Financial Articles

MAROTTA ON MONEY by David John Marotta

An overwhelming number of failed marriages cite financial troubles as a major factor in their breakup. This is no surprise because the way we use our time and money reflects our values. Without a strong set of shared values, marriages drift apart. But, dealing with finances together can bring a couple closer. Here are seven principles of how you can build wealth and your marriage.

Start young. June is the most common month for weddings, and there’s no better time to establish the rules of a relationship than at the beginning. And every seven years you delay starting a savings plan cuts in half your ultimate net worth in retirement. Chances are you know someone who’s getting married this month, so send them a copy of this article. It may be more valuable than the check you write.

Work as a team on the budget. Shared activities help you build and integrate your values and keep your finances in sync with the rest of your life. Couples that share church activities or philanthropic causes do better financially because their common vision allow them to work together instead of pulling in different directions. They do well while doing good.

The more opportunities to forge shared values the better the marriage team. Even the simple process of creating and adjusting a family budget provides a forum for discussion of what is really important to the family.

A budget gives you more freedom, not less. Couples without a budget can, and often do, fight about every dollar spent. Every purchase is an opportunity for values and priorities to clash. But couples who have worked together on a budget are already in agreement on the big picture. Once the difficult decisions are made about what will help further the family’s values, the specific purchases in each category are much less critical.

Couples with a budget do not get concerned about spending until a category goes over the budgeted amount. Having decided how much money the family can afford to spend on clothes for him and for her, it doesn’t matter as much if he prefers lots of inexpensive clothes and she prefers a few nice pieces, or visa versa. A budget allows discretion and freedom prevail within cooperation and teamwork.

Always pay yourself first. The best way to achieve your financial goals is by moderating your spending and staying on track with your savings needs. Only after you have saved several times your annual salary does the rate of appreciation become more important than the rate of savings.

To pay yourself first, set up an automatic monthly transfer from your checking account to an investment account where your contribution is automatically invested in a diversified portfolio. Even a small amount makes a big difference. Just five hundred dollars a month (just $6,000 a year) at 11.5% each year will compound to a million dollars by the middle of the 26^th year. Money makes money. And the money that money makes, makes even more money.

Limit the amount you spend unless you both agree. One big mistake can undo months of frugality and sacrifice. Therefore, big purchases require both members of the team to agree. Honoring each other in this way helps avoid resentment and disgust.

When a couple is just starting out, this dollar limit may be very small, perhaps only fifty dollars. As the couple matures, they will grow to anticipate each other’s wisdom and values; plus, they will likely be able to increase their discretionary spending limits.

Separate needs from wants. In the United States, nearly all of our purchases are wants, not needs. We really need little more than food, shelter and clothing to survive. It is easy to fall into the misconception that we deserve nice things because we work hard. But wealth is what you save, not what you spend. The textbook definition of capital is deferred consumption, and wealthy people learn to value financial security over immediate gratification.

We have worked with families with very modest incomes who through saving and investing have grown to be millionaires. On the other hand, we have worked with couples who spent every dollar of dual six-figure incomes. The difference is separating needs from wants.

Enjoy a frivolous slice. Both members of a marriage should have a slice of the budget which is completely at their discretion. So long as their spending stays within this thin slice of the budget pie, they can be completely frivolous. Perhaps it is only 0.5% of your total budget, but it will provide a place to put purchases that otherwise might cause marital strife.

If one member collects ceramic pink pigs and the other signed collectable hockey cards they can both enjoy their frivolous expenditures without jeopardizing budget items that are more important to the family.

Couples that learn to live proportionately maintain their balance whether they are rich or poor. No matter the circumstances, they include some fun, some gifting, and some investing as a reflection of their shared family values.

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David John Marotta is President of Marotta Asset Management, Inc. of Charlottesville providing fee-only financial planning and asset management at www.emarotta.com. Questions to be answered in the column should be sent to or Marotta Asset Management, Inc., One Village Green Circle, Suite 100, Charlottesville, VA 22903-4619.

MAROTTA ON MONEY by David John Marotta

Employers and employees alike are feeling the squeeze of swelling health care costs. According to the Kaiser Family Foundation, health insurance premiums have risen at an average rate of 12 percent per year since 2000.  Unable to keep up with rising premiums, employers are forced to pass on costs to employees, to trim benefits, or worse, yet, to dump the coverage all together.

Sick of facing the same dilemma each year, more Americans are turning to consumer-driven high-deductible health care plans like those which offer Health Savings Accounts. Since their 2004 debut, enrollment has increased exponentially and is expected to gain momentum.  By 2010, the Department of the Treasury estimates as many as 45 million Americans may be covered by an HSA-eligible plan. 

Thus far, the results of HSAs are surprising. In fact, they may be nothing less than a miracle cure for America’s health care crisis. So, you say, isn’t a health insurance plan with a high deductible the exact opposite of a great benefits package?  Nope. And here’s why.

The cause of healthcare’s malignant growth has been diagnosed as a lack of “negative feedback.” All systems must have a regulator in order to dampen runaway reactions. Healthcare coverage is no exception.

One way to provide just the right amount of negative feedback is to make sure that the person who pays for a service is also both the person who benefits from the service and the person empowered to decide if the service should be given in the first place.

Traditional health care plans, on the other hand, are built on cost sharing. And, chances are high that you consume far fewer health care dollars than you pay in. Most of a plan’s health care expenses are generated by a small number of participants with chronic problems. In fact, the top 10 percent of the most ill patients account for 69 percent of total health care payouts in America.  Additional expenses are generated by a small number of participants who abuse the system and consume services simply because they are not paying for them.

Instead of handing over thousands of dollars each year to a big insurance agency, why not keep most of those dollars in a savings account and use them on the services you actually need? There is no person better suited to determining the value of a medical procedure than the patient paying for the benefit.   

Insurance is best used to limit catastrophic risk, not to pool everyday expenses. Therefore affordable medical insurance should have a high deductible. Out of pocket expenses below the deductible provide sufficient negative feedback to prevent skyrocketing insurance costs.

To help Americans cover the out of pocket costs of high deductible plans, the federal government passed legislation providing tax incentives in the form of Health Savings Accounts. 

HSAs are just that, savings accounts.  As long as funds are saved and spent on qualified medical expenses all contributions, capital gains and withdrawals remain untaxed. And like any other bank account, HSAs come complete with debit cards and checks.

To protect you against catastrophic medical expenses, Health Savings Accounts are coupled with a High Deductible Health Plan (HDHP).

You may think your insurance has a high deductible already.  However, to qualify as a HDHP, insurance deductibles must be a minimum of $1,050 for individuals and $2,100 for families. Once the deductible is met, most HSA-eligible HDHP plans cover 100 percent of most medical expenses like emergency room visits, hospitalization, lab tests and prescriptions. Still, these deductibles are nothing to joke about. Paying a couple grand out of pocket before your insurance chips in may seem like financial suicide.

The good news is HSA-eligible HDHP premiums are only a fraction of the cost of a traditional medical insurance plan. A study by the Galen Institute found that the majority of HSA-eligible plan participants pay premiums of less than $100 per month. Try comparing that to the premiums for most insurance plans which average $335 for individuals and $906 for families – per month.

As an HSA owner you’ll likely do better than break even each year. With the savings on your insurance premiums, you should be able to accumulate a sizeable nest egg. And, unlike your traditional health care plan, your HSA funds are not subject to a “use it or lose it” policy. Anything you don’t spend one year carries over to the next year. After all, it’s your money.  While you’re on a roll, why not check out the invest options offered by your bank? 

So, you ask, what counts as a qualified medical expense?  The IRS has approved a long list of qualifying expenses.  In addition to doctor’s visits, hospitalizations, lab tests and the like, the list also includes prescriptions and some over the counter drugs like aspirin. 

Qualified expenses may also include items which may or may not count toward your deductible.  For some, that may include vision and dental costs like contact solution and teeth cleanings. HSA funds may also be spent on medical expenses for a family member not covered under the HDHP. However, nonqualified withdrawals will be considered as income and slapped with an additional 10% penalty tax.

So, what happens to your HSA when you leave your employer? The money is yours. No matter how many times you change employers, your account is fully portable. Accounts owners are immediately fully vested. All contributions made by an employer belong to the account holder.

And, there’s even more good news.  Consumer-driven health care plans are positively shaping the behavior of the insured while pushing health care costs down. The Galen study found that HSA owners were more likely to engage in healthy behaviors and to get annual check-ups. It also reported they were more likely to inquire about costs and less likely to consume health care they didn’t need. And don’t think that the health care industry isn’t taking note.

It should come as no surprise that average costs for consumer-driven health care plans increased at roughly one-third of the rate of traditional insurance plans, according to Deloitte Consulting LLP. Among them, HSA plan premiums actually decreased on average by 17 percent for individuals and by 6 percent for families, according to a 2005 report by the nation’s largest online insurance broker, eHealthInsurance. Now that’s something everyone should feel good about.

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David John Marotta is President of Marotta Asset Management, Inc. of Charlottesville providing fee-only financial planning and asset management at www.emarotta.com. Questions to be answered in the column should be sent to or Marotta Asset Management, Inc., One Village Green Circle, Suite 100, Charlottesville, VA 22903-4619.

Where does your home mortgage fit into your financial planning and particularly into your estate planning? In the world of yesteryear, the chief goal was to pay off the mortgage and hold the property free and clear. Higher land prices, higher building costs, and fluctuating interest rates have changed the landscape of the housing market, with instruments available from flexible interest schedules to interest-only mortgages, in which the buyer never actually purchases the property.

There are advantages to paying off your mortgage as quickly as possible and there are disadvantages as well. It just depends on your needs and your aims for the future, which route you should take. Say, for example, that you had just come into a lump sum of money – from a stock market windfall, inheritance from Uncle Joe, or some other pile of cash that gave you the option to pay off your mortgage and be done with it, or not.

Some things to consider in contemplating this matter include:
 Are you still working and intend to be working for 20 more years, or are you nearing retirement age within the next few years?
 Do you intend to retire in the home, or move to another retirement location altogether?
 Do you have children who would want to inherit the family home?
 Are you in a stage where you are actively trying to build a retirement nest egg?
 Is the interest rate on your mortgage high or relatively low?
 Do you need extra tax deductions or is that immaterial?

The answers to these questions can help you determine whether you want to use the extra money you have available for paying of your mortgage or put it to other uses.

If the following statements describe you, paying off the mortgage is the best option:
 You are a person who craves personal security and don’t like the worry of having a mortgage hanging over you.
 The interest rate on your mortgage is higher than that which you are currently earning on your investments.
 You would like to have money available to begin, or contribute more heavily to, an investment or retirement program.
 You don’t intend to retire in the home, but want to buy a smaller home by the lake, mountains, river, in the tropics, etc.
 Your mortgage is near to being paid off (within 10 years) so you are now paying more principle than interest.
 You have enough money to pay off the mortgage and still have a healthy savings account.

If these statements best fit you, you may want to ignore the mortgage and use the money for other purposes.
 The interest rate on your mortgage is lower than the interest rate you are receiving on your investments.
 You have more than ten years till retirement and are able to comfortably handle the mortgage payments and don’t anticipate any change in that situation.
 Paying off higher interest credit cards would be more beneficial to your financial situation than paying off a low interest mortgage.
 You still have 20 years to pay on the mortgage so there is a significant amount of interest still to be paid before you begin to seriously impact the principle.

These are questions that your estate planner or estate planning attorney can help you resolve by listening to your plans and making suggestions.

About Ronald E. Hudkins; Ronald Hudkins is a retired U.S. Army Military Police member that was assigned as a staff researcher. He has coordinated with military and criminal investigators, set on court marshals and worked closely with the Staff Judge Advocate Generals Office (JAG). He has a keen sense of legal matters - their interpretation, initiatives and guidelines. For imperative financial planning needs he suggests his book “Asset Protection and Estate Planning for All Ages.” Additionally, he offers a Free Newsletter, Articles and Forum at his web site: http://www.assetprotectnow.com/