Q: I just started my first job and they offer both an FSA and an HSA. Which is better? — Cami (via Twitter)
A: Cami, it’s not necessarily a function of which is better overall. You need simply to think about which is better for you.
For those not familiar, an FSA is a flexible spending account, and an HSA is a health savings account. As you might imagine from the names, the FSA is more flexible in how you can use the funds you put there, rather than having them era-marked specifically for health-related costs. But they both certainly can be used for health expenses.
Cami, for starters, you are only eligible to participate in an HSA if you have a high-deductible health plan, or HDHP. In 2018, the minimum deductible for such a plan was $1,350 for individuals or $2,700 for families. In that same year, you could contribute up to $3,450 for an individual plan or $6,900 for a family plan. An FSA only allowed contributions up to $2,650. So while limitations on how you could use the money would point to an FSA being the better option, contribution limits would score one for the HSA.
There is one final thing to take into consideration as you make this decision. HSA’s allow you to carry a balance, so any money that you build up over a year will carry over to the next. Unused funds will be invested by the company you work for, helping you build wealth. Contrast this with an FSA where any un-used funds at the end of the year are forfeited; although ask about a “grace period” which may allow you to spend up to a couple hundred of those dollars in the first month or two of the next year.
On these three main points, the HSA may appear to come out ahead because of the higher contribution limits and the ability to carry-over your funds. But every situation is unique. The flexibility of the FSA allows for spending on a wider variety of expenses, or you may not even be eligible for the HSA. Educate yourself and know the distinctions to decide for yourself what works for you. Good luck!
Q: I’m about to buy my first house, and I’ve seen “private mortgage insurance” on several pieces of paperwork. Why would I pay for that? — Zach (via Twitter)
A: The short answer Zach is that you’d pay for private mortgage insurance (PMI) because you wouldn’t have a choice. If you’re pursuing a conventional home loan and can’t put down at least 20% of the home’s purchase price up-front, the lender may harbor a reasonable fear about your ability to pay the on-going mortgage due to them. In that case, they are essentially taking out an insurance policy on your defaulting on the loan. And YOU are paying for that insurance policy.
Now yes, there is some inherent lack of common sense in saying “I’m worried you can’t pay me what you owe me, so pay me more.” And don’t even get me started on why a bank would give you a loan if they don’t think you can afford to pay on that loan each month. But I digress.
If you want to avoid PMI — which you do — just pay your 20% of the purchase price at closing and you won’t have to deal with it. If you can’t do 20% down, there are conventional loans that don’t require PMI. However, those interest rates will be higher, so you’re really no better off. You can also consider a non-conventional loan, like an FHA. But again, those interest rates will be higher and you’ll be limited in your housing options by places that either don’t meet FHA requirements or sellers who don’t want to deal with those requirements.
You could potentially borrow money to get to the 20% as well, though this can get sticky both for family relationships and in how the lender views the gift. They might even require a letter from the family member stipulating that it is a gift and not a loan so as not to affect your debt to equity ratio. There are no perfect answers, but hopefully I gave you some ideas.
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Eric Litwiller has spent the past eight years of his professional career helping people achieve their financial goals through the use of budgets, retirement vehicles, and estate planning options. He is a firm believer in the importance of using Earthly riches to fulfill a mission of Christian stewardship. Eric is not a licensed financial planner.