Reduce large, unexpected expenses

Before we discuss how and where to invest for retirement, the first, and biggest, problem is creating enough margin in your budget to save something. Those with average incomes and little room in the budget often cut what others consider necessities to make ends meet. This means not spending money on preventative healthcare, regular car maintenance, vet visits, home maintenance, and more. Cutting in these categories will save you money in the short-term, but if you have an average income, they can cost you big-time in the long-term.

Potentially preventing some huge unexpected expenses can really help you get ahead with an average income. There’s only so much you can control, but spending a little more today can drastically reduce your future expected expenses.

Get good health insurance

Healthcare is very expensive, and if you have an average income, it can be tempting to delay going to the doctor or seeking needed healthcare until you can no longer ignore the problem. Make preventative healthcare a priority in your budget. Go to the doctor at least once a year for an annual exam and take care of other problems as soon as they pop up. Not only will your body thank you, your budget will as well.

Quality, subsidized health insurance is an invaluable perk from potential employers. All else being equal, look for employers that offer great benefits to their employees. A good company knows it needs to take care of its employees by offering access to high-quality medical care at affordable prices.

Get pet insurance

If you have pets, make room in your budget to pay for pet insurance if you could struggle to cover unexpected vet bills. Nobody wants to decide between paying rent next month or paying for a life-saving treatment for their pet, but most will choose their pet (78% of Americans would go into debt to pay for their pet’s care). Pet insurance can help you avoid this issue entirely as long as you can make room in your budget for your loved one’s insurance. Pet insurance is much cheaper than human insurance, and for our cats, it is about $20 per month each.

We have been very unlucky with the health of our cats. Just this year, we’ve had hospitalizations for a blood clot, a mystery illness where our cat was refusing to eat, and a rare complication of coronavirus (I didn’t know cats could get a coronavirus, either). We’ve received over $10,000 in reimbursements from our pet insurance this year. Hopefully you never have issues with your pets, but if you would rather have coverage for unexpected medical expenses than paying out-of-pocket, pet insurance is the way to go.

Drive a reliable and affordable car

Vehicles can be really cheap to drive or extremely expensive to drive, depending on what type of vehicle you have and how well you maintain it. Consumer Reports ranks the reliability of the major manufacturers each year, so consider using their list or a similar study to help you choose which brand to purchase. We made a couple car purchases recently and chose Mazdas, which are higher on the reliability list but not as expensive as comparable Toyotas or Hondas.

No matter what type of car you drive, complete all maintenance as scheduled to avoid problems later down the road. Much car maintenance can be done at home for cheaper if you don’t mind getting your hands dirty. Change your oil as the manufacturer suggests, rotate your tires and regularly check your air pressure and wear, and don’t ignore any flashing lights on your dashboard.

Maintain your home

Home repairs can be very expensive, but regular maintenance can help you stay ahead of any potential problems. We have our HVAC system serviced regularly, pest control that visits once a quarter, and have other issues addressed when they pop up. If you are new to the area, talk to your neighbors to see what service providers they use and trust. It’s unfortunately not uncommon for unreputable companies to exaggerate issues with your home and get you to spend large sums of money that may not be necessary. For example, there’s a local HVAC company in town that will almost always say you need a new unit, no matter what your actual problem is.

Whenever service providers visit, take time to ask questions and learn more so you may be able to potentially self-diagnose and fix minor problems yourself in the future. I don’t consider myself an A/C expert by any definition, but I do know how to fix our unit when it freezes over and how to keep that from happening.

If you are deciding between renting or buying, renting is a great way to save money on repairs and maintenance. I love our house, but I miss having someone fix all of our problems at no extra charge when we lived in an apartment. There are many other considerations when it comes to renting vs. buying, which you can read more about here if you’re interested.

Cut other big expenses where you can

Ordinary, everyday expenses have a huge impact on your budget when you have an average income. What you spend on groceries, childcare, dining out, entertainment, and vacations determines how much you are able to invest for retirement. We do believe in paying yourself first and investing for retirement before tackling the rest of your budget, but the reality is that groceries and childcare comes before saving for retirement.

Groceries, dining out, and toiletries normally make up a significant portion of your budget when you have an average income. There is only so much money you can save here, and we would obviously never suggest skipping meals to save more for retirement. But there are ways you can save money on food and toiletries. Shop at a warehouse club like Costco for the staples, which can be especially beneficial if you have a larger family to feed. Buy in bulk if you have the space and if you can consume the items before they expire (I am often guilty of buying larger quantities than I can handle at Costco). Some grocery stores like Aldi, Lidl, and Kroger are cheaper than more “premium” grocers like Whole Foods, Publix, and Harris Teeter.

There are ways to save money on dining out aside from the obvious and unethical (yes, you could go out to eat less or not tip your server). If you typically order drinks when you dine out, try drinking water at dinner and having drinks at home later. When we order drinks with dinner, they tend to add $30 or more to our ticket, including tip. Many restaurants often have deals on slower days, so try going during the week instead of on the weekend if they have any specials. Our favorite local Mexican place has $1.99 Taco Tuesdays, which really can’t be beat.

Families in the US spend drastically different amounts on childcare, ranging from nothing to tens of thousands of dollars (or more) per year. If you are a single parent or if you and your spouse both work, you are going to need some sort of childcare. Grandparents that love children can be a great source of free childcare. Daycare programs range in price, and while it is probably not advisable to enroll your child in the cheapest program available, you can lessen the blow. Some employers offer free childcare for their employees, which is a huge benefit for parents. If you can figure out a way to do daycare 3 days per week instead of 5, you can cut your bill significantly.

Increase your income if possible

Increasing your income can be easier than reducing your expenses in some cases. If you are struggling to cut your expenses and still need to save more for retirement, you may need to make more money (simple, right?). The good news is it has never been easier to make extra income outside of your day job. If you are struggling to think of ways to increase your income, check out this article I wrote last year.

If you are in a role at work where you have room to grow, it’s worth putting in the extra effort and time to get that promotion or raise. If you feel like your career opportunities are limited, it might be time to explore going back to school or getting a certification in a new field. The trades (electrician, plumber, mechanic, construction, and more) are in high-demand in many areas with really good starting pay.

Obviously increasing your income is easier said than done. You can’t snap your fingers and double your income, but if you are willing to spend more of your time working, whether that’s at a side hustle, your day job, or opening the door to new career opportunities, you can increase your income.

Know where to save

Creating more room in your budget to invest for retirement is all for nought if you don’t know where to save. Check out this article I wrote last year for a step-by-step guide of where you should be investing for retirement. The short version is get your employer match first, maximize your Roth IRA and HSA, if possible, then contribute more to your employer-sponsored account, if you have one. If you still have more money to invest after all of that, you can contribute to a taxable brokerage account.

The more money you make, the easier it is to build wealth; there’s no way around it. If you are building wealth with an average income, you have to do your best to avoid large, unexpected expenses, cut other large budget items where you can, and increase your income, if possible. It is still very possible to become wealthy with an average income, and through the power of exponential growth, your savings can compound many times over. By living below your means and saving a little bit today, you can build your great big beautiful tomorrow.

Do I need health insurance?

The answer to the question of whether or not you need health insurance is almost always yes. Unless you are a billionaire and have more than enough money to cover any medical bill that could possibly arrive, health insurance is a good idea. No matter how young or old you are, how healthy or unhealthy you are, how much you dislike insurance or hate going to the doctor, you probably need health insurance. The benefits of health insurance may seem mundane; most people just save a little bit at the doctor here and there and don’t experience much savings, if any, from having health insurance. However, the greatest benefit of health insurance is that it covers you if you find yourself needing major medical care for whatever reason.

Without health insurance, what we think of as routine medical events, such as having a baby, could end up costing six figures if there are complications. It is impossible to predict when certain medical diagnoses will occur. A cancer diagnosis can happen to anyone at any time; treatments are always improving and your odds of getting a severe diagnosis may be low, but health insurance protects against those unknowns.

What type of health insurance do I need?

Health insurance isn’t always easy to understand and the options available may confuse you. While the available insurance options differ for everyone, there are two basic categories of plans to choose from: high-deductible health plans or traditional health plans. What is a deductible? This is the amount of money the policyholder pays before the insurance company starts paying benefits. The lower your deductible, the less amount of money you must pay before insurance kicks in. High-deductible plans have higher deductibles when you need care, but your monthly premium is generally lower. For 2024, a high-deductible health plan is any health insurance plan where the annual deductible is $1,600 or greater for single coverage or $3,200 or greater for family coverage. Additionally, annual out-of-pocket expenses must not exceed $8,050 for single coverage or $16,100 for family coverage.

High-deductible health plans (HDHP) come with the added benefit of HSA eligibility, which is one of our favorite retirement savings vehicles. If you are healthy and not expecting any medical expenses outside of a few visits to the doctor, an HDHP may be worth considering. Even though you will pay more if you experience a major medical emergency, an HDHP is infinitely better than not having any health insurance. Plus, choosing a higher deductible plan may save you money each month on premiums and give you the option to invest in the extremely powerful HSA.

Major medical needs can’t always be predicted, but some, like having a baby or opting for an elective surgery, can be. If you are generally healthy but will experience one of these events in a given year, it may be worth opting for a traditional insurance plan with better coverage, at least temporarily. The additional monthly cost may be worth the savings you get if you were to reach your deductible or out-of-pocket maximum. If you have medical conditions that require a great deal of care or are at an age where your medical expenses have increased significantly, a traditional health insurance plan may be the right choice for you.

How can I save money on health insurance?

Choosing the right type of health insurance plan for you and your family can help you save money by minimizing premiums, or if you have more medical expenses, maximizing the amount that insurance will cover. But insurance may still seem very expensive even after picking the right plan for you. Is there anything you can do about it?

Unfortunately we can’t fix the health insurance industry in the US, but you may have some options to make your plan more affordable. If you have health insurance through your employer and it isn’t working out for you or your family, try talking with your employer or HR to see if there is any possibility they may add additional health insurance options in the future. It may be worth looking at options outside of your employer and shopping around to see what else is available. Be wary of certain health share plans that aren’t actually insurance and aren’t subject to the same regulations. These plans can be less expensive, but aren’t legally required to pay claims and have other drawbacks such as limited or no coverage for preexisting conditions.

Make sure you know the ins and outs of what your plan covers so you know the best, and financially optimal, ways to seek the medical care you need. It may be cheaper to use a service like GoodRX to fill prescriptions instead of billing them through your insurance.

Nobody enjoys paying for medical insurance. Chances are you are paying for significantly more than you are receiving, but if you are one of the “lucky” ones who receives more benefits than they pay for, you are likely experiencing a major medical event and it’s pretty hard to be grateful for insurance coverage under those circumstances. No matter how much you dislike health insurance, you can’t go without it. Over 60% of personal bankruptcies are partially or totally caused by medical debt. Choosing the right health insurance plan for you and your family has the potential to save you money and give you access to super-powered tools like HSAs, but can also help put your mind at ease knowing an unexpected medical emergency won’t destroy your finances.

Became disabled, either temporarily or permanently, is significantly more likely to occur than an early death. Yet many Americans have life insurance but not disability insurance. Is disability insurance a necessity and how much coverage should one look for?

Are you ready to take your finances to the next level? Check out our Financial Order of Operations resource that outlines the nine steps anyone can take to build wealth and reach financial abundance.

If you are young and healthy, is there any reason to NOT choose a high-deductible health insurance plan so you have access to an HSA?

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Despite the power of contributing to an HSA, it may not always make sense to contribute to one. You must have a high-deductible health plan in order to contribute, which means you may be paying more out-of-pocket if you experience a large amount of medical expenses. Choosing a plan with better coverage may be worth considering in years where you may have costly medical procedures, surgeries, or when you are expecting the birth of a new child.

How do you know exactly when it might be worth considering getting better coverage? Let’s take a look at a few case studies that show the costs and benefits you will need to weigh.

Scenario One: You are having a baby and deciding between an HDHP and non-HDHP.

Let’s say you are trying to decide between two employer-subsidized health plans, an HDHP with a monthly premium of $200 and a “Cadillac” health insurance plan for $400 per month. You are also expecting a baby in the plan year, which will cost approximately $5,000 out-of-pocket under the HDHP and only $500 under the Cadillac plan.

Choosing the higher cost but better health plan would save you approximately $2,100 if you were expecting a large medical expense like having a baby. Choosing a great health plan may also make sense if you are planning to have an expensive surgery or in general expect more medical expenses.

If your employer offers more than one health plan, and one of the plans is HSA-eligible, run the numbers for yourself to see how the plans compare. It is impossible to know exactly how much you will owe in medical expenses in a given year, but you can at least know which plan will be better for you with different amounts of medical expenses. If you plan to use your HSA as a slush fund to pay for medical expenses, chances are better employer health coverage may be worth considering. If you plan to invest HSA dollars for decades, it could be a tougher decision.

Scenario Two: You are young and healthy with few medical expenses.

Assuming your employer offers the same health plans as above, an HDHP with a $200 monthly premium and “Cadillac” health insurance plan with a $400 monthly premium, here’s how the comparison might look for someone expecting little to no medical expenses in a given year.

Not only is the HDHP $2,400 per year less, you are also eligible to contribute to an HSA. If you invest the $2,400 difference and let it grow for 30 years earning 8%, you would have $26,246 in your HSA. Do that each year for a decade when you’re younger and you’re well on your way to paying for the $315,000 in medical expenses an average retired couple may need to cover healthcare expenses in retirement.

If you are trying to decide between an HSA-eligible health plan or better coverage that is not eligible for an HSA, I highly encourage you to crunch the numbers for yourself. The examples above are almost certainly different from what you anticipate paying in premiums and medical expenses.

Here’s what you need to know to compare the total cost of coverage for different health insurance plans:

• Insurance premiums
• Estimated out-of-pocket medical expenses
• Tax benefits of using an HSA
  • Do you plan to use it as a slush fund or invest it for the long-term?
  • If investing, how long do you anticipate that money will grow?

Better health insurance plans have a huge benefit that may not always show up when comparing the numbers: more coverage. If you anticipate having a low amount of medical expenses, that benefit may not show up when crunching the numbers. However, you can never anticipate exactly what you will pay in medical expenses in any given year, so the benefits of better coverage should not be overlooked.

Choosing a health insurance plan is a decision that should not be taken lightly. Make sure you weigh all pros and cons of having better coverage or contributing to an HSA before making a decision.

In this highlight, Brian and Bo discuss some of the best health insurance options for pregnancy.

Want to know what to do with your next dollar, you need this free download: the Financial Order of Operations. It’s our nine tried-and-true steps that will help you secure your financial future.