Three Ways You Can Improve Your Financial Health

On average, Americans are not prepared for unexpected expenses or a decline in pay. An analysis from JP Morgan Chase recommends that individuals should have savings of at least six weeks of take-home pay in an emergency fund. We are familiar with the rule of thumb that we should have a few months of income saved up in case of an emergency, however most Americans still fall short.

“To cushion against a simultaneous spike in expenses and dip income, a middle-income family needs about $5,000 in a rainy-day fund but has just $2,000 – a gap of $3,000. Lower-income families need about $2,500 but have just $700.”

NY Times

During times when nearly 50% of Americans don’t have anything set aside for savings, understanding good financial health is even more important. Financial health is a term that is used to describe an individual’s monetary situation. This may include your income, savings, retirement fund, and your expenses.

Create a financial plan

If you’ve never thought about your financial health, taking the time to create a financial plan could be a good starting point. A financial plan is a document that indicates your current monetary status, your long-term goals, and steps to achieve those goals.

Start with the basics

Once you have your financial plan in place, it is a good time to start diving into a budget. Take a long hard look at your bank statements. Where is your money going each month? Organize your expenses based on items that are needs versus items that are wants.

Think about which items can be eliminated. Are the re-occurring monthly subscriptions necessary? What about that daily coffee trip, do you need that? Check out how much you’re spending on going out each week. Cooking from home is looking pretty good, isn’t it? Expenses add up quickly. Removing the expenses that aren’t necessary can help build your savings at a quicker rate.

Where to save

So, now you have all this extra money to save, or maybe you want to invest. Chances are your employer already has some great savings options in place. A rich suite of benefits is one of the most attractive perks to most people. Often times employer benefit offerings include the following programs that allow their team to save and increase their financial health.

1. 401(k) Retirement Plan

A 401(k) is an employer sponsored retirement savings plan. Employees who are eligible can save and invest for their retirement by enrolling in their employer-sponsored 401(k) plan. Contributions to a 401(k) are deducted directly from paychecks. Participants can choose either a pre-tax or post-tax option.

What are the benefits?

• Benefit from tax breaks. Participating in your employer’s 401(k) gives you not one but two tax breaks. The first tax benefit being, contributions are tax-deductible. Participants also benefit from a lower taxable income because contributions do not count toward gross income for the year.
• Take advantage of your employer match. Did you know Americans are leaving billions of dollars in unclaimed 401(k) matches on the table? Many employers offer an employer match, which is essentially free money. Match money is tax-free, and participants do not have to pay taxes on the money until it is withdrawn at retirement.
• Contributions and compounding interest. The earlier a participant enrolls, the longer they benefit from compounding interest. Compounding interest is essentially the interest participants earn on top of their interest.

2. Health Savings Account (HSA)

A health savings account, or HSA, is another type of personal savings account. What makes an HSA different, is the money in the account is used toward qualifying medical expenses. Those who are under age 65 and who participate in a high-deductible health plan (HDHP), may qualify to open a health savings account.

What are the benefits?

• Money grows tax free. Money that is invested into a health savings account grows tax-free. This means any interest or additional earnings generated on the money invested into the HSA is tax-free. Any money that is not spent on qualifying medical expenses can continue to accumulate in the account for retirement, similar to a 401(k) retirement savings plan.
• Take your HSA with you. Health savings account are portable. Any money that is invested into the account will also be available for qualified medical expenses in the future. Your HSA money rolls over from year to year. This holds true regardless of if the medical insurance plan changes or if transferring to a different job.
• Others can contribute to your savings. Contributions to a health savings account can come from the owner of the account, their employee, a relative, or anyone else who wants to make a contribution. The maximum contributions that can be made to an HSA in 2020 are $3,550 for an individual or $7,100 for couples. This maximum increases by $1,000 for individuals who are 55 or older.

3. Flexible Spending Account (FSA)

Similar to an HSA, a flexible spending account (FSA) is a personal savings account that can be used to pay for qualifying medical expenses. However, unlike the HSA, FSAs can be used with any health plan as they are not tied to HDHPs. Money that is put into a flexible spending account expires at the end of the year. Because of this, flexible spending accounts are best for short-term saving on medical expenses.

What are the benefits?

• Reduces your taxable income. Contributions to an FSA are deducted through the payroll process. The contributions are taken out pre-tax, which means taxable income is lowered. This can reduce the amount of taxes the participant pays.
• Instant access. Participants elect the total amount they want to add to their FSA at the beginning of the year. Contributions are split up and taken out of the participant’s paychecks throughout the year. However, once your FSA plan starts, the money you invest in the account is available to use. This is beneficial because if something comes up and you need access to the money at the start of the plan year, you are able to access the funds.
• Family coverage. The owner of the FSA isn’t the only family member who can benefit from the account. Spouses and dependents who are claimed on the account owner’s tax return are also eligible to benefit from funds in the FSA.

Finding the best fit

By starting to save now, you are putting yourself one step ahead of the other 50% of the population who don’t have any savings. With the help of your employer’s benefit offering, you can begin to enhance your financial health.

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