HSAs. 401(k)s. Insurance. They all have one scary thing in common: open enrollment. Open enrollment is a time when you have to make a lot of important choices that can affect your financial future for the rest of your life. No pressure!
The choices seem endless—and so do the frustrations. A lot of companies don’t do a great job helping employees understand what their options even are, let alone which ones are best. But understanding your company’s employee benefits is the key to setting yourself and your family up for an amazing financial future.
Let’s walk through what you need to look for during open enrollment season so you can get the most out of your benefits.
What Is Open Enrollment?
Open enrollment sounds scary if you don’t know what it means. But it’s pretty simple. Open enrollment is a window of time when you can sign up for new or different financial programs, like opening your first investment account or switching health insurance plans.
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The catch is that it only happens once a year. Once it ends, you’re locked into your current programs until the next year. So it’s super important to double-check the open enrollment dates with your employer or the program you want to join so you don’t miss your window of opportunity.
That said, there are a few exceptions to the time limits. You can sign up for financial programs outside of the open enrollment period if you have a major life change like marriage, divorce or becoming a parent. You’re also eligible for special enrollment if you’re a new hire.
Usually, you sign up for these programs as part of your employee benefits. If your company doesn’t offer them or if you’re self-employed, you’ll need to find a program on your own and sign up during its open enrollment period.
Once open enrollment season starts, you’ll want to look for three main things—health savings accounts, 401(k)s and insurance.
Health Savings Accounts
A health savings account, or HSA, lets you save money for medical expenses. And it has some other great benefits, like the fact that it’s tax-free and doubles as an investment account.
An HSA is always paired with a high-deductible health plan (HDHP), and an HDHP lets you pay lower premiums than traditional health insurance plans. So getting an HSA is a great way to save money on health insurance.
Here are a few things to consider before you take the plunge and enroll in an HSA.
Your Family’s Health
HDHPs are ideal for healthy families that don’t expect to have heavy medical bills, but they might not work if you or your family have chronic conditions or health issues. That’s because HDHPs have higher deductibles than traditional insurance plans, so you have to pay more before the insurance company pitches in.
But if you and your family are pretty healthy, you’ll have fewer health care costs. You can use an HSA to save money so that by the time you have a medical expense, you can easily cover it.
HSAs come with some great financial perks. You can use funds from your HSA to cover your deductible or pay for other medical expenses tax-free. You won’t pay taxes when you put money into your HSA or when you spend it, as long as you use it to pay for approved medical expenses.
You can also choose to invest your HSA savings in mutual funds for tax-free growth. Once you reach age 65, you can spend that money on anything—you’ll just have to pay taxes for nonmedical expenses.
If you use your HSA to pay nonmedical expenses before age 65, you’ll pay penalties for taking an early distribution. So keep your other financial goals in mind when you decide how much money to save in an HSA.
If you’re saving for an emergency fund or trying to get out of debt, set that money aside in an easy-access savings or checking account. That’s where most of your money should be going. Only put enough money in your HSA to cover medical expenses you’re sure are coming, like dental and vision checkups, a scheduled surgery or having a baby. Once you’re debt-free and have a fully funded emergency fund, then you can start saving more in your HSA.
Perks and Limits
The great thing about HSAs is that there’s no obligation to spend HSA funds by a certain date. Any unused money rolls over each year. So if you know you’ve got a big expense coming up next year, you can start saving now.
The downside is that the government sets limits on how much you can save in one year. The limits for 2021 are $3,600 for an individual and $7,200 for a family.1 If you want to save more than that, you’ll have to use a traditional, taxable savings account. But you’ll still have a great head start on your savings!
Be sure to explore the HDHP/HSA option if your employer offers one. It could be a key piece of your financial wellness puzzle. If they don’t, then it may actually be in your best interest to buy your own health insurance so you can get the benefits of an HSA.
This benefit is essential to any worker’s financial wellness, and it’s one you definitely want to get into as soon as you’re ready. Dave Ramsey teaches that “ready” means you’re out of debt and have three to six months’ worth of living expenses saved in an emergency fund.
That’s because being debt-free will give you more disposable income to invest (since you’re not paying all those credit card bills and student loans). So you’ll see quicker results in your investments. And with an emergency fund protecting you from broken water heaters and car repairs, you won’t have to face early withdrawal penalties from your 401(k).
Once you knock out your debt and have that safety net in place, congratulations! You’re ready for Baby Step 4, investing 15% of your household income into retirement. You can get started by enrolling in your company’s 401(k).
Here are a few 401(k) tips to help you get started:
Invest in Mutual Funds
Mutual funds are essentially a pool of money managed by a team of investment pros. You’re investing in many different companies at once, so you avoid the risk that comes with putting all your money in one place.
Look for a Good Rate of Return
Much of your success with a 401(k) will depend on how the funds you invest in perform over time. That’s why it’s important to find funds with a long history of strong returns.
Good mutual funds should give you about a 12% return on investment, on average. Now, that doesn’t mean you’ll get a 12% return every year. Some years the return might be 5% or even a loss. But over time they’re providing a 12% return on investment. These are good, solid funds that just happen to have a slump once in a while—which is completely normal.
But on the flip side, there are some real losers out there that occasionally have a great year. These funds look appealing, until you realize they’ve only averaged a 3% return for the last 30 years. That’s awful!
The fund’s track record over the long haul is what matters. So remember: You’re not looking for the current rate of return—you’re looking for a record of consistent performance over time.
Take Advantage of a Company Match
The name says it all. Many companies offer a 401(k) match to encourage investing. Basically, for every dollar you contribute to your 401(k), the company will invest that same amount of money, up to a set percentage of your income.
Let’s say you make $50,000 per year and your company offers a 4% match. Four percent of your income is $2,000. If you invest $3,000 into your company-sponsored 401(k), the company will give you $2,000. So you made a total investment of $5,000—almost double what you put in. If your employer does this, take advantage of it! After all, why would you pass up free money?
Just remember, you don’t have to put all your eggs in one basket. It’s smart to open a Roth IRA for you and your spouse if you’re married, in addition to your 401(k). That’s because Roth IRAs offer tax-free growth and tax-free withdrawals, plus more investing options that can increase your rate of return.
When you have both types of retirement accounts, you can really maximize your investments. You fund your 401(k) enough to get your employer match. Then, you put the rest of your money in the Roth IRA until you meet your 15% investment goal. And if you want to invest above and beyond that 15%, that’s where your HSA investments can come in!
Now that we’ve covered the savings and investment side of your financial wellness strategy, let’s look at the other essential element—the right kinds of insurance to protect your money and the kinds you definitely want to avoid.
You might hear about cancer insurance, accidental death insurance or “investment insurance” plans such as whole life or universal life. Don’t be fooled by the marketing language around these policies. They’re designed to make money for the seller, and they don’t actually give you valuable coverage. So skip them.
Instead, you should check to see if your employer offers any of the following insurance benefits. If they do, take advantage of each one. And if they don’t, be sure to sign up for them elsewhere. These are the essential types of insurance:
Identity Theft Insurance
Identity theft is on the rise. It’s not a matter of if this happens to you or your family—it’s a matter of when.
Identity theft protection repays you for stolen funds and recovery expenses—and instead of you chasing down those funds, an insurance agent does it for you. It’ll save you a ton of time and energy. And the best part is, it’s one of the most affordable types of insurance you’ll ever have!
Term Life Insurance
Term life insurance is essential since it will provide for your family if you pass away unexpectedly. But the bulk of your life insurance should not be through your employer. You need coverage of your own in case you change jobs. And employer policies usually don’t provide enough coverage. You need term life insurance coverage equal to 10–12 times your yearly income to be sure your spouse and children are well taken care of.
Long-Term Disability Insurance
Most of us like to think we’re invincible, but something can happen in an instant that changes your life forever. Disability is a reality you can’t afford to ignore, which is why disability insurance is so important.
If an illness or injury should prevent you from working for a long period of time, this insurance kicks in and replaces a portion of your income until you can resume work. Without it, you’re at risk of finding yourself with no money coming in and no way to make more. Disability insurance will make sure that the bills get paid and your family is taken care of.
Health insurance is a must. Most companies offer a traditional health care plan, but more and more of them are switching to HDHPs that come with the option of a health savings account. And as we said, the best way to cover your health care needs outside of insurance is through an HSA.
If your employer doesn’t offer this option, that’s alright. You can still find an HSA on your own! Dave recommends HealthEquity, an HSA provider that offers low costs and easy-to-use mobile and online experiences. In fact, HealthEquity is the only HSA provider Dave trusts to take care of his team.