Understanding the way that we think and make decisions is incredibly important when it comes to thinking about your benefits and your financial goals. Our minds work in an incredible way that enables us to make sense of the world without too much undue stress, but sometimes they can lead us in the wrong direction.
To improve our decision-making process, we should try understand how we naturally interpret events using the “rules of thumb” (or heuristics) our brains are wired to make. This prevents us from stressing out about many of our small decisions, but it also means we make many decisions without really considering whether we made the right decision or not. Ideally, make a quick judgment call on the potential impact of your decision, and proceed from there. When buying your morning coffee — and especially if you are in line in front of me— just make a decision.
When choosing your benefits, which might represent the cost buying of a vehicle, we often just rely on “what I got last time” when making that decision, if we even paid enough attention last year to remember.
The reason we do this is because it’s stressful. Think about the scenario for a second.
First, we are trying to “predict” what will happen for the next year of our lives. The only information available to us is what happened to us in the past, next to some big price tags telling us how much of our paycheck we’re going to lose. It’s a recipe for failure when you look back a year later and assess whether you made the “right decision”. You will have either spent too much OR spent too little.
Second, health plans are very complicated. You have multiple inputs – premiums, deductibles, copays, in-network providers, and more sprawled out across multiple tables and multiple pages. You might even have to play detective to get an understanding on providers, procedures and more. Many things have been done to make this a less confusing process, but it’s certainly not simple.
Here’s where you can change your mindset. Instead of thinking you’re going to get feedback telling you that you made the right or wrong benefits decision, think about it like a poker player. In her book Thinking In Bets, Annie Duke provides some excellent accounts of how risk and probability-based decision-making enable successful poker players to maximize their long-term outcomes by focusing on their decisions rather than the result of the decisions. This takes luck and other external factors out of the picture and creates a mindset where you are only controlling what you can control.
Hopefully your employer has picked a benefits enrollment tool that can provide some of this information in consumable ways, but if not, you owe it to yourself to spend a bit more time gaining a better understanding of your decision inputs.
Now let’s look at it practically. As Shawn mentioned in “How to think about your benefits,” [link], the average person is making this decision in around 30 minutes. Thinking about your own financial situation and medical situation is a key part of how you can take a more data-driven approach towards your benefit selection.
Ask yourself the following questions:
- How much am I saving for the long term?
- How much do I have available in liquid assets to handle any unexpected expenses this year, both with my health and with my home, vehicles, etc.?
- How likely is it that I have a significant financial expense this year and what are the likely cost ranges of such an event?
- How likely is it that I (or other family members covered on my plan) will have regular visits to the doctor throughout the year
- What is the impact to me if these events occur?
The Health Savings Account (HSA) has gained traction in recent years. When you think about those questions, you get a picture of why. The account is designed to not only provide money that is available immediately for medical reasons, it also carries over and allows for discretionary investment. It also moves slightly away from the use-it-or-lose-it principles we might see in plans with higher premiums and lower deductibles. An HSA is an interesting way of taking on a bit of extra risk while enabling you to create a solid safety net (that your employer may match!) if something significant does happen.
Insurance is a tool that allows for you to protect yourself from events with a low likelihood of occurrence but a high likelihood of devastating financial impact in the event of occurrence. When you look at it this way, it can help you understand both why you should have a safety net and why you should invest your time into making a good decision on your benefits enrollment. Remember, you have a lot more control over your decision today than you do over the future. Risk will always be there, but a series of good decisions over time will almost always come out ahead.Like