Lesson #135-How you can take more risk when you're winning with money
When I use the word "risk" associated with your finances what comes to mind?
Do you think of putting all your money into one investment that could go boom . . . or bust?
Do you think of quitting your day job on a whim to start a business with no money in savings?
Those are indeed risk, but risk in our finances doesn't mean all or nothing. We face risk each day when we invest in the stock market. The stock market could lose value tomorrow.
When we buy a home, their is risk in the house dropping in value or becoming a money pit. (For more info on how to buy a home the right way please check out the book I wrote A Tale of Two Houses.)
The thing is that it is almost impossible to avoid any kind of risk with our finances. Yes there is the possibility of losing money when it comes to taking risk, but there should also be a chance at reward as well.
On today's lesson I share why our family took a "risk" with our health insurance this year and share how we are able to do it in the first place.
Like most of you, our open enrollment for our health insurance benefits at my company occurred in late October/early November. Typically when it comes to that time, I usually just go in, select the same coverage we had last year and see how much the coverage increased.
Instead though I looked through all of our health care plans options and an interesting situation arouse. Typically we have gone with a high deductible plan which has a Health Savings Account (HSA) attached to it. The deductible is $3,000 with a 80/20 co-pay after that up to a maximum out of pocket amount of $6,000. The monthly premium was $274.96 or $3,299.52 a year.
However I noticed that there was another high deductible option with a $5,000 deductible with a 80/20 co-pay after that with a $10,000 maximum out of pocket. But the monthly premiums for this plan was only $63.55 a month or $762.60 for a whole year. The difference in monthly premiums was over $211.41 a month, which translated to a savings of $2,500 on an annual basis!
But of course that also involved more risk. So what did I do? I ran the number of course. In addition to the premium difference, my employer also contributes an amount into our HSA each January. The amount was $800 for the $3,000 deductible plan and $300 for the $5,000 plan. I counted that as a deduction to annual premium because that money covers the first medical expenses you have for the year.
That was the upside, but what about the downside? Well taking the numbers above, I then ran some scenarios on our medical expenses for the year. Below is what I came up with:
Basically as long as we didn't have $20,185 in medical expenses for the year we would come out ahead and our total exposure to loss was only $1,963 and that is if we had the medical expense year from hell. But on the plus side if he had our normal medical expenses per year (non counting labor and delivery years) we could come out ahead $2,000 a year.
Ultimately we decided to take the risk and go with the $5,000 plan and take the difference in premium and put it away in our HSA that way we were paying ourselves the difference instead of the insurance company.
But the point on today's show isn't about changing your health insurance coverage. It's about why we were able to take the risk. We were able to take the calculated risk because we're debt free, we have an emergency fund, we have money already in our HSA in case we had a medical emergency, and we know what our money is doing.
Ultimately we're taking a slight risk. Yes we could have multiple emergency rooms visits or one of us might need surgery this year. But odds are we won't and the reward is worth the risk.
The bottom line is that winning with money allows you to take more calculated risks in health care, investing, and in our career. It's just simply another reason to get our financial houses in order.
Other Resources mentioned in the show
Today's quote of the lesson is brought to you by the JW's Financial Coaching Newsletter
“Don't think in terms of taking huge risks to get rewards. Think about the least amount of risk for the greatest reward, and be extremely disciplined in that." ~ Tony Robbins
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