Since most new college grads don't have dependents yet, life insurance is probably a pretty low priority. On the other hand, disability insurance should be a higher priority. If your employer makes one available as a fringe benefit, it probably won't cost much and it's a very good deal. (Individual policies, unfortunately, tend to be prohibitive.) In order to avoid adverse selection problems, employer-provided disability plans often require that you need to sign up promptly as soon as you are eligible, in order to keep premiums costs low.
Auto insurance coverage is going to be a significant insurance expense for many of you. It's worth shopping around. In general, high deductibles will pay for themselves very quickly in lower premiums.
Although few of you will buy a home for a while and therefore you won't need homeowner's insurance, you may want to consider a renter's policy to cover your household goods (furniture, electronic equipment, etc.) They are often available at fairly modest cost (especially if you opt for a high deductible.)
Tuesday, April 17, 2007
Choosing a health plan: mind the after-graduation gap
As a fulltime college student, most of you have been covered by your parents' health insurance policies or a college student individual policy. Those policies will run out shortly after graduation, and you need to plan quickly to make sure there are no gaps in your coverage. (If you let coverage lapse for more than a month or so, you may find it even more prohibitively expensive to obtain insurance. Lapses in insurance coverage can also mean problems down the road: when you eventually find a job with good health benefits, you won't be covered for "pre-existing conditions" unless you had continuous insurance coverage.)
According to a Harvard Law School study, the leading cause of personal bankruptcy is due to illness and injury, and gaps in insurance coverage are the big reason for that. Even though you may be young and health, the cost of an unexpected illness or accidental injury could be catastrophic.
However, purchasing an individual insurance policy can often be prohibitively expensive. If you are currently covered by your parents' policy, you have the right to purchase COBRA coverage, but it will cost you 102% of what your parent was paying for your coverage PLUS what your parent's employer was contributing. That can easily be $400 per month or more! The Wall Street Journal recently ran an article with some suggestions for alternatives.
Those of you staying in New York State after graduation may find that the state-run Healthy New York plan is your lowest cost option if your first job doesn't provide health benefits. It will give you a number of options for different HMOs and insurance companies and the premiums are typically about $200 a month or less for an individual, significantly less than the open market. (A growing number of other states provide similar plans.) This can be a very good deal, especially if you only have a short gap of a few months to cover before you get a job that will provide medical benefits.
For most people, the best insurance deal comes from an employer-paid group medical plan. Group coverage keeps administrative costs low, and high employee participation rates keep down "adverse selection" problems that can cause individual policies to skyrocket in cost. If your employer offers you coverage, you should definitely take advantage of it. Large employers typically pay around 80% of the costs and that is a tax-free benefit to you under current law and they usually offer several choices of insurance plans.
Choosing a medical insurance plan with a high deductible and without drug benefits can hold premiums down while still providing protection against catastrophic medical bills. You can use the premium savings to set up a tax-free Health Savings Account (HSA) to cover deductibles and prescription costs. Choosing a Health Maintenance Organzation (HMO) plan can also save money on medical care costs in some cases, though it will restrict your choice of physicians, hospital, labs, and other providers.
According to a Harvard Law School study, the leading cause of personal bankruptcy is due to illness and injury, and gaps in insurance coverage are the big reason for that. Even though you may be young and health, the cost of an unexpected illness or accidental injury could be catastrophic.
However, purchasing an individual insurance policy can often be prohibitively expensive. If you are currently covered by your parents' policy, you have the right to purchase COBRA coverage, but it will cost you 102% of what your parent was paying for your coverage PLUS what your parent's employer was contributing. That can easily be $400 per month or more! The Wall Street Journal recently ran an article with some suggestions for alternatives.
Those of you staying in New York State after graduation may find that the state-run Healthy New York plan is your lowest cost option if your first job doesn't provide health benefits. It will give you a number of options for different HMOs and insurance companies and the premiums are typically about $200 a month or less for an individual, significantly less than the open market. (A growing number of other states provide similar plans.) This can be a very good deal, especially if you only have a short gap of a few months to cover before you get a job that will provide medical benefits.
For most people, the best insurance deal comes from an employer-paid group medical plan. Group coverage keeps administrative costs low, and high employee participation rates keep down "adverse selection" problems that can cause individual policies to skyrocket in cost. If your employer offers you coverage, you should definitely take advantage of it. Large employers typically pay around 80% of the costs and that is a tax-free benefit to you under current law and they usually offer several choices of insurance plans.
Choosing a medical insurance plan with a high deductible and without drug benefits can hold premiums down while still providing protection against catastrophic medical bills. You can use the premium savings to set up a tax-free Health Savings Account (HSA) to cover deductibles and prescription costs. Choosing a Health Maintenance Organzation (HMO) plan can also save money on medical care costs in some cases, though it will restrict your choice of physicians, hospital, labs, and other providers.
Use credit wisely
1) Get a credit card now (if you don't already have one.) The reality is it's often easier to get a credit card while you are a relatively penniless student than when you are a relatively penniless recent graduate!
Once you are out in the working world, you will find that a credit card is indispensable for business travel and, wisely used, it will help you build a credit history that will allow you to get a mortgage, car loan, or business loan in the future.
One of the factors that goes into your credit rating is the length of time you've had credit, so you might as well start the clock running now, if you haven't already. Shop around for a card with no annual fee and other good terms like cash-back rewards.
2) Use it sparingly and pay off balances in full each month within the specified grace period to avoid interest. Interest on credit card balances carried from month to month can quickly grow astronomical. (Even the initial offer stated a low interest rate, those are subject to change over time.) Late fees can often be much larger than interest, so watch out for those as well. Payments over 30 days late also really hurt your credit rating.
3) Treat your credit history as a very important asset. A bad credit history can have a lot of bad consequences:
-- inability to get a car loan, mortgage, or business loan
-- inability to rent an apartment (landlords check credit histories)
-- inability to get certain jobs (employers, especially in the financial industry, check credit histories of prospective employees)
-- higher insurance rates (some insurance companies believe that clients with poor credit histories are more likely to have accidents or otherwise be a bad risk to insure.)
4) Check your credit history for free every four months. The three major national credit reporting companies, Equifax, Experian and TransUnion, have set up a common website that allows you to check your credit history with each of them. Federal law states that you have a right to one free report annually from each company. If you stagger your requests to each of the three companies, that allows you to check your credit record for free every four months. This website explains how to do this.
5) Be careful with personal financial information. If you get unwanted credit card solicitations in the mail, shred them. Don't just toss them in the trash. Someone else might fill them out and send off for a credit card in your name. Be careful with any piece of paper with identifying personal information (e.g., Social Security Numbers, bank account numbers, credit card numbers.) Be especially careful with checks, including those special unsolicited checks sent to you by credit card companies that want you to take cash advances.
6) Beware of "cash advances" on your credit card. They have high upfront fees of several percent, even if you pay off the cash advance right away, within the grace period on your statement. Those cash advance fees on a short-term cash advance paid off within the grace period can easily be equivalent to an annual interest rate of 30% or more.
7) Things you can do to keep a good credit rating:
Pay all bills promptly. (Rent, utility, credit cards, student loans, etc. Not all creditors routinely report, but this can change at any time.)
Use credit sparingly but wisely. If your balances are always zero, you will not build much history. You don't need to run up interest charges to build a history. An occasional purchase (promptly paid off within the grace period) will build a history without running up interest charges.
If you do run into short-term financial difficulties (e.g., due to unreimbursed medical bills or job layoff), contact the creditor before you run into unsolvable problems and negotiate an alternative payment plan. That way the lender will still report you are paying off your obligation "as agreed."
Once you are out in the working world, you will find that a credit card is indispensable for business travel and, wisely used, it will help you build a credit history that will allow you to get a mortgage, car loan, or business loan in the future.
One of the factors that goes into your credit rating is the length of time you've had credit, so you might as well start the clock running now, if you haven't already. Shop around for a card with no annual fee and other good terms like cash-back rewards.
2) Use it sparingly and pay off balances in full each month within the specified grace period to avoid interest. Interest on credit card balances carried from month to month can quickly grow astronomical. (Even the initial offer stated a low interest rate, those are subject to change over time.) Late fees can often be much larger than interest, so watch out for those as well. Payments over 30 days late also really hurt your credit rating.
3) Treat your credit history as a very important asset. A bad credit history can have a lot of bad consequences:
-- inability to get a car loan, mortgage, or business loan
-- inability to rent an apartment (landlords check credit histories)
-- inability to get certain jobs (employers, especially in the financial industry, check credit histories of prospective employees)
-- higher insurance rates (some insurance companies believe that clients with poor credit histories are more likely to have accidents or otherwise be a bad risk to insure.)
4) Check your credit history for free every four months. The three major national credit reporting companies, Equifax, Experian and TransUnion, have set up a common website that allows you to check your credit history with each of them. Federal law states that you have a right to one free report annually from each company. If you stagger your requests to each of the three companies, that allows you to check your credit record for free every four months. This website explains how to do this.
5) Be careful with personal financial information. If you get unwanted credit card solicitations in the mail, shred them. Don't just toss them in the trash. Someone else might fill them out and send off for a credit card in your name. Be careful with any piece of paper with identifying personal information (e.g., Social Security Numbers, bank account numbers, credit card numbers.) Be especially careful with checks, including those special unsolicited checks sent to you by credit card companies that want you to take cash advances.
6) Beware of "cash advances" on your credit card. They have high upfront fees of several percent, even if you pay off the cash advance right away, within the grace period on your statement. Those cash advance fees on a short-term cash advance paid off within the grace period can easily be equivalent to an annual interest rate of 30% or more.
7) Things you can do to keep a good credit rating:
Pay all bills promptly. (Rent, utility, credit cards, student loans, etc. Not all creditors routinely report, but this can change at any time.)
Use credit sparingly but wisely. If your balances are always zero, you will not build much history. You don't need to run up interest charges to build a history. An occasional purchase (promptly paid off within the grace period) will build a history without running up interest charges.
If you do run into short-term financial difficulties (e.g., due to unreimbursed medical bills or job layoff), contact the creditor before you run into unsolvable problems and negotiate an alternative payment plan. That way the lender will still report you are paying off your obligation "as agreed."
Bank Accounts
You will want to have TWO bank accounts: checking and savings:
Look for low-fee checking account with electronic bill-pay option
-- cheap and easy way to keep track of what bills you've paid, payment history, etc.
-- saves on postage, envelopes, late fees (because it's less time-consuming to pay bills, and you can even schedule them to be paid in advance)
-- set up "pay yourself" first by scheduling an automatic transfer to your savings account after each paycheck is deposited.
--when shopping for a bank, consider your travel habits and ATM fees.
Look for a savings account that pays a competitive interest rate--they can vary a lot, so shopping can really pay off! Credit unions can be a good choice for a savings account. They enjoy certain tax and regulatory advantages that allow them to offer higher interests on savings accounts.
If you need some help with savings discipline: consider Certificates of Deposit, which give you a higher interest rate if you are willing to tie up some of your savings for six months or more.
Checking and savings accounts in banks, savings & loans, and credit unions are all covered by Federal Deposit Insurance. They are safe places to earn modest but predictable rates of return on your savings.
It's really important to have a "rainy day" savings account for unpredictable disasters (e.g., car repairs, unreimbursed medical bills, job layoff.) A common rule of thumb is three months salary, though of course, more is always better.
Look for low-fee checking account with electronic bill-pay option
-- cheap and easy way to keep track of what bills you've paid, payment history, etc.
-- saves on postage, envelopes, late fees (because it's less time-consuming to pay bills, and you can even schedule them to be paid in advance)
-- set up "pay yourself" first by scheduling an automatic transfer to your savings account after each paycheck is deposited.
--when shopping for a bank, consider your travel habits and ATM fees.
Look for a savings account that pays a competitive interest rate--they can vary a lot, so shopping can really pay off! Credit unions can be a good choice for a savings account. They enjoy certain tax and regulatory advantages that allow them to offer higher interests on savings accounts.
If you need some help with savings discipline: consider Certificates of Deposit, which give you a higher interest rate if you are willing to tie up some of your savings for six months or more.
Checking and savings accounts in banks, savings & loans, and credit unions are all covered by Federal Deposit Insurance. They are safe places to earn modest but predictable rates of return on your savings.
It's really important to have a "rainy day" savings account for unpredictable disasters (e.g., car repairs, unreimbursed medical bills, job layoff.) A common rule of thumb is three months salary, though of course, more is always better.
Do your own taxes!
It's not rocket science.
(Yes, the tax code is scary and intimidating. The curious can browse through a complete copy on-line, all 3.4 million words with 23,000 cross-references!)
But, the fact of the matter is that income tax returns for most new graduates are pretty straightforward and the IRS has tried to translate all that code into something that taxpayers can understand.
Preparing your own tax return is a good way to force yourself to take a close look at your overall financial picture at least once a year. (Even if you wind up going to a professional in the end, it's worth trying to do it yourself to get a feel for your tax situation. And, caveat emptor, professional tax preparers make mistakes too, and YOU are ultimately the one responsible for filing an accurate return, so it's important for you to understand the return you are signing.)
Tax issues that typically face recent grads:
Line 6) Exemptions: Can your parents still claim you on their 2009 tax return (the one they file next April) if you graduate in June? That depends: the relevant IRS rules are here. If you provide more than 50% of your own support in 2009, they are not permitted to claim you, and you can claim your own personal exemption.
Line 7) Wages, Salaries, Tips: This figure should reflect the total of the amounts reported in Box 1 on all the W-2's you receive for all jobs held during the year.
Line 8) Taxable Interest: Banks and other financial institutions that pay you taxable interest will issue you a 1099-INT each January showing the amount of taxable interest paid. If the amount of interest is small, you may not receive a 1099-INT, but you can find out the amount of interest paid by looking at the "Year-to-date Interest Paid" figure on your last bank statement of the year.
Line 18) Student Loan Interest: You may be able to deduct up to $2,500 in student loan interest from taxable income. The relevant IRS rules are here. The financial institution servicing your student loans is required to send you an annual statement showing the total amount of interest paid each year.
Line 31) Education credits: If your parents can claim you as their dependent and if they choose to claim you as their dependent, THEY may be eligible for the education tax credits for tuition paid.
If you parents do not claim you as their dependent, YOU may be able to claim education tax credits for eligible tuition paid on your behalf. This turns out to be a pretty complicated issue. Colleges are required to issue you a 1098-T tuition statement which shows the amount of tuition billed each year. However, the figure you need is not the amount of tuition billed last year, but the amount of tuition PAID during the year. These may not always be the same. It gets especially complicated when grants are involved, since they need to be netted out from tuition.
There is more guidance available from the National Association of Student Financial Aid Administrators here.
The IRS also has a very comprehensive Publication 970: Tax Benefits for Education. This is a really helpful resource that covers a broad range of topics including student loan interest, tuition tax credits, tax treatment of scholarships and graduate fellowships and stipends, and the tuition tax deduction. Some of you may be fortunate enough to find an employer who will pay for some of your graduate school tuition. The tax treatment of that benefit is covered here.
In the end, even after you've done your fairly simple tax return by hand, you may want to use tax software (e.g., TurboTax or TaxCut) to do your taxes. If your income is under $52,000, you may be able to use free versions of TurboTax, TaxCut, and other similar software to prepare and e-file your tax return for free through the IRS Free-File partnership available free at the irs.gov website. I would strongly recommend doing your taxes by hand and with the software as a double-check.
Important WARNINGS: The IRS has carefully checked the on-line third party software providers in their Free-File program and they have checked for safeguards against identity theft. There are fake "look-alike" websites that try to entice people to enter their personal financial information. Beware! Always use the irs.gov website to access the Free File partner programs.
Situations in which you'll probably need to use a paid preparer: multiple state tax returns (because of income earned in different states, e.g., due to moving, or living in one state but commuting across state lines to work in another state.) This can get pretty complicated as you may need to file state tax returns in both states, and you may be able to claim a credit for taxes paid to one state against your tax liability in another state.
(Yes, the tax code is scary and intimidating. The curious can browse through a complete copy on-line, all 3.4 million words with 23,000 cross-references!)
But, the fact of the matter is that income tax returns for most new graduates are pretty straightforward and the IRS has tried to translate all that code into something that taxpayers can understand.
Preparing your own tax return is a good way to force yourself to take a close look at your overall financial picture at least once a year. (Even if you wind up going to a professional in the end, it's worth trying to do it yourself to get a feel for your tax situation. And, caveat emptor, professional tax preparers make mistakes too, and YOU are ultimately the one responsible for filing an accurate return, so it's important for you to understand the return you are signing.)
Tax issues that typically face recent grads:
Line 6) Exemptions: Can your parents still claim you on their 2009 tax return (the one they file next April) if you graduate in June? That depends: the relevant IRS rules are here. If you provide more than 50% of your own support in 2009, they are not permitted to claim you, and you can claim your own personal exemption.
Line 7) Wages, Salaries, Tips: This figure should reflect the total of the amounts reported in Box 1 on all the W-2's you receive for all jobs held during the year.
Line 8) Taxable Interest: Banks and other financial institutions that pay you taxable interest will issue you a 1099-INT each January showing the amount of taxable interest paid. If the amount of interest is small, you may not receive a 1099-INT, but you can find out the amount of interest paid by looking at the "Year-to-date Interest Paid" figure on your last bank statement of the year.
Line 18) Student Loan Interest: You may be able to deduct up to $2,500 in student loan interest from taxable income. The relevant IRS rules are here. The financial institution servicing your student loans is required to send you an annual statement showing the total amount of interest paid each year.
Line 31) Education credits: If your parents can claim you as their dependent and if they choose to claim you as their dependent, THEY may be eligible for the education tax credits for tuition paid.
If you parents do not claim you as their dependent, YOU may be able to claim education tax credits for eligible tuition paid on your behalf. This turns out to be a pretty complicated issue. Colleges are required to issue you a 1098-T tuition statement which shows the amount of tuition billed each year. However, the figure you need is not the amount of tuition billed last year, but the amount of tuition PAID during the year. These may not always be the same. It gets especially complicated when grants are involved, since they need to be netted out from tuition.
There is more guidance available from the National Association of Student Financial Aid Administrators here.
The IRS also has a very comprehensive Publication 970: Tax Benefits for Education. This is a really helpful resource that covers a broad range of topics including student loan interest, tuition tax credits, tax treatment of scholarships and graduate fellowships and stipends, and the tuition tax deduction. Some of you may be fortunate enough to find an employer who will pay for some of your graduate school tuition. The tax treatment of that benefit is covered here.
In the end, even after you've done your fairly simple tax return by hand, you may want to use tax software (e.g., TurboTax or TaxCut) to do your taxes. If your income is under $52,000, you may be able to use free versions of TurboTax, TaxCut, and other similar software to prepare and e-file your tax return for free through the IRS Free-File partnership available free at the irs.gov website. I would strongly recommend doing your taxes by hand and with the software as a double-check.
Important WARNINGS: The IRS has carefully checked the on-line third party software providers in their Free-File program and they have checked for safeguards against identity theft. There are fake "look-alike" websites that try to entice people to enter their personal financial information. Beware! Always use the irs.gov website to access the Free File partner programs.
Situations in which you'll probably need to use a paid preparer: multiple state tax returns (because of income earned in different states, e.g., due to moving, or living in one state but commuting across state lines to work in another state.) This can get pretty complicated as you may need to file state tax returns in both states, and you may be able to claim a credit for taxes paid to one state against your tax liability in another state.
Getting a handle on your finances
1) Do Your Own Taxes!
2) Bank accounts
3) Medical Insurance
4) Other Insurance
5) "Fixed" Costs
6) 401(k), 403(b)
7) Credit Cards, Credit Ratings, Identity Theft
2) Bank accounts
3) Medical Insurance
4) Other Insurance
5) "Fixed" Costs
6) 401(k), 403(b)
7) Credit Cards, Credit Ratings, Identity Theft
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