Nov. 30, 2022

How To Prioritize Where You’re Investing (And Why!)

How To Prioritize Where You’re Investing (And Why!)

An investment strategy refresher for your post-debt life.


Finally defeated your high-interest debt and got your cash flow under control? This week’s episode is for you, baby! 

If the 401(k) vs. IRA vs. HSA vs. everything else conundrum has you frozen with indecision, look no further than this week’s podcast episode for a framework that’ll help clarify these types of decisions so you can move forward with confidence in the new year. 

Even if you feel like you’ve got a relatively good grip on your investment strategy, this refresher may help you consider things in a new (and more lucrative!) way.

Learn more about our sponsor, Vin Social: http://vinsocialvip.com/.

Transcripts can be found at https://www.podpage.com/money-with-katie-show/.

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Transcript

Katie: No high-interest debt, reliable cash flow, and a solid emergency fund. Do you have all three of those things? If so, join me on today's deep dive, where I share my own order of operations, if you will, to see how I invest to get the biggest tax breaks today, and the most financial gains later in life. If you've ever wondered how to divvy up your 401(k), Roth, IRA, HSA taxable investments every single month, then this episode is for you. Let's get into it. 

Welcome back to another episode of The Money with Katie Show, Rich People, and gird your loins. Today we are breaking down the foundation of my investor philosophy. Of course, in order to dive into this, we have to set the stage with what this philosophy is optimized for, what it's trying to achieve, and what type of risk it's assuming. So we'll talk about my broad theses on various investment accounts, how I prioritize my own, and more. So put your thinking bucket hats on, fam. For the sake of satisfying my own neurosis, I want to cover three things before we jump into this. Number one, consider this episode your primer for what to do next if you don't have any high-interest debt. I know there are mixed sentiments about debt out there, but I cannot in good faith promote Investing to someone who's paying 24% on a credit card balance. Knock that stuff out first. Number two, this is also probably a great fit for you if your cash flow is under control. I say cash flow rather than just emergency fund because while having a cash cushion is important, if you're living paycheck to paycheck right now, otherwise, you're probably not yet logistically ready to start investing. The ideal participant in what we're gonna talk about today already has some free cash flow every month that they're just not sure what to do with. And number three, lastly: This is not financial advice to just be followed blindly. These are starting points, and I cannot emphasize enough how they have to be adapted for your tax bracket, your comfort with risk, and most importantly, your financial objectives. 

So to recap, let's say you're a good saver. You always have a decent amount of money left over at the end of the month, but you're not sure what to do with it. You're facing analysis paralysis, but you know that you do want to be financially free. So let's talk about objectives, shall we? For the purposes of this episode, you can assume that we're talking about investing for the medium- and long-term, investing for your eventual freedom, right, rather than a particular purchase in the near- or medium-term. So that means we're dealing with very long, flexible timelines for compounding and withdrawals. We are also going to try to avoid taxes and fees. These are the enemies of long-term returns at all costs. This is because we're primarily concerned with accumulating as much wealth as possible to buy us more options later. We'll be right back after a message from the sponsors of today's episode. 

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Katie: Let's talk investment priorities. Why does this matter? Well, short of generating an outrageous amount of passive income from being a business owner, there's really no way around investing in something if you ever want to retire. But investing is just about the world's broadest term, and believe it or not, there are a lot of ways to approach it incorrectly, and most of them are probably beyond the reasons you're thinking of right now. Most people are not investing $10,000 in a single stock and crossing their fingers, so it feels silly to waste a bunch of time advising against taking some outsized risks to try to beat the market with picking individual stocks. Instead, let's back up a step. Let's pretend we are looking at a few different Easter baskets full of eggs. Now, each egg represents an index fund or a stock. We're no longer looking at which eggs specifically that we wanna pick. We're looking at the baskets in which we can put the eggs, because all these baskets are not created equal. Some have bigger holes in the bottom than others, and you know you can lose a few eggs along the way. Some have a higher cost of entry for each egg. So what's basket number one? Your 401(k). If you have access to a 401(k), 403(b), or 457 plan through your employer, congratulations. You have a basket with a $20,500 limit in 2022, of which the IRS won't tax the growth. This limit is set to rise to $22,500 in 2023. Get pumped. Ultimately, the reason everyone urges you to use your 401(k), aside from the possibility of an employer match, is not just because they want you to save for retirement, but because of taxes. I used to wonder why everyone was so riled up about the 401(k) plan and their equivalents in the public sector. Can't I just save for retirement in a different account? I would wonder, and yes, there are other options, but the 401(k) is special because it's a way for you to invest a sizable amount of money for the long run and defer income taxes on a big chunk of your income.

This is usually the point at which someone asks, “But Katie, my 401(k) plan can be Roth too. Should I use Roth?” Now, make no mistake, I am a fan of tax diversification. I think everyone should have a little bit of everything for flexibility later, but it is the official opinion, until otherwise stated, of The Money with Katie Show that if you are in the 22% marginal tax bracket or above, you will be better served in the long run by contributing the maximum to a traditional 401(k). We’ll link a blog post in the show notes that explains the logic behind that sentiment further. 

But for now, here's why. Comes down to three major arguments, for me. Number one, an up-front tax break creates more investible income, because a traditional or pre-tax contribution is effectively deferring that salary into the future. It directly lowers your tax bill in the current year. If you imagine a $100,000 salary, to use nice round numbers, that's taken fully as income in the current year, whether making no 401(k) contributions at all or contributing to a Roth 401(k), it's all treated as income in your current tax year. A chunk of that salary has to be sent to the IRS to pay your taxes on the salary. In this example, the total federal and FICA tax bill is about $22,000. If you instead invested $20,500 of that salary in your traditional 401(k), that is effectively deferring $20,500 of it into the future. It's like you're lowering your salary by that amount, despite the fact that you are still keeping it as part of your net worth. Your tax bill now is only about $18,000, meaning you spend net less of your income on taxes and keep net more. That $4,000 or so difference will stay in your pocket, effectively showing up on each paycheck or returning to you in the form of a tax refund. So that $4,000 is investible income that you literally did not have before. So TL;DR: Traditional 401(k) allows you to invest more. 

Now this is normally where someone says, “Well, you have to pay taxes on that money eventually. So isn't it a wash?” Which brings me to reason number two. The way our tax code is written today, there are technically ways to get your pre-tax funds back out of your 401(k) tax-free. This process is known as a Roth IRA conversion ladder. We covered it in episode 36: How to Pay No Taxes in Early Retirement. It leverages the standard deduction really strategically, but the gist is that the Traditional 401(k) provides more flexibility for controlling the tax rate that you pay on your income now and later. 

Now, this is usually the part where someone says, “But Katie, what if I have a higher tax rate in retirement? Won't I have a higher tax rate later?” That brings me to reason number three. It is almost impossible that you will have a higher tax rate in retirement than you do as a working professional, especially if you are already beyond your first few low-income years of your career and don't have plans to own cash-flowing businesses to fund your lifestyle in retirement. That's a different story if that's the case, but I find that this concern typically stems from a fundamental misunderstanding of how you’re taxed in retirement. Technically your only income comes in the form of withdrawals from your own retirement and brokerage accounts, and after a certain point, Social Security, which, TBD if that will actually be around for us in 40 years from now.

Theoretically, you won't be withdrawing more than you need to spend, because there would be no point to take the money out and claim it as income otherwise. Of course, if you work for a really, really long time, you make a lot, a lot, a lot of money, it is possible that your Social Security payouts will be decent. But that's pretty hard to project from our vantage points now 40 years away. The point is, you'll only be taxed more in retirement if you are spending more than you are earning now. The paradox is this: If you're in a lower tax bracket now, the only way for you to be in a higher tax bracket in retirement is by spending a ton of money after you retire, but you won't have a ton of money to spend every year in retirement unless you are earning and investing a lot now, and if you're earning and investing a lot now, you are likely already in a tax bracket that you will have a hard time outspending later.

So the caveat that I'm gonna note here to all of these, like, mind-twisting proofs is that the tax code is written in pencil, not pen. So while I do think all of this holds pretty steady for the way our tax code works today in 2022, it is possible that marginal tax rates could double or triple. Who knows? Loopholes could close, and the system itself could be overhauled, or Social Security payments could change in such a way that these arguments no longer make sense. My perspective is, let's make the best decisions with the information we have today, and build in some flexibility and tax diversification to address those potential future changes.

I consider the 401(k) your tax magic school bus. I think it's the first basket you should visit before you even think about doing anything else if you have one. And by the way, I am looking at myself in 2017 saying, Katie, put down the iPhone, step away from the Robinhood app, go increase your 401(k) contribution first. Here's the deal. You need to contribute at least up to your company match. That is free money on the table that will compound and is definitely considered part of your total compensation in the eyes of the company. But I would shoot for 10% or higher if at all possible. Now, if your 401(k) plan has crazy fees, this calculus may change slightly. The fees are not a showstopper, in my opinion, for people that are getting, say, a 6% dollar-for-dollar match, because the extra money that the company is kicking in, and you know, you obviously have to contribute to get that extra money, will offset any losses you suffer from extra management fees. But it is something to be conscious of if you know that you do not get a match. In that case, you are comparing the value of your up-front tax break to the annual management fees, and after your balance gets large enough, it may not make sense. I hope that's not the case for you, and when you leave that employer with the 401(k) plan with high fees, you wanna roll it over quickly. In any case, 10% is a healthy figure to aim for in a 401(k) plan and once you've hit 10%, then go for maxing it out. I find that sometimes people really need a number to cling to, and I like 10% because it tells me that at the very least, if you're saving 10% of your income, you are going to be able to retire eventually. It might just not be as soon as you want. 

The other benefit of the 401(k) that I don't think we should ignore here is a psychological one. When I reflect back on my own 401(k) journey…a sentence that is so nerdy, it physically pains me…I set my contribution to 10% on day one of my employment because my mom practically bullied me into it. And since I never saw the money, it never really felt like a loss. I never got a single paycheck that did not already have that 10% contribution taken out of it, so I didn't know what I was missing. As humans, we tend to feel the pain of losses more acutely than the joy of gains, and the research around loss aversion is so interesting. So it's almost always going to be better to just commit to the amount up front, rather than tell yourself you're gonna work your way up to it later. Because once you see the money on your paycheck, it'll be very challenging psychologically to go back and increase your contribution. Some plans do have these clever commitment devices wherein it'll automatically increase your contributions as you earn more. Go ahead and turn that on if you have it. The point is, since the 401(k) removes the action step on your end and just makes the transfer before you even get paid, it means we are less likely to fall victim to our human tendency to shirk the hard decision when the time comes. We'll be right back after a message from the sponsors of today's episode. 

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Katie: All right, so that concludes basket number one. Let's move on to our second priority basket number two, the Roth IRA. If you are anything like most people I talk to, you probably just said one of two things—and by the way, I also said this back when I was first learning about these things, so you're in good company. You either said, “What the hell is that?” Or you said, “But I have a 401(k). What do I need an IRA for?” You need an IRA for the same reason you have a 401(k): tax-free growth, baby. The IRA is a smaller basket. It only allows you to contribute $6,000 per year as of 2022. It's going up to $6,500 per year next year in 2023, and it is higher if you have catch-up contributions after a certain age. But hey, that is still $6,000 per year that generates returns off the top of which the IRS can't skim on an annual basis. If you don't have access to a 401(k), this is no-brainer next-best option. So a few things to note. Number one, you have more control over your IRA than your 401(k), because you get to choose the brokerage firm and the fee structure. I'll be honest: My Roth IRA is with a company called M1 Finance in the “ultra aggressive pie.” This is volatile. It means that I'm almost 100% invested in stocks in that Roth IRA, and riskier stocks at that. As I get older, I'll worry more about dialing back the risk in this account, but for now I'm okay with it, even in this current market. Especially because this is probably the account that I'm gonna use last, as we've talked about back in that episode about paying no taxes in early retirement. 

Number two: While you can have either a Traditional IRA or a Roth IRA, I personally prefer to leverage the Roth IRA. For one thing, the rules around deductibility are a little funky for Traditional IRAs. If you're covered by a retirement plan work like the 401(k), you can't deduct your Traditional IRA contribution, which basically eliminates the most valuable component of a pre-tax investment account. And while the Roth IRA does have an income limit phase-out, so in 2022 it's $144k for singles and $214k for married filing jointly, it is relatively easy to yeet around that by using a backdoor Roth IRA. We're actually gonna talk about that a little bit more at the end of today's episode for our Rich Girl Roundup question this week, but the TL;DR is that you can do a non-deductible Traditional IRA contribution, then convert the funds to a Roth IRA once they settle, as long as you don't have any other money in traditional rollover SEP IRAs lying around, pretty much any IRA with pre-tax funds in it; you don't want those if you're gonna be doing this. So like I said, we'll follow up with that at the end of this episode. 

And lastly, number three: The feds are serious about that annual limit, y'all. There aren't really any safeguards in place to stop you from going over. So make sure, if you're doing this as like a monthly dollar cost averaging thing, that you're putting in $500 per month, if you split your annual contributions into that monthly cadence like I do, or you'll be penalized for the amount over the limit. It feels pretty ironic to be punished for accidentally investing too much for retirement, but tax laws are unforgiving. You will be faced with a 6% penalty each year on the excess amount until you correct the mistake.

All that to say, second priority: Roth IRA. Max it out, $500 a month. Easier said than done, but actually might be easier done than expected. If you are a super saver, you probably are not spending this money anyway. One thing I hear sometimes from high earners is, “Well, I pay an incredibly high marginal tax rate. I don't want to contribute to a Roth IRA at all because of that, even if I can manage it using the back door.” And I wanna take pains to clarify something here. Contributing to a Roth IRA does not create additional tax burden. The money that you contribute is treated no differently than money you take as income to spend or money you take as income and then contribute to a taxable brokerage account on the front end. All three of these things look the same in the eyes of the IRS, so you're going to pay your regular income taxes on a contribution to a Roth IRA or a taxable brokerage account. The only difference is that the money you put in a Roth IRA is never taxed again. So I caution high earners from prioritizing a Roth IRA over something like a pretax 401(k), but once you've already contributed the maximum to that 401(k), your Roth IRA really is probably the next best place, with the exception maybe of the HSA, which we'll chat about in a moment. All that to say, you don't pay additional tax by contributing to a Roth IRA rather than a taxable account. Your upfront tax liability on those two decisions is the same, but your long-term gains in the Roth IRA will be much greater. 

Now, a popular question: “Should I contribute the maximum to my 401(k) before pivoting to my Roth IRA, or can I do both?” Look, at this rate, you are already doing more than literally 90% of people, so I'm not going to draw this hard line in the sand here perspective-wise. Sure, if you wanna be as optimized as possible, the technically most efficient way to move forward would be contribute as much as you possibly can to the Traditional 401(k), and then multiply that contribution amount by your marginal tax rate to determine how much that just saved you in taxes, and then contribute that amount throughout the year to your Roth IRA. Because to reiterate, we are creating more investible income by using our 401(k), and then we are investing that income into the Roth IRA. 

For example, if I'm a single gal and I'm earning $150k, I'm in the 24% marginal tax bracket, and if I contribute the full $20,500 to my 401(k) based on a tax calculator at that bracket, I'm saving $4,920 on my taxes that I now get to keep and can turn around and contribute to a Roth IRA. Theoretically, it would be perfectly optimized to not contribute to the Roth IRA until the full tax advantage of the 401(k) is leveraged. But that's kind of splitting hairs.

If you aren't able to contribute the maximum to both and you wanna split your investible income between them, please, be my guest. You are still getting amazing tax diversification even if it is not the technically most optimal. The important thing is that these two buckets are receiving the lion's share of your investible income, because as we stated in the beginning, this is our long-term investing strategy for ending up with as much money as possible later, and we want to avoid tax drag or the compounding erosion effect that taxes have on your growth as much as we possibly can. 

All right, so I mentioned the HSA basket. Number three: the HSA if you have access to one. I am hesitant to spend too much time here since the percentage of Americans in their thirties who have access to HSA accounts through their high-deductible health plans is actually relatively low. It's around 20%, last I checked, but if you do have access to an HSA, I feel pretty confident saying you should probably use it. Let's pause to distinguish between an HSA (health savings account) and FSA (flexible spending account), as an FSA is “use it or lose it.” The balance resets at the end of every year. So some people like to use things like Dependent Care FSAs to save money on taxes that they're gonna spend on things like daycare, but for the purposes of our long-term investing strategy, the HSA is what we care about. 

There are a few major selling points here. Number one, your money goes in tax-free. It grows tax-free and it comes out tax-free if it is used for qualifying medical expenses. Number two, after you turn 65, your HSA basically receives the same tax treatment as an IRA, which means you can use the money for anything you want—you just have to pay taxes on it as if it's income, but there are no penalties. It basically turns into a traditional IRA. And perhaps the most compelling, HSAs are not subject to required minimum distributions, also known as RMDs. In that sense, they are kind of like a second, smaller 401(k), but one that you'll have to wait longer to use. You can touch your 401(k) in a straightforward manner at age 59 and a half, not 65. Anyway, RMDs are the bane of tax planning because they occur when the government basically says, “Yo Rich Girl, you've got way too much money sitting in that pre-tax account and it is time to start spending some of it, and pay us taxes while you're at it.” The HSA is the only pre-tax account that I am aware of that does not have to deal with RMDs, which makes it very valuable in 2022. If you are covered by an individual high-deductible health plan, your annual HSA contribution limit is $3,650, and if you're covered by a family high-deductible plan, it's $7,300. Much like your 401(k) contributions, these direct tax savings can also be invested elsewhere. So at $7,300 a year and a 24% marginal tax rate, that'll lower your overall federal tax bill by $1,752.

Another bonus worth knowing here that makes the HSA just a little bit different: HSA contributions that are made via payroll deductions, aka they're taken out of your paycheck like the 401(k) contributions, are also not subject to the 7.65% FICA tax, which increases the tax savings in the previous example to $2,310 per year. It's kind of amazing. That said, I understand people have competing priorities and if you have a lot of investible income, so you're living beneath your means to the extent that you can afford to fill up all of your tax advantaged buckets we've just discussed and you still have some left over, then I would favor the HSA in that top three.

Now, if you can't, and you are being forced to prioritize (hashtag thank you wage stagnation), I would weigh the HSA contributions against contributions in bucket number four. Bucket number four is your taxable brokerage account. This is probably the account that you think of when someone says investing. It's not for retirement, it's just for building wealth. But since it isn't for retirement, that means you can kiss your sweet tax breaks goodbye. You will have to file typically 1099-DIV forms every tax season for an account of this nature, and the IRS will tax the ordinary and qualified dividend gains annually, even if you are reinvesting them, as most of us are and should be. Same with 1099-INT forms, if you have bond interest in this account. 

So it bears repeating at this point that I am not a tax expert; I am not an accountant. I am literally just a human being who has filed her taxes for her investments before. So if you wanna know more about your investment taxes specifically, you could consider getting an accountant to help, or my personal favorite recourse, call your parents. But although it's not as tax-friendly, the individual investing account is a wonderful place to put extra money. Much, much better than stowing it away in a savings account every month. Of course, technically, the most responsible thing to do would be to avoid an individual investing account until you've maxed out that 401(k) with the $20,500 per year (that's $1,708 per month), the Roth IRA at $6,000 per year (that's $500 a month), and the HSA, if you have one, at $3,650 per year (that's $304 per month). But I mean, look, my philosophy is this. While I will need money in retirement, no doubt, I will also probably need some wealth that I can access penalty-free in the next 10 years to buy a home or have a kid or to do literally any number of things that come before I leave work. I don't necessarily want all of my invested wealth to go toward retirement, because that means I'd have to wait to start taxable investing until I can afford to max out a 401(k), Roth IRA, and an HSA, and that might take a while if I'm not this super high earner, even though we've just laid out the technically most tax-efficient way to proceed in this episode, and you should undoubtedly take advantage of your accounts that offer the tax benefits. 

It is always worth weighing your other medium-term goals here and determining if you should be tossing a couple hundred a month into an account that's not a qualified retirement account. Sure, it's going to sacrifice some of the tax optimization, but flexibility is very valuable too. I used to contribute 15% to my 401(k), $500 per month to my Roth IRA, and actually around $800 per month to my taxable account when I worked full-time making $60,000 per year, and part-time as a fitness instructor for another thousand or so per month. I was not yet maxing out the 401(k), but I wanted the flexibility of the funds in that taxable account and I couldn't afford to do both, so I split my contributions between them.

All that to say, it may not be perfect, but if you cannot afford to do all three or all four, it is okay, absolutely, to adapt to create some flexibility. 

You also probably remember, if you listened to the deep dive into paying no taxes in early retirement, that the taxable brokerage account is a vital part of the puzzle of early retirement. It is pretty much impossible to retire early without one, unless your spending is less than the standard deduction, which isn't unheard of, but is frankly pretty hard to do. If you're not going to retire until you're 60 or older, then it's not as important that you're contributing to one of these. But if you plan to tap dance outta the boardroom at age 40, well, you definitely need to be making a taxable account a priority too. All three buckets, and maybe four if you have and can afford to leverage that HSA, should be receiving contributions if that's the goal. 

In conclusion, this is intended to provide some general clarity around the different options at this stage of life, and why each one is important if our goal is a long-term financial freedom. So don't feel bad if you cannot yet afford to fill basket one. Investing even $20,500 per year on the average income in the US is still pretty daunting. This Easter egg hunt is a lifelong affair, and if you get honest with yourself, you stay the course, you will slowly make your way all the way to basket four. It just takes patience. And raises. And discipline. But that's it, I promise. 

Welcome back to Rich Girl Roundup. As a reminder, we take listener questions about every month on Instagram, so follow on Instagram @MoneywithKatie, if you're not already, and we'll pick a question that feels interesting and applicable and relevant and will answer it. As always, my standard disclaimer: I am not a licensed financial professional. This is not financial advice. This is just “What would Katie do? How do I think about this? What would I do if I were in your shoes?”

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This week's question is from Rachel. “Is pet insurance a good financial decision? How much coverage am I really getting, and would I be better off having a dedicated pet emergency fund? I see so many GoFundMes for people's pets.” Oh, that is so depressing. “And it seems like there's a general lack of financial planning around pet health.” 

Totally agree. Pet insurance is one of those things that can either be a lifesaver or like a total waste. So I'm glad that you asked. The purpose of having any type of insurance is merely to protect your downside. It's for limiting the risk that you are exposed to. So we're legally required to carry some types of insurance, like health insurance in certain states, or car insurance if you have a vehicle. Whereas some other types of insurance, like pet or life, are optional. When you get quotes for pet insurance, you'll usually have to tell the insurer things about your pets, like the age, the breed, where you live, how long you've had them. Info that'll help the insurer determine how risky you are to ensure. You'll also likely have to provide their vet records so that they can establish any preexisting conditions. This all will determine how much you have to pay every month to carry the insurance. That's known as your monthly premium. Does this sound familiar? Aka the way your health insurance works. You'll also usually have to divulge health information from your pet's past. Again, sometimes this is self-volunteered. Sometimes they will find this in their medical records, but you should not lie, is the point. Typically, if you insure a very young animal with no health problems, your premiums will be lower than if you are insuring an aging animal with an established health history already. Because the insurance company wants to incentivize you to carry insurance for a long time before they think you are going to need it. I went through the sign-up process for the purposes of this answer with my five-year-old dog, Georgia. She is a German Shepherd, and for $60 per month, their base plan would include diagnostics like blood tests, urinalysis, x-rays, MRIs, lab work, CT scans, ultrasounds, certain procedures like outpatient, specialty emergency care, hospitalization, surgery, and medications like injections and prescription medication to some degree. They would cover some part of it right now. For an additional $12 per month, they would also cover vet visit fees as well. So the $60 per month plan that we're looking at for this example, they would pay 80% of the bill after I pay a $250 deductible, up to $20,000 per year. So suppose your dog requires a $5,000 surgery that is covered under these terms. You would first owe the $250 deductible and they would cover 80%. So your out of pocket here would be $1,250 rather than the full $5,000. 

Now the way I think about these types of risk assessments is, I know I would pay $720 per year in premiums and another $250 toward the deductible every year. You do get a discount if you pay annually in full. So that's something to keep in mind. But I'm paying monthly. That's $970 per year in kind of guaranteed out-of-pocket expenses before this insurance is gonna begin paying for things. And you would have to cover, again, 20% of the expenses, 'cause they're only covering 80%. So it's not like your costs are zero after you pay the $970. So it seems to me that this would be an excellent thing to have in the event your dog needs a major catastrophic operation. Like if we're talking a $5,000 or $10,000 surgery. In that event, if you have insurance, you're gonna be paying $3,000 out of pocket instead of $10,000. 

That said, there will likely be, and hopefully, because it means your pet is healthy if this is the case, many years where you're not getting your money's worth, aka you're paying $720 in premiums and maybe even a $250 deductible for little things, but you're not asking the insurance to kick in for anything major. So this type of insurance can really help with cash flow issues. Many, many people would be in a hard spot, and understandably so, if they suddenly had to spend five to 10 grand on a pet surgery unexpectedly. So I think it can make sense. That said, it is also possible that you could put that same $970 per year every year into a pet emergency fund that you just hang onto, and then use it when the time comes, if necessary.

So again, insurance limits your downside. It can help with cash flow management because you're just paying for the premium every month and it's kind of guaranteed. But obviously, and this is, I think, the thing worth stating here, insurance companies overall are profitable because they make more money than they spend on the vast majority of the people or the animals they are insuring. Being a pet parent, especially with a dog? Very expensive, whether you are paying for insurance or you're self-insuring by setting aside cash to use in the event of an emergency. Either way, it is probably smart to pick at least one of these two things.

All right y'all, that is all for this week. I will see you next week, same time, same place on The Money with Katie Show. Our show is a production of Morning Brew and is produced by Henah Velez and me, Katie Gatti Tassin, with our audio engineering and sound design from Nick Torres. Sarah Singer is our VP of multimedia, and additional fact checking comes from Kate Brandt. Sam Cat is our VP of Chaos, and Beans is our Chief Bark Officer.