Monday, December 7, 2009

Budgeting: Part 10: Work Benefits

"Write your injuries in dust, your benefits in marble."

- Benjamin Franklin


Most people don't formally factor each work benefit into their budget, and that seems like a reasonable approach to me. However, if these benefits are essential to you, then it's important to know how much they're worth.

Insurance

The biggest work benefits are typically health insurance and other medical benefits such as dental insurance and prescription drug coverage. The time when people typically try to measure these benefits is when they are looking for another job. For example, if Company A is offering a higher salary than Company B, but Company A pays only 50% of health insurance costs while Company B pays 80% of a similar insurance policy, then the cost of the insurance most be known to make a fair comparison.

But there are at least two other times when attention should be paid to the cost of these benefits: when planning for a possible job layoff, and when planning for retirement. People mainly tend to look at their cash costs when figuring their budget. If cash costs are $3,000 month, then it is often (incorrectly) assumed that an $18,000 emergency fund will last 6 months, and a $36,000 income stream will be sufficient for retirement. It can be a rude awakening to discover that your emergency fund will not last nearly so long when you start having to pay cash for a number of different insurance premiums (health, dental, life, etc). Worse yet, in some cases your replacement cost may be significantly higher than the current cost to your employer. For example, if you have a serious medical issue, you may not be able to obtain private life insurance at reasonable rates, even though you were able to obtain reasonable rates through your employer.

Other Payroll Deductions

One simple error that is surprisingly easy to make is to omit spending that occurs through paycheck deductions. In the United States, it is very common for out-of-pocket medical expenses and childcare expenses to be paid for through paycheck deductions, because they are associated with tax-advantaged health care and dependent care "flexible spending accounts". Often these deductions can be paid directly to healthcare and childcare providers up front without a payback step. But remember that $1,000 deducted throughout the year and paid to doctors and pharmacies is still $1,000 of spending even though you never handle the money.

In some cases, certain job-related expenses such as union dues, cafeteria meals, or uniforms are also deducted from paychecks. Sometimes these expenses are relevant to your budget, while other times they are not. For example, if you are planning for retirement or for a job layoff, then the cost of the union dues may not be relevant. But what about the uniforms and the cafeteria meals? Even though you won't wear a uniform and eat at a workplace cafeteria during retirement or unemployment, you will need substitutes for these expenses because you'll need other clothes to wear and other food to eat. Hence, these expenses need to be recognized as real spending.

Discounts

Lastly, many employers provide significant discounts for certain services, such as childcare centers, fitness centers, downtown parking facilities, and even cellphone and Internet service. If you intend to continue using these services during unemployment or retirement, then you should be aware of their potential increased cost to you.

Summary

The bottom line is that most employer provided benefits should generally be considered spending. Failure to recognize this fact in your budgeting will tend to understate your real spending level. While it's not necessary to create and track a separate line item for each benefit, it is a good idea to calculate the value of your work benefits and factor that into your emergency planning and retirement planning.

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