In business, a sunk cost is a cost that has already been incurred and can’t be recovered. Economists tell us that we shouldn’t factor these costs in when making a rational decision about how to proceed. Since we’re human and hate losses, however, we often use these previous costs as justification to invest more.
The more we invest in something, the harder it becomes to abandon. To change would be to admit that those previous investments were wasted. That’s a tough pill to swallow, so we engage in what economists call a sunk cost fallacy or what psychologists call irrational escalation. You and I might more easily refer to it as throwing good money after bad. Or for my British readers, in for a penny, in for a pound.
Most of the discussion around sunk costs has to do with money, but money isn’t the only metric. Time is another resource we invest. So is effort. We invest those things in relationships, life pursuits, plans for retirement, a career. Sometimes those investments pay off and get us to where we want to be. Other times we realize, if given the chance to do it over, we would have chosen differently. In those cases, just like the business person should not throw good money after bad, we should not throw good life after bad. Or good time after bad. Or good friendship after bad.
The time, energy, effort and emotion we previously put into all those things are sunk costs. We shouldn’t use the fact that we invested badly as an excuse to continue to invest badly. Yes, changing course will force you to admit the mistake. That might cause pain, stress, confrontation or ridicule, but it will be temporary and you will have the opportunity to move forward in the right direction. If you continue in your error, you won’t have the short-term moment of pain as you admit error, but you will have the long-term pain and regret that comes from persisting in your error. Which is worse? The latter, by far.
It’s Monday morning. You’re starting a new week. Maybe you’re heading off to work. Maybe you’re already retired. Either way, be honest with yourself. Is there anything on your calendar this week that you’re doing, not because you want to or because you think it’s the right thing for you and your life, but because you’ve invested a bunch of time/money/life pursuing that path and you don’t want to admit failure? I do. This article is your permission to stop. If not today, someday soon. For today, at least make a decision if not an action. Decide “this is not what I want to do.” And then start figuring out exactly what it is you do want and what needs to change to make that a reality. In short:
- Admit your mistake. Choose temporary over permanent pain.
- Decide what it is you really want out of life.
- Have the courage to pursue that, regardless of what came before.
There is a lot of uncertainty with healthcare lately, but two trends will likely continue: It will continue to get more expensive and you will continue to be responsible for more and more of the costs. Even with Medicare, it is estimated that the typical retiree will need between $200,000 and $400,000 to pay for health expenses during retirement. With that in mind you should seriously consider using a Health Savings Account (HSA) to help fund your retirement health expenses. You might be using one now, but if you’re like most, you’re not using it to its full potential. Let’s change that.
What is an HSA?
An HSA is a tax advantaged medical savings account available to people enrolled in high deductible health plans. Think of it as an IRA for your medical expenses. Unlike IRAs, however, HSA money is triple tax free: going in, as it grows and coming out. That is a huge advantage. The only caveat is that you need to spend the money on qualified health expenses or you’ll pay taxes and a penalty. The list of qualified expenses is rather long and even includes things like long-term care insurance premiums. Here are a few quick facts on HSAs:
- Contributions are tax deductible.
- The assets in the account grow tax free.
- Withdrawals for qualified medical expenses are tax free.
- If you take the money out for non-qualified expenses, you will pay taxes and a 20% penalty.
- Unlike FSAs, HSA dollars are not “use it or lose it.”
- Contributions can be made by either you or your employer.
- 2017 annual contribution limits are $3,400 for an individual and $6,750 for a family.
- Those over age 55 can make an additional $1,000 catch-up contribution each year.
- Money in the HSA can be invested in stocks, bonds and mutual funds.
A few things change at age 65…
- Distributions after age 65 are never subject to a penalty, even if not spent on qualified medical expenses. For non-qualified expenses just pay the taxes and use the money for whatever you want.
- At 65 you can pay for all Medicare premiums except Medigap with tax free HSA distributions.
- Once you enroll in Medicare, you can no longer make contributions to an HSA, but you can continue to use the existing money in your HSA.
Your best strategy
HSAs are growing in popularity, but they are not being used to their full potential. Because of the HSA triple tax advantage (in, out and during), the money should be invested for growth and allowed to compound as long as possible. Instead, here’s how most people use their HSA: 1) Add some money, 2) Leave the money in a no risk/no return money market, 3) Use the money as soon as they incur a medical expense.
Here’s how you should use your HSA: 1) Contribute the maximum amount allowed each year, 2) Invest the money in stocks, bonds and/or mutual funds, 3) If possible, pay for your current medical expenses out of pocket and allow your HSA money to grow until you retire. By doing that you are getting the most bang for your buck and creating a pot of money for retirement that can be used tax free for medical expenses or for anything else as long as you pay the tax.
The family and I have been traveling in Iceland for the last few weeks. We had an amazing time (more in a future post), but I was again reminded that whoever said “The joy is in the journey” never spent much time flying coach. If you do any amount of traveling, you know that travel days are often hard. You’re tired, rushed and a bit stressed. In my family, we deal with this in two primary ways. First, we know in advance that travel days are hard, so we do our best to both act and react with an extra measure of grace toward each other and those around us. Second, we have some key tools that help make travel easier. Below are 5 of my favorite travel tools. Click the orange links to learn more.
TripIt: Every trip involves booking things like airline tickets, rental car, hotel, Airbnb, dinner reservations and event tickets. Each of those bookings usually has some sort of confirmation number, e-tickets, instructions, directions and contact information. I used to print it all out and shove it in my carry on. Now I just use the free TripIt app on my phone (available on both Apple and Android devices).
Here’s how it works. Step 1: Book stuff like your flight, hotel and rental car (or anything else for your trip). Step 2: When you receive the booking confirmation email, forward it to firstname.lastname@example.org. Step 3: TripIt automatically and instantly creates an itinerary for your trip with each piece of booking information organized neatly in a timeline. Click on a particular piece of information and it will pull up all the details associated with it. Voila! No more paper printouts.
You can create unlimited itineraries and if you get the pro version of the app ($49 per year), it will also give a number of helpful notifications like flight status alerts, terminal and gate reminders, check in reminders and even a notification when it’s time to leave for the airport. It will also alert you if your flight is delayed or cancelled (usually before the airline does) and will suggest alternate flight times and numbers so you can call the airline quickly and rebook before everyone else at your gate starts trying to do the same thing. This has saved my bacon more than once.
TSA Pre Check: I’m grateful for airport security, but rigorous screening can leave you looking and feeling like you lost a very public game of strip poker. And because it takes time to remove certain items from your bags, take off your belt/shoes/jacket/etc. and get a full body scan, long waits in security lines have become the norm. You can avoid all of this by signing up for TSA Pre Check.
Here’s how it works. Step 1: Go to www.tsa.gov/precheck, fill out a quick application and schedule an appointment at one of hundreds of available enrollment centers. Step 2: Go to your appointment, pay an $85 fee, get fingerprinted and agree to an in-depth background check. All of this only takes about 10 minutes. Step 3: Once the background check is complete, you will receive a letter in the mail with your Known Traveler Number (KTN). Include this number when booking your flight and “TSA Pre Check” will be printed on your boarding pass which allows you to use the Pre Check Lane. That means shorter wait times (usually 5 minutes or less), you don’t need to take off your shoes, belts or light jackets and you don’t need to remove things like liquids and laptops from your carry on.
Bose wireless noise cancelling headphones: As the Grinch said “There’s one thing I hate! All the NOISE! NOISE! NOISE! NOISE!” The thrum of a jet engine accompanied by the screaming baby in 9C can leave you feeling a bit out of sorts and exhausted at the end of a travel day. Tune it all out with these Bose headphones. They’re a little pricey, but I absolutely love them. The best way to describe them is that they’re magic. Turn them on and constant noises like jet engines almost completely disappear and variable noises like people talking or a baby crying are greatly reduced. They’re wireless (no chords to mess with) so they automatically pair with your phone or tablet. Flip them on to watch a movie or listen to music and because the aircraft noise is being cancelled out, you don’t need to crank up the volume to hear. They also work great when you’re trying to sleep on the plane or even when you’re at home and want a little peace and quiet.
Anker portable charger: Our phones have become indispensable travel companions. When I hiked the Grand Canyon last year, my cell phone was my camera, camcorder, pedometer, trip organizer (via TripIt) and, not least, an actual phone in case of emergency. Most trips last longer than your cell battery, however, and you’re not always close to a power source. Whether you’re at an airport with no charging stations or at the bottom of the Grand Canyon, this portable charger works great. It has two USB ports so you can charge multiple devices at once and it contains enough power to recharge my iPhone 7 times. Anker was founded by former Google employees and has quickly become the world leader in mobile charging by doing a few things very well. They have chargers in multiple sizes and make great (long and strong) phone cables as well if you don’t like the short one that came with your phone.
Amazon Kindle: Whether at the airport or at the beach, there’s usually plenty of time to read while traveling. Rather than taking a book or two, I just bring my Kindle, complete with my Kindle library as well as any books I borrow from my local library and deliver to my Kindle before the trip. It’s light, holds thousands of books and has a charge that lasts for weeks. I prefer the basic e-reader version because there’s no glare, but if you’d rather have the Kindle that’s also a tablet, the Kindle Fire is a good option as well.
Safe (and enjoyable) travels!
Note: Since I have my own books for sale on Amazon, I am a part of their Amazon Affiliate program. Some of the links above are affiliate links, which simply means that if you buy a product after clicking one of the links, Amazon (at no additional cost to you) will pay me a small commission that I use to help cover the costs of this site. That’s not why I recommend the products, of course, but I wanted to make you aware of it.