a few things to consider when trying to figure out how high your deductible should be:

• What do you think your chances are of getting into a car accident that is your fault?  If you are a high risk driver and you get into plenty of fender-benders, you would probably want to have a lower deductible to save your out-of-pocket expenses every time that you get into an accident.
• How well do you want your repairs done?  If you have a really high deductible, say $2,000 - and your damage only totals $1500, you aren’t getting a dime from the insurance company.  If you can live with a shoddy body job or some scratched paint, having a higher deductible will help keep your premium lower while still covering you if you do some serious damage to your vehicle.
• How much do you need your car?  If you absolutely cannot survive without your vehicle, I would recommend getting a lower deductible just to help keep you in your car.
• How much cash do you usually have on-hand?  If you absolutely need your car to get to work, and you are living paycheck to paycheck, what happens if you get in an accident and can’t afford the deductible?  If you don’t usually have high cash reserves in the bank for emergency situations like this, make sure to get a lower deductible.
• Finally, how much will your deductible affect your insurance premium?  If you have a stellar driving record, your deductible might now affect your premium all too much.  When you are searching for quotes, try playing around with your deductible to see what effect it has on your overall premium.

Having an emergency cash buffer is always a good idea to help keep you safe and protect your credit report in the event of an emergency.  Having a nice cash reserve will help you avoid having to take out a payday advance or use your credit card when you need fast cash to make a payment or pay a bill.  I consider having a cash buffer as a form of insurance - it protects you in the event of an unfortunate event, however this form of insurance pays you interest, instead of costing you a monthly premium.

I like to keep about $4,000 in an savings account that I can use in case of emergencies.  I determined this amount by using a few different ideas.  One method of thought is that my maximum health insurance deductible is $4,000.  In the worst medical emergency, I would have just enough in my emergency cash fund to pay for my medical bills.  Also, I considered what would happen if I lost my income.  I figured that four grand is enough to hold me over for about two months, and two months should be plenty of time to get back on my feet.

How did I start my cash buffer?  I just saved the money up, stashed it away and forgot about it.  I lived below my means for a while until I had enough money saved away.

So how can I afford to have that money just sitting in my bank account?  Well first, it should not be sitting idle - it should be accruing interest.  There are plenty of free online banks that have competitive savings rates.  Just shop around online.

The question I ask is: how can you afford not to have that money just sitting in your bank account?  Think of the domino effect if you are just barely getting by and something bad happens.  First, your credit goes downhill, then you become overwhelmed in debt - things can easily spiral out of control.  Not having an emergency cash buffer could end up costing you in the long run.