Step 7: Maximizing your Employment Benefits
Today I’d like to discuss what I recommend as Step 7 on the path towards financial independence. But before we do that, let’s review the first six steps briefly.
Step 1 is to define why you want to achieve financial independence. Pursuing FI is not a trivial thing. It will likely require major life changes and years to accomplish, so you better have good reasons to do it, or you will fail.
Step 2 is to figure out where you are starting from, basically what your current financial situation is. This is done by calculating your net worth.
Step 3 is to better understand how money enters your life and how it leaves it by tracking your income and expenses, respectively. If you don’t understand this, you can’t effectively make any plans for the future.
Step 4 is to develop a financial plan moving forward. Once you understand your current net worth, and how money enters and leaves your life, you have the key information to make a basic financial plan for the future. Remember, this is a fluid plan that you will refer to often and update/change over time as your financial circumstances change.
Step 5 is to insure against major catastrophes. I recommend making sure you have proper insurance in place as soon as possible because you can never predict when disaster will strike.
Step 6 is to establish an emergency fund. I believe the amount in your fund and how long it can sustain you is variable based on your personal circumstances. But everyone should have at least some liquid cash set aside for a rainy day.
And that brings us to Step 7, which is to maximize your employment benefits. I haven’t seen much about this in many books or blogs, but I think it is pretty important and should not be overlooked.
There is likely a lot of bang for your buck in this step. What do I mean? Well, most of you are probably already working full time for an employer. But even though you may be slaving away at your 9 to 5, you may not be receiving all of the possible benefits your employer has to offer. By simply identifying what benefits your employer offers and enrolling in anything you are currently missing out on, you can keep doing the same job AND get WAY more in return for your time and efforts.
Let’s talk about some common examples you should be taking advantage of:
401(k) Match
Most employers these days offer some type of employer sponsored retirement plan. This most commonly comes in the form of a defined contribution plan, such as a 401(k) (or a 403(b) if your employer is a non-profit organization or government entity). As a part of most of these plans, the employer will match a portion of the employee’s contributions.
The employer typically matches 50 cents to $1 of every dollar the employee contributes up to a percentage of their salary, usually up to 3-6%. For example, let’s say you make $50,000 per year and your employer will match dollar for dollar up to 5% of your salary. So, for every dollar you contribute to your plan up to $2,500, your employer will also contribute up to $2,500. Pretty awesome. Why? Because it is essentially a 100% instantaneous return on your investment. You won’t find that kind of return anywhere else. This is why people often refer to the employer match in a 401(k) as “free money.”
Many people don’t even realize that this benefit exists. And even if they do, many claim they can’t afford to contribute to their retirement plans. How can you afford not to? At this stage on the path to FI I’m not suggesting you have to contribute the maximum amount to your 401(k), which is $19,500 for 2020, but just enough to take full advantage of the employer match and get that free money!
Like in the example I listed above, you would only have to contribute $2,500 to your 401(k) to take full advantage of the employer match benefit. That breaks down to just over $48 per week that you have to contribute. And it’s not like you are paying an expense or buying something you don’t want with that $48 each week, you are saving and investing for your future!
If you aren’t yet contributing enough to your 401(k) to get your full employer match and you want to achieve financial independence, this should be one of the first things you need to change. Don’t leave free money on the table.
Health Insurance
If your employer offers health insurance and you aren’t taking advantage of it, you are making a mistake.
First, you need to understand that health insurance is necessary in the United States. I discussed how important health insurance is in Step 5, Insuring Against Catasrophe. If you don’t have health insurance and you or a family member has a major trauma or illness, it is quite possible that you could be financially devastated.
Second, health insurance is expensive, especially if you try to purchase it on your own. Most employers offer health insurance as an employee benefit. Because an employer is getting health insurance for the whole company, they can almost always get better rates than you could on your own. It’s like buying things in bulk from Costco. Plus, not only is the rate of the insurance cheaper, but your employer likely will pay a significant portion of the premiums, further lowering the cost to you.
I was recently impressed with how much of an employment benefit health insurance can be after reading a recent blog post on The White Coat Investor website. This post was about physicians finding their own health insurance when they do something called locum tenens work, which means they work temporary jobs for their given specialty throughout various places in the country. The author of this post has a family of four and has a high deductible health plan (HDHP), which allows him to have a health savings account (HSA), and all the benefits that can come with it. Because he does not have an employer, he had to purchase this plan himself. His monthly premium for their healthy family of four is $1500 per month, which adds up to $18,000 per year.
I compared this to my situation. I have health insurance through my employer. I also have a HDHP and an HSA. I have a family of six. Our premium is $45 per month, which adds up to $585 per year. My employer pays for the rest of the premium. That alone is more than a $17,000 per year benefit compared to the above situation.
If you aren’t getting your health insurance through your employer and have the option to do so, make that change right away.
Life Insurance
In Step 5, Insuring Against Catastrophe I also wrote about life insurance. I can’t stress how important it is to have life insurance, especially if you are the primary income earner for your family. Between what I do at work and my role at church, I encounter people that are dying or families who have lost a love one on a regular basis. It is so devastating when the person who dies was the primary income earner and they leave their family without any security for the future, all because they didn’t take a few hours of their time to purchase a simple term life insurance policy.
One of the easiest and cheapest ways you can get life insurance is through your employer. Similar to health insurance, you may have access to a term life insurance policy at a discounted rate through your employer. Some employers will even offer term life insurance as a straight up benefit as part of your employment package and you don’t have to pay a thing.
Another benefit of getting life insurance through your employer is that you usually do not need to qualify with a health history or physical examination, as you would if you were to try and get a policy on your own. So even if you aren’t in the best of health or have any pre-existing medical conditions, you can still get life insurance coverage and won’t even have to pay a higher rate.
I have term life insurance through both my employer and two other personal policies. Life insurance (term only, not cash value/whole life) is something I strongly believe in. As part of my employment benefit package, I have a term policy equal to three times my annual salary that I don’t have to pay anything for. Beyond this, I pay a discounted low monthly rate that is deducted from each paycheck for a term policy equal to my annual salary. I also have two more personal policies, for which I pay a higher rate and had to medically qualify for, from a different insurance company. As I approach financial independence I plan to cancel these policies one at a time, but for now it gives us peace of mind and is one of the ways I am maximizing my employee benefits.
Disability Insurance
Disability insurance is another potential benefit you can get through your employer. It may even be more important than life insurance if you are the primary income earner in your family, because you are much more likely to become disabled and unable to work than you are to die prematurely.
Disability insurance can be very expensive, so if you can obtain it through your employer at a discounted rate, it is definitely worth looking into. And similar to obtaining life insurance through your employer, you typically don’t need medical clearance for disability insurance group coverage through your employer like you would need if you were purchasing an individual policy on your own.
It is important to know that unlike life insurance, which is pretty black and white on whether a policy will pay out (you are either dead or you aren’t), there are many shades of grey when it comes to disability insurance. There are differences between short and long term disability, degree of disability, definition of disability in the policy, individual coverage vs group coverage, etc. So before you make any major decisions on disability coverage, make sure you understand the nuances of any policy and if it meets your needs.
I used to have my own individual policy for disability insurance, and it was expensive. I am also covered under a group policy through my employer. I kept both policies when I first started my job in case I wasn’t happy and wanted to work somewhere else. My individual policy would have followed me wherever I went, but not the group policy.
After I decided I was very happy where I work and didn’t plan on changing jobs, I elected to cancel my individual policy. I felt my group policy was a great deal and met my needs because it covers 84% of my salary long term, is completely paid for by my employer, and has an “own occupation” definition of disability. This means if I become disabled in any way and can’t perform my job as a neurosurgeon, even if I could work as another type of doctor, I still qualify to receive disability payments.
If you don’t currently have disability insurance, I strongly recommend you talk to your human resources department to see what options might be available to you through your employer.
Dependent Care
Do you currently take your kids to daycare? Do you have a dependent parent who lives with you and requires home health care? If so, then you know that these costs can really add up. Have you ever looked into whether your employer offers a dependent care flexible spending account (FSA)? If so, then you could significantly reduce your tax bill by enrolling, and thus your overall cost to care for dependents.
With an FSA a certain amount of money is deducted from your paycheck on a pretax basis, thus reducing your taxable income. This money must then be used for the intended purpose, which in this case is dependent care. If you follow the rules, then you don’t owe taxes on it. The other common type of FSA is for healthcare, not to be confused with a health savings account (HSA).
In 2020 the annual FSA contribution limit is $2750. If you and your spouse both work and have the option to contribute to a dependent care FSA, you could contribute a total of $5,500 per year. If your marginal tax rate is 28%, then using an FSA in this manner to pay for dependent care would save you $1,540 in taxes annually.
The catch with an FSA is that if you don’t use the money, you lose it. But if you are already paying this much per year in dependent care, the risk of not using it is pretty low.
Gym Membership
Do you workout at a gym and pay a monthly membership fee? If so, does your employer have a gym at work? Have you ever looked into it? How much does it cost? The workout facilities at your place of employment may even be free. But even if it does have a fee, I’ll bet it is much cheaper than what you would have to pay at a commercial gym. Plus, it may be more convenient since it is located where you work. Some employer sponsored gyms even offer you a discounted rate if you use it a certain number of times per month as an incentive to maintain good health.
Food
Do you purchase food at work for breakfast or lunch? Do you bring a lunch to work? If so, have you ever looked into any food benefits that might be available? This could include a free meal per shift, or perhaps discounted employee rates in the cafeteria. Maybe there’s an employee lounge that has food available where you could eat, or beverages you could drink throughout the day instead of using a vending machine. These little expenses add up over time, and a small benefit like this could save you a lot of money in the long term.
This is a benefit I try to take advantage of on a regular basis. My hospital gives me a $7.50 allowance in the cafeteria each day I am on call. I usually bring my lunch to work, so I don’t use this money for a regular meal. However, our cafeteria sells protein shakes that I like, so every time I am on call I try to get two of these shakes and save them for a time I want to drink them.
Other
These are just some of the possible employee benefits that might be available to you. There are many other possible benefits including legal insurance, financial advising services, counseling services, identity theft insurance, adoption assistance, long-term care insurance, the list could go on and on. There may even be some type of education program where your employer pays for you to go back to school and increase your skill set. You never know what might be available until you look.
Conclusion
There are many steps on the path to FI. Today we considered some possible ways you could maximize the benefits your employer has to offer. Here are some take home points to consider:
- You are likely already working hard, so you might as well get the most out of the time you dedicate to your employer. This means maximizing your employment benefits.
- How can you take action? Speak with a Human Resources representative and identify what benefits your employer offers, and find out what you are missing out on. Make the appointment today!
- If you aren’t doing so already, make sure you develop a plan to contribute enough to your 401(k) to get the full employer match. Don’t leave free money on the table.
- Look to see if there is anything you are paying for on your own that your employer also offers, such as life insurance or disability insurance. If the products are comparable and the rate is cheaper, make the switch!
Thanks for reading. I hope you are doing well in your progress towards reaching FI. If you have any questions or comments that might help other readers, please list them below. In the meantime, keeping working towards Freedom Through FI!
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