Advanced Personal Finance

My wife and I were talking about some relatives at dinner last night.  It seems one of them has recently lost his job in the home construction business.  That didn’t come as a complete shock given the housing slow-down.  What did come as a surprise, though, is that this person refuses to sign up for unemployment.

A little back story is in order.  The relative in question was fairly recently hired by the now former employer.  I think it was within the last two years or so.  So he probably got little, if any, severance.  He himself just bought a house with accompanying rather large mortgage.  Throw in that he and his wife just had a baby and you’ve got serious financial  responsibilities.

The idea that you would voluntarily decline unemployment benefits is mind-blowing to me.  You pay the premiums for unemployment insurance.  Why wouldn’t you use it when you’re unemployed?

I looked up the process for applying for unemployment benefits in our state and it couldn’t be easier.  Fill out some online forms.  Checks begin to arrive.  Each couple of weeks, you go to the site and confirm you’re still unemployed.

So if you (God forbid) lose your job, please file for unemployment.  That’s what it’s for - newly unemployed people.

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I’ll soon be taking a leave from my job through FMLA. It occurred to me, though, that I had no idea what that would mean regarding benefits. So I did a little research and here’s what I found out.

The bottom line is, when you’re out on FMLA leave, you continue to get health insurance as if you were still working. If you pay for part of your coverage, you still have to pay your piece. Other benefits resume when you return to work.

The details

The details of benefits coverage seem to be pretty simple. Continue to pay for your portion of medical benefits and they remain in effect. If you fall more than 30 days behind, your employer has the right to halt your coverage. But to do so, the employer has to send written notice to that effect.

If an employee doesn’t return to work within 12 weeks, the employer is not obligated to pay for the employee’s medical benefits. Company-to-company policies may differ, of course, but that’s the minimum standard for FMLA.

Finally, if while you’re out on leave you would have gotten canned in a mass firing, the employer can stop benefits effective the day you would have been terminated.

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New babies get people thinking in a lot of different ways. Some anticipate with nervous excitement; some with flat-out fear, some anticipate the arrival of their baby with utter exuberance. Personal finance issues probably aren’t among the first thoughts.

Since we’ve gone through this, I can honestly give some personal advice. Some of these things we learned the hard way. Some we actually did right. It’s always helpful to learn from someone else’s mistakes, so if you’re in the market for a new person, have a look.

Pre-baby

• Check your medical insurance. Just polling friends, it’s amazing the range of coverage different plans provide. For our daughter’s birth by planned C-section, insurance paid for everything. Well, there was the $10 charge to have a phone in the room (Huh?). Look for what’s covered prenatal, for the actual delivery, and for post-delivery well baby visits - copays, deductibles, the usual stuff.

• Visit hospitals. The nearest hospital isn’t necessarily the one where you want to have a baby. Do some research and go on tours.

• Buy life insurance. You’ll now have a true dependent - somebody who must count on you for everything. Everything costs money these days. Even if you’re not around, it still needs to get paid for.

• Check your benefits. If you’re adopting, lots of bigger companies (and some small ones) offer adoption assistance, sometimes a significant amount of money. If you’re doing it the old fashioned way, check with HR about FSAs, paid/unpaid time off, and short term disability.

• Tell your boss. This is a sensitive subject for women, and I’m not a woman so I’ll just say at some point, your boss needs to know what’s going on. For me, I needed to tell my boss and coworkers because of unpaid time off to help after the birth.

• Start saving for college. Think I’m joking? I’m not. The cost of college has been far exceeding inflation. We started saving only a few months into the pregnancy in a 529 plan. You name yourself as the beneficiary and when the little bundle gets a name, it’s a simple paperwork change.

• Start researching child care, if appropriate. If you both plan on going back to work, you need to have arrangements for baby care. Daycare slots for newborns/infants are notoriously difficult to find.

• Save money. Lots of it. If this is your first, you have no idea how many diapers you’ll go through. No idea.

• Buy baby stuff. I’m not going to lie - you’ll want to buy baby stuff. Try to restraint yourself, though. I’m chagrined to say we have one child and, at last count, five strollers. We have a stroller for all occasions. Honestly, though, we didn’t know what to look for in a stroller. You’ll find out, too.

Post-baby

• Tell the medical insurance company. You’ll want to put your new baby on your plan right away. Depending on the plan, you’ll have a certain amount of time to do this, but don’t put it off. The doctor visits for shots start at one month.

• Get (or update) a will. Even if you have little in the way of assets, you’ll want to do this. That life insurance you bought needs a place to go if you die.

• Decide on a guardian. Should you and your spouse both die, you need to have someone set up to raise your child in your place. Oh, yeah, and don’t forget to tell the person you select. Very important.

• Get a Social Security Card. A lot of hospitals will start this process automatically and/or give you the paperwork to take home. Just make sure it gets done. The turn-around on the actual card was surprisingly fast for us, by the way.

• Finalize child care.

• If returning to work, make contact and arrange for return. Your boss will need to know your plans as far as date of return, new hours, limited schedule, or other restrictions. Some workplaces are definitely not parent friendly. Those places suck. If your boss is not helpful on this now, you’ll likely run into issues later when you have to stay home with a sick child or leave early because their school is closing early because of snow.

Oh, yeah, enjoy your new baby. That’s important, too.

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One of the most awesome employment benefits you can have is an Employee Stock Purchase Plan. Most of the time, contributing to them is the equivalent of getting free money. Most of these plans give you a discount on the price and many have a look-back provision that makes them even sweeter. Buy one day. Sell the next. Make 15%.

ESPP Basics

Employee Stock Purchase Plans are programs that allow employees to buy stock in the company they work for, usually at a discount. They all have their own rules set by the company, but there are usually commonalities among them:

• Provide for a discount on the price. The discount will vary, but 15% is not uncommon.
• Have a look-back provision. A look-back sets the your purchase price at either the day the purchase cycle ends or the day it began, whichever is lower. In other words, if your plan runs every six months, you’ll buy at the lower of the January 2nd price or the June 30th price.
• No restrictions on how long shares must be held. This one is key. Ideally, you can sell the next day. Sometimes the transaction takes a few days. Worst case, you have to wait for several months.

Take the money and run

Here’s how the free money works. It’s too simple. As soon after your program buys shares for you as you’re permitted to, sell them. At minimum, you make an immediate 15% (or whatever your discount is) profit. It could be even better using a look-back provision. In that case, it’s possible your discount (and hence, profit) would be even higher.

What I’m advocating is derisively called ‘flipping.’ Some people say it’s an abuse of the system. To which I have two things to say.

1. They set up the rules. I’m just playing by them.
2. Do you really expect me to keep an inordinate amount of a single stock, in the company I work for no less, in my investment portfolio? That breaks, like, rule number one of investing.

Our experience

My wife worked for a company that had an ESPP. The discount was 15% and it had a look-back provision. We took a slightly different tack than what I’m advocating here, simply for tax reasons. We waited until we’d held the stock for a year to take advantage of long-term capital gains tax. Though in retrospect, it probably didn’t make any difference because of our taxable income.

The beauty part is that, because the money for the ESPP came directly out of her paycheck, we never even missed the money. So every six months was another windfall. If I remember right, we used the bulk of it to pay for her MBA program.

Bottom line, if you have an ESPP available to you and you don’t participate, I think you’re a turning down free money. And turning down free money is dumb.

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Pensions aren’t very common any more and I think they’re slowly going away completely. In 1980, 38% of Americans had a defined benefit pension. In 1997, that was down to 21%. It’s undoubtedly lower today.

I work for a company, however, that still has a pension (though they’ve suspended any more contributions). I’ve often wondered what happens to that pension when you quit (prior to retirement, that is). Well, I got my answer a few days ago when a friend decided to quit.

It turns out the answer is determined by the company plan.

Some plans hold on to the pension until you actually do retire, then begin your pay-out. Good luck keeping track of that until you retire.

Some, like mine, allow you to roll over the pension into an IRA. You can even take a lump sum right away with some pensions (at a vastly reduced amount).

So if you have a pension, check the plan to see what becomes of that money if you quit.

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