Living without a car: myth or reality?

United States are built around the cars. In fact, the car is about a personal freedom: you do not have to depend on anyone to get to the place you want. There is a great system of highways and freeways in place for making our trips as comfortable as possible. It is not terribly expensive to buy and maintain the car. Different models are available on the market, designed to fit any wallet. But it is still an expense. For example, I normally spend around $3K per year for inexpensive car service and fuel, combined with insurance. It may easy increase up to $6K for the years, when major regular service is required. You may want to add insurance deductible, when accident happens. Also, there are too many cars on our roads. They all are contributing into the traffic and pollution, especially in densely populated metropolitan areas. Is it possible to live in United States without a car? Let us find out.

You definitely do not want to live without a car in a remote rural area. It is plainly impossible to do anything, when there is no public transportation available nearby. Therefore, in this article I would like to focus on metro areas. But do we have to limit our choice to NYC, Washington DC, Chicago, Boston, San Francisco and similar noisy crowded cities with homeless people, drugs and criminal activities spread around? This is the question I asked myself in the past, visiting different cities across the countries. I believe, some of them would make a nice option for living without a car.

But let us discuss places where it is actually better not to have a car. The first and obvious choice would be New York City. It has a terrible traffic and an excellent subway system. In addition to that, there are countless bus routes and some ferries (worth to mention a free ferry to and from Staten Island). And of course Grand Central Terminal, where people take a train to suburbs or other cities. There is a great choice of different neighborhoods across the City, completely covered by public transportation. But the cost of living in NYC is generally very high, partially due to the high taxes. Some lower cost areas comfortable for living can be still found, Brooklyn for example. It is also worth to mention, that subway has a direct connection to free AirTrain taking riders to the largest nations’s airport JFK. As regarding suburbs, situation may vary: you have to stay close to railroad station or town center in order to live without a car. And there may be still a need for a car to reach some important place like a doctor’s office, even if you do not have to commute to work every day.

Another city with a great public transportation options is Washington DC. The system of bus and rail service is available almost everywhere in the City and even suburbs as far as Virginia or Maryland. Also, there are excellent train connections to Baltimore, NYC and other cities. Washington Metro rail service looks cleaner and nicer than purely functional subway in NYC. There is a direct connection to Reagan airport with green and yellow lines, however larger Dulles airport can be reached by slower bus service only. It is easy to live without a car within the city limits, as well as near-by suburbs like my favorite Alexandria or Arlington. All areas west and north of Capitol are considered safe and some of them are reasonably priced. But it would be still a good idea to have a car, if you live outside of the area covered by rail or bus service.

Chicago and Boston are other cities with carefully developed transportation system. Although they do not have a system as large as NYC or Washington DC, the entire downtown area and even certain suburbs are within the reach by either a train or a bus. In fact, the great advantage of Chicago’s rail system is a direct connection to O’Hare International Airport: the train would deliver you right into the terminal, like in Europe. Over the decades, Chicago was well known as the criminal center of the world. But situation improved dramatically: downtown area is much safer and comfortable to live now, with a great choice of good looking high rise condos, shopping options and all that for very reasonable price. Boston’s MBTA is also an excellent example of subway, buses, commuter rail and ferry routes delivering people almost everywhere within the City. There is a subway connection to Logan airport using free shuttle bus. But cost of living in Boston is higher, compared to Chicago or Washington DC.

Other cities, although quite populated, definitely can not compete with NYC, Washington DC, Chicago or Boston in public transportation options and coverage. There are people, living without a car in San Francisco. BART service (which can be considered as a sort of subway system) although running through downtown and financial district to SFO and East Bay communities, is available to the small part of the City. Other parts of San Francisco are served relatively well by light rail and bus Muni system, but it can be slow to deliver you from Embarcadero Bay waterfront to Ocean Beach for example. Even fewer options are available to the residents of Oakland or San Jose. In fact, most of South Bay communities are well covered by VTA bus routes. But the bus service in this area is really slow and inefficient. You need to live closer to the light rail station to leave your car at home, but light rail is available in selected areas only. It also takes an extremely long time to ride VTA light rail from Blossom Hill to Mountain View, for example. Still, many people use BARTVTA and Caltrain for commute to work or leisure activities.

Among smaller cities, it is worth to mention Portland and San Diego. There is no subway, and it may not be required as the scale of city limits is not as huge as NYC. However, both are covered very well with light rail and bus service. It is definitely possible to live in Portland downtown area with a car because of excellent TriMet system. Also, I would argue it is possible to live without a car in some smaller cities outside of Portland such as Hillsboro, Beaverton or any other towns accessible through the MAX service. Portland international airport is also directly connected to MAX. Plenty of private offices or government services, as well as Oregon State University and associated hospital are located in downtown area, where anyone can easy walk from bus or light rail station to pretty much anywhere. San Diego’s MTS is another, may be even smaller scale example of well designed system for medium size metro area. There are three trolley (light rail) lines and countless bus routes, basically covering the entire downtown and some suburbs. It is possible to take a trolley to downtown area, San Diego State University, San Diego Airport (connected through shuttle) or even Mexican border. But like in Portland or San Jose, you are out of luck if you live in the area served by bus service only as it can be slow and inefficient.

There are two other cities worth to mention, as they seem to have a really good public transportation: Minneapolis and Salk Lake City. Like in Portland or San Diego, there is no subway system but light rail and bus services are quite efficient and can take people to different places, mostly within the city limits. The rare availability of public transportation is combined with very reasonable cost of living at both places, which make them standing unique against others discussed above. Unfortunately, I have never been at these places and did not draw my own opinion, but according to others both cities are friendly to hikers and bikers. I also wanted to warn, that there are many other large size metro areas like Houston, TX or Phoenix, AZ for example, where you need a car even if you live in downtown. This is because public transportation options are really limited in these cities.

The bottom line is that there are places in United States, where you can live without a car. But these places are typically limited by large or medium size metro areas in certain states, and very likely you end up with a higher cost of living, combined with criminal and drug activities. This is a reality, we are facing. But there is a clear trend to make more places comfortable for walking and enjoying life without a car. In fact, there are some smart living neighborhoods or even cities which already provide this option. Santa Clara’s Rivermark Village is one great example, and The City of Bee Cave is another example which is my favorite little town around Austin, TX. At both places, you can easy walk, enjoy great parks and shopping without ever using a car.

Laid off? Plan, rather than panic!

It is nice to be employed. Employment comes with various benefits, money is the most essential one. But in United States, employment can be terminated at any time for business reasons. It is hard to accept, that someone is in power to decide your future. But this is the way, how business position itself against the failure. In this unfortunate event, some people start to panic, as they anticipate the loss of benefits and potential loss of money. In order to avoid terrible mistakes in a panic mode, it is always good to have a plan. The plan, which include the reasonable steps in case of layoff from the rational rather than emotional side. Based on the recent personal experience with a large scale layoff, in this article I wanted to share some information important to approach this event with the courage, not a fear.

As I already mentioned, layoff may happen at any time while we are employed. By that reason, it is always nice to be prepared. First, make sure HR records with home address are up-to-date: at least one FedEx package will be sent in the event of termination. In fact, it is always recommended signing up for FedEx delivery notifications: in this way, it is possible to learn about the layoff event one day before it actually happens: in most cases, FedEx overnight delivery service will be used. Second, it is a good practice to download each paycheck and store it on your personal computer’s disk: paychecks will not be available anymore in the event of layoff, however total compensation over the last two years is required to calculate the annual income correctly, when filing for unemployment benefits.

There are also a few other steps, which may be useful in some situations before the actual layoff happens. It might be beneficial to obtain employment verification letter in anticipation of certain events such as credit application, etc. Many companies use Theworknumber for verification services: it makes sense to figure out a company’s code, if current employer has records with this provider. As regarding the background check performed by potential employer, most of them are using a third party provider (such as Accuratebackground for example) for a new hire background check. Also it is important to make sure that the contribution maximum for 401K plan is reached early for a calendar year, since there may be no contributions for the rest of the year in the event of employment termination. Finally, it is always recommended verifying what will happen with healthcare spending accounts, and act accordingly to prevent the loss of these savings.

It is also beneficial to get familiar with WARN act, as it may have a direct impact in some situations. The Worker Adjustment and Retraining Notification (WARN) act is a law, which require most employers with 100 or more employees to provide an advance 60 days notice of employment termination. In this case, in the event of termination all affected employees remain on the company’s payroll for 60 days with all benefits included. The rules of WARN act application are complicated. Typically, it may be in effect when more than 500 positions are eliminated in a short time at certain location.

With respect to health insurance, employees affected by layoff has an option to purchase COBRA (Consolidated Omnibus Budget Reconciliation Act), as company’s insurance ends with the termination notice. COBRA has coverage, identical to employer’s insurance. Employer is typically responsible for its part of COBRA for 30 days after termination. Beyond that, former employee is in charge for the entire cost. Therefore, it is recommended to figure out the total cost of health insurance provided by employer and explore other options, if they are available. Affected employees has 60 days period after the termination notice to purchase COBRA. It can be done at any time, since COBRA coverage is retroactive. It means, that all events before the purchase will be covered. In total, COBRA coverage can be extended up to 18 months and may be terminated at any time.

401K plan provided by employer can remain in place, if the total contribution amount exceed $1000. Also there is an option to roll it over to Roth IRA or 401K with another employer, if hired for a new job. It makes sense to leave 401K with former employer, if the plan has better benefits and the choice of options than the one provided by current employer. Roll over into Roth IRA will have a tax implication and need to be approached with caution. Besides that, 401K funds can be distributed into taxable account, but penalty will be assessed in addition to the tax if the owner is younger than 59.5 years old.

At the termination date, most companies provide a severance package. This is a lumped sum, paid to affected employees based on their compensation and a tenure with company. The rules are quite different across the industry. Typical package for example may include 4 weeks pay for the first year of service, and then 1 week for each other year up to 26 weeks. The years of service could be reduced with WARN act, by 60 days when affected employees are still on a payroll. It also should include payment for any unused vacation time. In order to receive the package, affected employee must sign a release agreement mailed using FedEx the day before the termination date. Payoffs are processed when the release agreement received, and paid through the direct deposit or check in mail.

Right after the termination notice, employees affected by layoff may be eligible for unemployment benefits. In some states, there are specific rules which require waiting for certain period before applying for unemployment benefits due to the funds received with severance package. Fortunately, this is not a case in California. The unemployment compensation is paid weekly and currently it is $450 per week. In order to receive the benefit, application is required. During the application, be prepared to provide certain information such as the name, social security number, home address along with the phone number, driver’s license number, list of all previous employers with the dates, wages over the last 18 months, work authorization status and ability to work. Please make sure to mention “layoff” as the reason of not working anymore. In California, please use the link for more detailed information. There are also instructions on youtube, how to file an application for unemployment benefits.

Finally, as few words about stock options. All stock not vested by the termination event will be eliminated immediately. Any vested RSUs (Restricted Stock Unit) are distributed and considered as employee’s personal stock, which can be sold at any time. Typically, there is a few months period after the notice to exercise any vested NQS (Non-qualified Stock). As regarding ESPP (Employee Stock Purchase Plan), the ongoing contribution ends at the termination date and refunded without the interest.

It is important to be aware about all details described above, in order to prevent any loss of benefits offered by the former employer or the state and streamline the process. The next step would be the job hunting, but it deserves a separate article. I wish a good luck to anyone, involved into the unpleasant and stressful experience of being terminated at your job.

Tax, while living abroad

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B. Franklin said: In this world, nothing can be said to be certain, except death and taxes. Paying tax is our duty, as responsible citizens. US definitely does not have the highest tax in a world. However, in contrast to other countries, it imposes tax on every citizen, no matter where he or she lives. As long as you are US citizen, you must submit a federal tax return. Along with US tax return, you are also required submitting a tax return in other country to comply with local laws, just in case if you prefer to live in other country for an extended time. Most countries require to submit a tax return, when someone is physically present in the country for at least 183 days in a year. Does it look scary? Actually, it can be managed. In this article, I wanted to focus on foreign tax specifics for US citizens living abroad.

First, I would like to discuss US tax. The tax form 1040 must be submitted, regardless where you live. The deadline for Americans living abroad is June 15th, but it still makes sense to submit a tax return by April 15th because of the interest charged if some tax is due. Taxes must be paid on the combined worldwide income. However, there are two methods, US citizen can use to reduce tax: FEIE (Foreign Earned Income Exclusion) and FTC (Foreign Tax Credit).

Any US citizen with a tax residence outside of US is qualified for FEIE. Even without foreign tax residence established, anyone who have been outside of US for 330 days during the tax year is also qualified for FEIE. The exclusion is applicable to the income received for performing services in other country, i.e. wages, salaries, tips, etc. Capital gains, dividends, rental income, pensions are not considered as earned income and no exclusion is allowed. In 2017, the exclusion limit is $102,100. This would mean, that  no tax will be withheld  on any earned income below this limit. However, if the amount is greater than $102,100 then the difference between the earned income and exclusion limit is taxable at the rate of the total income earned abroad. For example, no tax is required for the annual income $90,000. However, for the annual income $110,000 tax is due on $7,900 at the rate of $110,000. This would mean, that 28% tax on $7,900 (which is equal to $2,212) will be collected.

Typically, no state or local tax is due for those living abroad, as long as they do not have any property or income from the sources within the state. For example, if someone living abroad rent out his or her property, tax on the rental income along with the property tax must be paid. But rules and regulations are different across the states. Most states would release their former residents from tax obligation, as long as they live for more than 6 months outside the state. But some states makes it extremely difficult to end the residency, in particular: California, Virginia, South Carolina, New Mexico. In order to leave one of these states, former resident must prove that he or she has no intention to return to the state and there are no connections left. For example, in California you must file a non-resident tax return, as long as you are physically absent but still “domiciled” in the state. Under the “domicile” term, authorities consider the place where you intend to return. Your property, the place where spouse and children live, days spent inside the state, obtaining professional services, bank accounts, organizations membership, driver license, voter or vehicle registration are among the “domicile” considerations. By the reasons stated above, it is always advised to establish home address in one of the states which does not have income tax, before leaving US.

In order to avoid double taxation, US has tax treaties with more than 42 countries. FTC can be claimed for a tax paid to the foreign government, to reduce the amount of tax on worldwide income paid to US government. It is available to anyone, who have earned or investment income in a foreign country. For example, if tax is paid on investment property in foreign county, then this tax is exempt from US tax. But in case of retirement, the income typically comes from US sources. Does it mean, that the tax paid to US government is also due for a foreign government? It is normally not a case for those countries, which has tax treaty with US. For example, in Canada resident allowed claiming a foreign tax credit on Canadian return for any tax paid in US. After all, the total tax you pay while living abroad depends if the foreign country has tax higher than US or not. The final tax to be paid is typically the highest one, either in US or another country of residence. Also, some amount of small income may be exempt from tax. In the table below, you can see the tax on residents in certain countries.

It is easy to see, which country has a tax higher than US for certain level of income. Some countries are quite popular with US retirees, others are not. The most generous exemption is offered by Portugal: foreign residents do not have to pay any tax on their foreign income during the first 10 years of residency. Cyprus offer 19K Euro exemption, which may be a deal for those with low income from US. But what about some Latin America countries, popular with US retirees like Costa Rica, Panama, Ecuador? All these governments actually share tax payers data with US government. However, residents in Costa Rica, Panama or Ecuador must pay tax on income generated in their respective countries only. This would mean, that a typical retiree is responsible for US federal tax, which is essentially the same as it would be when living in US in a state with no income tax.  Also, another good news is that both Panama and Ecuador has dollar as their official currency and US citizens living there does not have to worry about exchange rates. Hate paying US federal tax? Then move to Puerto Rico: its residents are not required to pay US personal income tax.

Penalty for being poor: how it works

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It is well known, that staying rich and healthy is better than the opposite. However, it is also not a secret that many people prefer to stay poor, because of the multiple benefits they are eligible for in this country. But when anyone eventually gets sick, affordable and accessible health care is extremely important. In this article, I wanted to share some observations I had regarding health insurance currently available through the states exchange and apparently more expensive for people with lower income.

For many decades, Medicaid served as a public insurance option for those who does not have money to buy insurance and has no access to employer’s benefits. But strict requirements on income, assets and family situation still kept many people uninsured. Since Affordable Care Act (ACA) implemented in 2014, 32 US states signed up for Medicaid expansion. It is an integral part of ACA, substantially relaxing original Medicaid requirements. Pretty much everyone with income less than 138% of Federal Poverty Level (FPL) is eligible for this program. These are the states signed up for the expansion (according to Kaiser Family Foundation).

Source: kff.org

What happened to the states, which did not sign up (yellow color on picture above)? Using the main exchange website healthcare.gov, as well as Covered California I collected some data for the insurance premium range, with respect to the annual gross income and age. These are the data for Austin, TX. Apparently, people with less than $15K annual income must pay the entire insurance price, without any subsidies. Situation changes around $15K: there are some plans available for free. For larger income, the prices are gradually climbing, because subsidies are phasing out. But they do not reach the numbers offered to people with $10K income even with $40K income!

The other chart I have, is for Portland, OR. Oregon signed up for Medicaid expansion, but the exchange site still return some numbers. And for those with income below $20K , the numbers are very high. Compared to the above chart for Austin, TX, the entire data are shifted right as subsidies are starting at $20K rather than $15K, then premiums are gradually raising but both maximum and minimum numbers are definitely lower than correspondent numbers for Austin, TX. Also, the minimum premium appears to be always lower for a person of 60 years old, compared to 55 years old for both Austin and Portland.

Finally, I decided to publish similar chart for one of the most expensive places in US: San Jose, CA. Covered California site does not return any numbers for those with annual income less than $20K: the message direct users to Medi-Cal (California Medicaid), explaining that with this income free or extremely low cost insurance is available. This is why I put zeroes there. With income $20K and above, a wide choice of insurance plans is offered with minimum numbers running around zero up to $35K income (which is substantially higher than for Austin or Portland) and maximum numbers well above other places. Minimum price decrease with age, similar to the above charts.

It is very important to be aware about the Medicaid expansion, because many people fall into the category with low income when they laid off or fired and unable to find another job for extended period. Unfortunately, Medicaid expansion will be terminated, if the repeal process is successful. Therefore, the Texas model will be likely extended into the entire country. What does it mean? You need to have an income above 138% of FPL, in order to be eligible for health insurance tax credit. One way to increase income is actually converting small portion of 401K into Roth IRA, which will generate tax event but extend annual income to be qualified. As Texas example demonstrate, the difference can be quite significant: as high as $500 per month, which will result in $6K per year. How does it compare to the tax, generated by the Roth conversion? You can see the tax rate table below. It may generate total 20% tax in a worst case, which would be $5K per year for $25K annual income. Still, less, than the premium advantage. Of course, much more savings comes from deductable and out-of-pocket expenses. But this was the worst case. In the best case (no state income tax) the federal tax of $2.5K per year would be a deal.

Retiring abroad: ugly reality

During the past decade, many Americans decided on retiring abroad. Almost everyone cited a high cost of living as a main reason, in particular the rising cost of health care. It is not a secret, that average US citizen does not have a luxury to save the amount of money, required to live comfortably at the familiar place without a job. One way to escape the high cost of living always was to move into less expensive area within the US. For example, people from San Francisco Bay Area often move north into the state of Oregon or Washington, to reduce daily expenses while keeping descent quality of life. Among east cost population, Florida and Texas has been quite popular for retirees due to the mild climate and zero income tax. But not anymore. Current situation in health care, including shrinking choices and rising prices, especially in lower cost areas forces people to look outside of US. Actually, there are plenty of Americans who currently live abroad. Most of them are happy with their choice, but things are changing rapidly. In this article, I wanted to share some information collected from different sources, including my own experience dealing with realities outside the US.

First, a few words about the cost of living and health care cost. While the cost of living may not be dramatically different in most developed countries, health care cost is definitely lower than in US. There is also a public health care system in place in many countries, which is free for all residents. Although it might be not a primary reason of moving abroad, it is still an important factor in financial planning. But do not expect free health care upon arrival: US retirees are likely not eligible for public option, because they never worked and never paid taxes into the system. Still, private insurance has very reasonable pricing and doctors are available immediately or on very short notice. In fact, health care quality in almost 40 countries is better than in US. These are the countries typically recommended to US retirees due to the reasonable cost of living, easy immigration process and excellent health care quality reported for year 2017: Spain, Ireland, Malta, Portugal. But things are changing: growing number of native retirees and high number of refugees are dramatically shifted existing landscape across many countries, especially within European Union where the highest quality health care has been traditionally delivered.

Another important aspect of moving abroad is a tax law, specific to the country of choice. US citizens are required to pay taxes, no matter where they live. At least, they require filing a tax return every year. The good news is, that there won’t be any federal tax on earned income up to $101,300 (as of year 2016). But this income must be earned. For example, capital gain, ordinary dividends or rental income are not earned income, and tax must be paid in full. This is all about federal tax. As regarding state and local taxes, it depends. Renting out a house while living abroad typically means paying property tax to the county, where house is located, along with federal and state taxes on rental income. Normally, people do not require paying other state and local taxes, if they do not physically present in the state. Different states has their own rules and regulations. For example, California may still consider you as a resident, if you have a rental property and regularly come to the state to manage this property. Alternatively, California may consider you as non-resident, if you hire a property management company: in this case, non-resident tax return is required.

While living abroad, it is still beneficial to maintain US home address. Some brokerage companies (like Fidelity, for example) are known to close accounts for those living outside of US. Banks and credit unions are less likely to close account in this case, but they still keep sending mail and some include credit cards or other useful documents. Smaller banks may have problems to send mail for the address outside of US. Of course, you can provide the relative’s or friend’s home address for that purpose. But in the later case, you automatically pass a presence test in respective state where relative or friend lives, and required to file a resident tax return for the state. In order to avoid that, it is better to establish a virtual home address with company like US Global Mail for example. For the charge of $10 per month or more, they provide a service to collect and scan the documents received on your name. Also, the good news is that these companies provide a home address in the states without personal income tax, such as Texas. Even those renting out a property in California are not required to pay state taxes on capital gain or ordinary dividends in California or any other state in this case.

Another important consideration is a foreign bank account. In order to live in other country, bank account is essential for the normal life. Which likely mean to establish a temporary or permanent residence in that country, unless you are a dual citizen of US and the country of actual residence. Typically, residency application require sufficient funds to be present in account, to make sure the retired person has enough money to live. US bank account can not be used for that purpose. Meantime, it is important to know that US citizens much report any foreign accounts which has at least $10K in combined value for any period, while account is active. This is known as FBAR filing requirement, and implemented to ensure tax compliance by the citizens living abroad. But unfortunately due to the FATCA (Foreign Account Tax Compliance Act) requirements, many foreign banks refuse to open bank accounts for US citizens. Moreover, some existing bank accounts are being closed. There are disturbing news coming in particular from EU countries about this matter. According to FATCA, all foreign banks are required to disclose financial information about Americans with money, residing outside of US. Apparently, banks are afraid of serious penalties imposed by IRS. By that reason, it is important to learn which banks still open accounts for Americans and even open it in advance, before the actual move.

As regarding credit and debit cards issued in US, situation is clearly not in favor of people moving abroad. The good news is that most credit cards will work outside of US, as long as you notify card issuer about the change of your location. The bad news is that most cards will charge a foreign transaction fee. There are certain credit cards which do not impose the fee, and some debit cards which actually refund ATM charges to owner. It is very important to choose the appropriate card carefully, if you plan to use it outside of US for an extended period. There is also one other problem: all cards expire one day. As of now, pretty much all billing and payment operations can be completed online. But the replacement card will be sent to US address, whatever is registered with card issuer. There are some banks, which can send the card to non-US address, using DHL for example. These banks need to be verified in advance, to make sure the card arrive in mail on time. But remember: you do not want to give non-US address to the companies like Fidelity, to avoid brokerage account closure. Even better idea would be to make certain arrangements, before moving abroad: close those cards which are not in use, and ask to issue a brand new card for those in use. Some cards are issued for two years, others for five or even more years. Anyway, there will be an extended period, before card expired. Finally, there is an option to issue a credit card in the foreign country: American Express for example provide such service. However, conditions may be quite different from US and credit history loss is possible.

In addition to the troubles discussed above, there is one other serious challenge: double taxation. As I already mentioned before, all US citizens are required to file a tax return with IRS, regardless of their income. They still require paying taxes in the country of residence, if they live in that country for more than half a year. Fortunately, there are tax treaties in place between US and most other countries, which effectively eliminate double taxation. This would mean, that for those Americans paid some amount of money in compliance with US tax code, can subtract this amount from the taxes they are required to pay in their country of residence. Of course, both US and foreign tax returns are getting more complicated and the help of professional tax adviser may be required.

Bank accounts and double taxation can be a problem, especially taking into account that most countries require more than $10K in account to establish a residency. Are there any solutions? One solution can be to actually live in two or more countries, without applying for residency in either of them. Most countries does not consider anyone a resident for tax purpose, if he or she physically present for less than 180 days in that country. Therefore, the best idea may be to live half a year in one country and another half a year in other country. There are certain countries such as Canada, Mexico or UK, which allow US citizens to stay up to 180 days without applying for residence permit. In fact, Americans may re-enter Canada every 180 days, as long as they do not overstay. However, most countries within EU has a 90 days rule. According to the rule, US citizens can stay up to 90 days within each 180 days in a country as a visitor. Then, it is still possible to live in two countries: one within EU and other is not, but traveling between them within each 90 days. Also, there are countries like Georgia or Palau which allow Americans to stay indefinitely as non-residents!

What is our conclusion? It is definitely possible for an average American to live in foreign country, and there are certain benefits of doing that. But before making decision to move, it is important to understand all challenges and specifics for living outside US, and be prepared to adjust the life style and expectations.

Health care: do we care?

We are all humans, and those who get sick need a health care. Health care in US is terribly expensive. One of the most expensive across the entire world. This is why health insurance is an important condition for doctor’s visit. Recently, there were plenty of discussions about Affordable Care Act (ACA, also known as ObamaCare) and American Health Care Act (AHCA or TrumpCare) which may replace ACA. It is important to know, that both initiatives are about money, not about insurance or health care itself. At this time, I would like to leave AHCA aside, since it is still under discussion by Congress. Meantime, ACA has been under severe scrutiny by republicans for a while. Does “repeal and replace” slogan sound familiar? I did not use any provisions from ACA, since I use employer’s insurance. But I wanted to build some opinion about ObamaCare, to share this info with those who need it now and to compare the upcoming ACA replacement with ObamaCare later.

In order to collect the data, I used Covered California for California state and healthcare.gov for other states (in particular, Oregon and Nevada). I was looking for insurance premium as the most important metric, since these are money we pay every month for insurance, no matter what. There are two opposite sides: minimal insurance premium, which often comes with high deductible, and small (or non-existent) deductible which obviously comes with higher premium. Also, I consider Health Maintenance Organization or HMO insurance (it happens to be Kaiser in both California and Oregon along with Health Plan of Nevada and Prominence in Nevada), opposite to Preferred Provider Organization or PPO (which comes from insurance such as Blue Shield in California, Athem Blue Cross in Nevada, BridgeSpan and Moda in Oregon).

First of all, I reviewed the details about available health insurance at San Jose, CA. I considered the age of insured individual between 40 and 60, and the income varying from $30K to $40K per year. Why did I choose this range? Because if you are not super rich, and worked as an employee at corporation for extended period (opposite to your own business), then most likely you end up with this amount of income at the voluntary retirement event. But if your income fall below 138% of the Federal Poverty Level (FPL), then most likely you can qualify for traditional Medicaid program or its expanded version. Some states signed up for Medicaid expansion, which cover people too poor to buy insurance, but not eligible for traditional Medicaid. Currently, 31 states including AZ, CA, CO, MD, MA, NV, NY, OR, PA, WA as well as DC expanded Medicaid.

In California, in order to be eligible for Medical (State’s Medicaid program providing free or reduced cost health care), you have to be between 19 and 64 years old, with adjusted annual gross income at or below $16K for an individual and $22K for a couple. Also, people older than 65 can qualify, if they are blind or disable. In addition to that, the qualification includes asset test. Current income limit is $1188 per month for an individual and $1603 for a couple. Asset limit is $2000 for an individual, or $3000 for a couple. The following assets are excluded: a primary home, one vehicle, household items, belongings, life insurance policies and the balance of pension funds, IRA and certain annuities. One of the important ACA provisions is the expansion of Medical eligibility to pretty much all low income individuals with the income at or below 138% of FPL. Medical is covering pretty much all essential services, but pays doctors lower rates and by that reason not all doctors accept Medical. Apparently, those who does not qualify for Medical and too young to qualify for Medicare, must be either insured through the employer or buy ACA insurance at the market exchange.

No surprise, in most cases the premium price is rising with the age: the greatest increase appear to be for Blue Shield Gold plan with no deductible: about 3% each year, with total around 30% in ten years from 50 to 60, for person who earn $30K per year. There are fewer subsidies available for those earning $40K per year, and Blue Shield Gold premium increase is less significant: about 26% per ten years. Which clearly indicates, that subsidies are shrinking with the age, especially for those between 50 and 60 years old. Surprisingly, Kaiser insurance premium actually drops over the years with Bronze plan, and remain almost the same for Gold plan with no deductible. The premium increase with age for Bronze PPO plan and high deductible is almost invisible: a few percents over ten years.

It is clear from diagrams above, that annual income affects the amount of insurance premium. According to the current ACA rules, people with lower income receive more subsidies, than people with higher income. But how much is the difference? I found, that the premium cost from various providers is changing dramatically with the income, with the starting points and rising rates quite different across the plans and providers. Extremely sharp growth observed for Kaiser Bronze plan from $53/mo for $30K income to $169/mo for $40K income. Meantime, the cost of Kaiser Gold and both PPO plans with no deductible doing the opposite, i.e. rising sharply for lower income below $30K and less significant for income above $30K.

Another question I had in mind: how the state and metro area affects the insurance premium? For that purpose, I verified at least four different metro areas: San Jose, CA, San Diego, CA, Portland, OR, Reno, NV. Surprisingly, the cost of insurance does not always follow the cost of living, as the highest cost of living is obviously in San Jose, CA followed by San Diego, Portland and Reno. In fact, the highest cost of HMO Bronze plan is observed in San Diego and Reno, while the highest cost of HMO Gold plan appears to be in Reno, NV. The highest cost for all HMO plans is in Reno, NV, while the cost of PPO plans is higher in California. For three out of four plans, you can buy the least expensive insurance in Portland, OR.

We can see a very similar trend for the person with annual income $40K (compared to $30K) at the same age of 50, except may be HMO Bronze plan: with the annual income on the rise, the least expensive plans are clearly in Portland, OR, while the highest cost is split between San Jose, San Diego and Reno.

In this article, just four metro areas has been discussed. There are too many data to compare across the entire country. But another observation easy to make is that offerings on the ACA market exchange is dramatically different from one state to another. While in major metro areas of California and Oregon there is a choice of up to 30 different plans, the areas like Las Vegas, NV, Phoenix, AZ does not have much choice at all, beyond a few unattractive HMO plans. Even for some populated areas of California, for example San Luis Obispo the choice is still limited by 10 PPO plans, represented by Blue Shield of California and Anthem Blue Cross. It means that you really must live in a major metro area of selective states, in order to obtain reasonable coverage under ACA.

Apparently, all discussed above is going to change as soon as next year in one way or other, because of the AHCA being discussed in Washington DC and various alternatives proposed at the states level: Healthy California Act, New York Medicare for All initiative, Nevada’s Medicaid for All healthcare model. While all these initiatives has a significant support in respective states, it is still unclear how to fund them, taking into account the plans of Trump’s administration to cut Medicaid funds and eliminate ObamaCare provisions (including Medicaid expansion). But it is clear that some healthcare system will be in place in US for coming years, and it would be interesting to compare the above data to the alternative solution, which suppose to be better than the previous one.

Finally, I wanted to share this excellent map, created by Health Care Cost Institute in 2015. Since that time, obviously the cost went up in most states, but according to my observations the health care cost distribution across different states remain the same. According to the map, the lowest state to national average price ratio is in the states of Nevada, Arizona, Florida and Tennessee, followed by California and Oregon (which is apparently one of the most expensive across all states). But please keep in mind, that these data account for the total cost across all insurance plans including those sponsored by employer (not just insurance premium for ACA), which explains the difference with the data published above.

How to survive without a job?

Loosing a job can be a frustrating experience. Especially in Unites States. There are plenty of useful (and not so useful) articles on Internet, how to deal with this difficult situation. But my mission here is different. In this article, I would like to focus on financial aspect of the problem. Did you ever ask yourself: how much would I need to survive without a job? For how long? And what do I need to do, in order to have these funds readily available? If you did, then you are not alone.

It may sound as a surprise, but yes it is always possible to put aside some money to feel more secure about loosing a job. However, there is no free ride: in order to prepare for this unfortunate event, we need to earn more money. More money is always better. The federal poverty level (FPL) is $11,880 for a single person and $16,020 for a couple in year 2017. I bet you will not be able to put aside much money, if you earn less than 4X FPL. But for everyone earning more than that, i.e. $47,550 as a single, or $64,100 for a couple the opportunity exists. More money is better, however those with higher income pay more tax.

In other article, I provided some numbers for minimum income required to live in different metro areas in US: specifically, you would need anywhere from $17K to $26K per year to barely survive as a single person. For a couple with 2 kids, the numbers are higher but the range is smaller: $41K to $54K. Basically, anyone can put aside the difference between after tax money earned during the year and the minimum income stated above, which depends on each family situation and location. But obviously, in a real life you would need more than bare minimum to live.

According to my observation, a low cost of living area (LCA) like Boise, ID gives an opportunity for a single person to live well on $30K per year, while $50K per year would be required for couple. But in a high cost of living area (HCA), such as Walnut Creek, CA for example, these numbers are obviously higher, reaching $40K (for single) and $64K (for couple). In a chart below, you can see how much money an average person can put aside, based on family size and the cost of living in his or her area. The numbers are calculated taking into account federal and state tax for Idaho and California respectively. As you can see, those living in a low cost area and earning $60K to $80K annually can save up to $30K each year. For people with higher income, the number grows linearly and may reach as much as $120K per year, even if they live in a high cost area.

These are after tax money. I intentionally use this simple example to demonstrate, what kind of numbers are reasonable here. But in a real life, most people contribute before tax money into 401K plan. In this case, $18K per year (or $24K per year if you are over 50) can be put aside immediately. This may add $6K to $8K additional savings per year for a single person, and $12K to $16K for a couple. However, 401K money will be available after 59.5 and a tax still must be paid when funds are withdrawn.

But how much money do we need, to live without a job for a while? The obvious answer would be just to combine the cost of living over the time. For example if you need $30K per year, then $150K must be readily available to live for 5 years. But this solution is too simple. First, there is an inflation which reduces the buying power of our money over the time. Second, we may not want just to run out of money at some time in the future. Actually, much better choice would be to invest money and live on interest or dividends. In this way, there is almost no risk to be left without money. Also, you may want to leave some heritage behind for the family members. Four percent rule is a great rule to follow in this case.

According to the rule, 4% of the total assets can be safely withdrawn each year, without significant damage to the principal. It is assumed, in any market condition 4% return on investment is possible. With this rule, it is easy to see that in a low cost area (LCA) where a single person need $30K and a couple need $50K per year, the total assets of $750K for single and $1250K for a couple are required. According to the chart below, the couple making greater than $120K annually may be able to put aside $1250K during 31 years. From the other side, for a single person the magic number of $750K can be reached after 26 years, even if the annual gross income is around $80K. With higher income, the number of years can be reduced by more than half in extreme cases at the high end of income range. Also, as you may noticed higher income does not directly translate into substantially shorter time for those making more than $140K per year.

In a high cost of living area (HCA), a couple need to earn at least $160K annually, in order to reduce the number of years to reasonable 29 years. For single person, there are better opportunities: even $100K of annual gross income would be enough to collect $1M in 31 years. Similar to the low cost area, further gross income increase would reduce the number of years by more than half. For example, those with a very high income around $200K can put aside $1M after just 10 years of career. Clearly, higher gross income is better. But as I already mentioned above, income higher than $180K would not cause a dramatic reduction in the number of years, required to save $1M for single or $1.6M for couple. The time is at least 2X longer for couples, which seems reasonable: it is much better when both family members are working, then the numbers will get closer or even outperform the numbers for single.

Investment choices: how to become homeless?

Investment is an extremely popular topic discussed by many bloggers. It is vitally important to manage financial assets efficiently, since any mistake is terribly expensive and may eventually lead to complete loss of money, loss of home and pretty much everything we have in our lives. In this article, I wanted to share my opinion based on the decades of experience I have managing personal investments for employer sponsored 401K plan. We will discuss different types of investment and how to combine them, to earn money and avoid poverty.

Stock is an ownership interest in corporation, which actually issue that stock. Individual investor can buy a stock of any public company, traded on the financial market. Stock has always been considered as a risky investment: it may cause a significant loss of money, as it tend to drop by various reasons. Even large corporations are not protected: for example, Bank of America’s stock (BAC) lost almost 100% of its value in 2009 during the recent recession, locked in a slow and painful recovery since that time. But lately, stock market gains were very impressive. Also, some companies pay dividends to their shareholder, which add a value to the stock. Therefore, it is better to buy stock market funds, rather than individual company’s stock. Total US stock market funds (such as VTI or VSAX) obviously experienced more than 50% drop during the economy downturns, but they never lost 100% of the value and always recovered in a few years. But it is not exactly applicable to international stock market funds like VEU or VXUS: this type of investment is difficult to manage, the fund may lose more than 50% of its value and historically does not yield performance similar to US stock market. Still, it can be a part of portfolio in order to mitigate risks associated with US market. It is attractive to own stock funds, if you are looking for 5-6 years term investment: during that time, the stock will likely recover even in the worst scenario. Typically, it is advised to have about 60% of the total assets in stock funds when you are younger than 35 and to bring stock portfolio down to 30% by retirement age.

By purchasing a bond, you lend a specific amount of money to the issuer of that bond. In return to your money, issuer will pay an interest to maturity and in addition to that will return a bond value by specific date. Bonds can be issued by corporations or government agencies. There are bond funds available on the marker, such as BND which hold primarily US Treasury and corporate bonds, IEI with a focus on US Treasury bonds only, and MUB managing various municipal bonds. The aggregate bond funds such as AGG for example, combine multiple types of bonds. Bonds are a safer investment as they never drop by 50% as stock do. But the return is low. Still, bonds can be an important part of conservative portfolio. It is typically advised to hold from 20% to 40% of the total assets in bonds. TIPS are also bonds, but considered as a different type of investment with even less risk than bonds, because they hold US Treasury issued inflation protected securities. The US Treasury notes has a fixed return, combined with a variable rate adjusted with the inflation. Lately, the variable part was almost non-existent because of the historically low interest rate. But it is changing now. To protect the portfolio from rapid changes in market conditions, it is better to include 10% to 20% of the TIP into the diversified portfolio.

The other type of investment is Real Estate Investment Trust (REIT). The trust represents the company, which own income producing real estate. Similar to stock funds, there are domestic (VNQ) or international (VNQI) funds. In fact, they both are ETF i.e. Exchange Transfer Funds. ETF manage assets like an index fund, which means it is traded on stock exchange similar to stock. ETF has lower fees, compared to funds. But with respect to real estate, the performance is variable and the value can drop not as much as individual stock, which is still less than most stock funds. For example, VNQ experienced 75% loss in year 2009 during one of the worst real estate crisis in history. By contrast, VNQI is more stable but does not produce much return since real estate market recovery. For portfolio diversification purpose, it is recommended to have at least 10% assets in REIT.

The remaining type of investment are commodities. These are the most volatile and expensive investments, and because of that reason it is normally recommended to hold no more than 5% for younger generation of investors, and eliminate it as you get closer to the retirement. DBC is one of the well known commodity tracking funds. Currently, it appears as an attractive low price entry point. However, return may not be great at least in the nearest future, due to the strong dollar and striving economy in US. There are funds for certain types of commodity, such as gold shares GLD or silver trust SLV. They are relatively expensive to hold, though less expensive than DBC. In addition to commodities, it is worth to mention foreign currencies as another investment choice. Although even more volatile than commodities, currency trading may provide a safe heaven for the times when US dollar is loosing its strength. There is a popular digital or virtual currency Bitcoin. Recently, it was doing very well: the value jumped more than 100 times during the recent few years. Eventually, virtual currency may replace US dollar in all domestic monetary transactions.

In order to have a well balanced portfolio, it is important that each type of investment is included as discussed above (may be except for commodities and foreign currencies). But actually there is one excellent Vanguard fund which successfully manage the entire portfolio for you: VWINX. This fund has an exceptional track record (even during the latest downturn, it lost no more than 30% of its value) and diversified by holding both US domestic and foreign stocks, bonds and some other investments. There are other total market funds available from Fidelity or Schwab for example, but Vanguard has the lowest fees.

Let us consider the typical portfolio for mid-age investor, assuming $10K has been initially invested in year 2007: 40% US Stock (VTI), 10% foreign stock (VEU), 40% bond (AGG), 5% REIT (VNQ), 5% commodities (GLD). The graph to demonstrate a portfolio change during the last 10 years is shown below (red curve). Apparently, investor lost some money during the recession years. But then it nicely recovered, grown up to $13478 by the beginning of year 2017 (with the total return more than 25%). Then, let us consider another portfolio with domestic and foreign stock completely eliminated. The remaining investments include 60% bond (AGG), 20% REIT (VNQ) and 20% commodities (GLD). The blue curve on the graph associated with this portfolio clearly show that investor did not lose much during the recession, and had a return well above the traditional portfolio (red curve) up to year 2014. Solid stock gain made traditional portfolio superior after that time. Still, the portfolio without stock end up with 18% total return by the year 2017.

The graph clearly show that stock missing within the portfolio is likely to diminish the return on investment over the long term. But from other side, stocks tend to lose their value more than other types of investments during certain events like a recession. I typically prefer to stay with bonds, REIT and commodities within the portfolio, combined with some individual stocks rather than total market fund (like VTI). Another important consideration is the entry point: how much is the fund or stock value at the time, when initial investment is made. While it does not make much difference for bonds, the stock value relative to the previous time may give some guidance. But the history does not always repeat itself. During the last year, my portfolio included 20% individual US stock (BAC, C), 20% foreign stock (VTRIX, VWO), 15% bond (BND), 20% global REIT (VNQI, WPS) and 25% commodities (GLDSLV).

 

Credit Cards: evil or not?

Cash is a king. I do hear these words all the time. I bet you too. What is so special about the cash? It is dirty, inconvenient. It takes a space in your wallet. Yes, at some gas station like Arco gas is a bit cheaper, if you pay cash. At farmers markets, you can use cash only by obvious reason. Anything else? Yes there is another important reason why so many people hate credit cards: they spend much more using the card. Simply because they do not see the actual money to spend. Moreover, plenty of people have never paid their balance on time. They end up paying outrageous interest fee, and blame the card not habits they developed. The truth is: if you are like me, never buying anything extra in supermarket and paying your entire balance regularly on time then there is not a single reason why cash is any better than credit card. In fact, many credit cards come with generous reward programs. Even debit cards are better than cash, because some of them can be linked to high interest checking account.

Most credit cards pay from 1% to 5% cash back at this time. These are the cards without annual fee: I never apply for a credit card with annual fee. Although cards with annual fee may have better rewards, you are always required to spend a lot of money to take advantage of those rewards. But in fact, 5% is not that small. How much money do you spend using credit card? For example, if you spend $500 each months then $25 come back into your wallet as a reward. And these are your money, no tax or other reduction applied. Unfortunately, 5% cash back cards are rare these days, likely for a specific type of purchase and may come with conditions. For example, Fort Knox Visa Platinum Card pay 5% cash back on gas purchases at the pump, but require credit union membership. PenFed Platinum Rewards Visa Signature is another excellent card, which earn 5X points on gas and 3X on grocery stores. But it still require a credit union membership. Also, the points for this card are not exactly percents of cash back: one point is equal 0.85%, to be precise. There are other cards like Chase Freedom which I use from time to time with rotating categories. In year 2017 this card return 5% cash back on gas during the first quarter, and 5% on groceries during the second quarter. It may be difficult to remember and sign up for these categories, but you get a reward.

With respect to grocery stores, credit cards are not that generous. There are still some cards which return 3% cash back on groceries. Amex Blue Cash claim to do that, but Amex acceptance is limited and rewards can be earned at selective supermarkets only. Visa Signature Cash Rebates Card from Consumers Credit Union, which has a flat 3% cash return for grocery or convenience stores is definitely a better choice. Another important category are travel expenses: airfare, hotels, rental cars may eat up more of your money than anything else. If you like me travel overseas, then it is important to understand the amount of foreign transaction fee the card charge when used abroad. For all travel expenses, I use Barclay Arrival World Mastercard with 2.1% reward rate and 5% redemption bonus. Since it is no longer offered to public, another good example of travel card is PenFed Premium Travel Reward Amex card with 5X points cash back on travel expenses. But again please remember that 5X points are equal to 4.24%. Still, it is a great deal. Also, it worth to mention two other excellent credit cards I have, which pay 2% cash back on each and every purchase: Fidelity Rewards Visa Signature and Citi Double Cash. I use these cards for all purchases, other than gas, groceries and travel. Finally, there is another card which may deserve your attention: BankAmericard Better Balance Rewards. It simply returns $25 per quarter, when you pay more than a minimum balance each month.

A great alternative to cash back rewards credit cards are high interest checking accounts. For a long time, I did have super reward checking account at Provident Credit Union. For up to $25K deposit, expect to receive a generous 2% dividend when the following conditions are satisfied: make purchase of at least $300 each month using the debit or credit card from the same credit union, have a monthly direct deposit or ACH transfer to the account and enroll into electronic documents. Not a bad deal, taking into account that their credit card return 1.5% cash back in addition to the dividend. Another great example is Consumers Credit Union rewards checking account. It is not exactly better, but on my opinion more convenient than Provident’s high interest account and it has a few tiers. You can earn up to 3.09% dividend on up to $10K deposit after completing at least 12 debit card transactions each month, have a direct deposit or ACH debit transaction, enrolled into electronic documents and access account online at least one time in a month. There are higher tiers of this account which can earn up to 4.59% on $20K deposit. It all depends how much money do you have available to leave in the checking account, and how much money do you actually spend: the highest tier require $1K to spend each month using the credit card, which does not work well in my case.

The remaining question you may have after reading this article: which one is better, credit card with cash back or high interest checking account? In fact, they complement each other with a right strategy. Let us assume, that you have a spare $10K and ideally earn 3.09% or $309 per year when all conditions are met. How would you earn the same money with credit card? You need to spend at least $6180 in order to earn cash back $309. To this extent, rewards checking is superior to credit card. But please do not forget: you still need to make certain number of transactions with debit card. The best strategy is to have 12 small transactions per month as required, leaving those of higher amount for credit card in order to accumulate more cash back. This is how credit card can be complimentary to the debit card transactions and high interest checking.

For the second tier with Consumers Credit Union checking account, you have to spend at least $500 each month using their credit card. As I mentioned before, it is a great card for groceries with 3% cash back reward and not so great for gas with 2% cash back reward. But ask yourself: do I spend that much on groceries every month? I do not. However, you earn 3% cash back combined with 3.59% on $15K deposit. What if you are like me, spending around $350 each month on groceries? The remaining $150 will earn 2% cash back for a gas, instead of 5% using other great cards I mentioned above. But according to the table below, it still worth the effort. The second column is a cash reward you can collect just using currently available cash rewards credit cards. The third column clearly demonstrates the advantage of high interest checking account combines with associated cash rewards credit card: in total, it is $43.1 per month compared to $18. In order to compute dividend from checking account, I use the highest tax bracket 34% for ordinary income: you may use lower whatever you have, then the advantage of checking account will be even greater.

How about the highest tier, which require spending $1000 per month using credit card? I bet you never earn $918 per year, even if all other cards return 5% cash back (which is not a case, as discussed above). According to the table below, advantage of checking account with a highest tier is greater than in previous case: $69 per month, compared with $28. The only problem is that not everyone can spend $1K per month using credit card. At least, I find it very problematic for myself. But fortunately there is another strategy, which does not require you to spend that much money but still provide benefit greater than this tier.

The strategy is to use Provident Credit Union high interest checking in combination with Consumers Credit Union high interest checking. In order to earn 2% dividend on $25K deposit at Provident, $300 must be spend using debit or credit card. I would recommend a cash reward credit card from Provident, because it returns 1.5% cash back for all purchases and does not have foreign transaction fee. In this case, you have to use Consumers credit card for groceries and gas to satisfy the second tier requirements, and Provident credit card for all other purchases up to $300. Combined with dividends from both checking accounts, this strategy return $75 per month compared to $24 with just credit card rewards and $69 with the highest tier from Consumers credit union.

The conclusion is simple: cash back credit cards, combined with high interest checking accounts from two credit unions is by far the best combination. Of course, if you have a spare $40K cash to deposit into checking accounts and you can afford to spend $800 each month using credit cards. But if you do, then it would be very difficult to beat this strategy.

Phone for free: why not?

Tired paying big bucks to cellular provider? Have minutes left on your plan every month? You are not alone. Large providers such as Verizon, AT&T are trying to earn money, no matter what do you think. The cost of voice and data plans in US is extremely high, compared to other countries. Fortunately, there are other smaller companies called Mobile Virtual Network Providers (MVNO). They basically resell cellular service provided by big four (Verizon, AT&T, T-Mobile and Sprint) in packages more attractive for someone who does not want to pay outrageous price for tiny usage. But these companies may not stay in business for long, you may not be allowed to use your favorite phone or they can have a customer service virtually non-existent. It is important to know how to navigate this world, quite different from expensive but familiar world of major cellular providers. In this article, I would like to share my personal experience how I end up paying almost nothing for the phone service.

First, it is important to realize what kind of usage you are looking for. Do you spend long time on phone while outside of home or work? How much voice minutes and data traffic do you normally use? Most companies in cellular business want you to talk and browse mobile internet a lot, so they can boost a profit by charging you for unlimited minutes and gigabytes of data. But is this really your habit? I am an active Internet user, but most of the time I spend either at home or work office. And I do not talk much on cell phone either. There is an office or home phone readily available for long talks. By that reason, I decided to look for inexpensive home phone service first. Since the days of land line are almost over, most providers offer VOIP (Voice Over Internet Protocol) phone service in one bundle with cable Internet and TV. I use AT&T UVerse for home Internet connection. Currently, AT&T offer local phone service for $24.95 per month in California. And it does not even include long distance calls. Obviously, I had to look for alternatives. There are plenty of VOIP providers on the market, for example PowerPhone, Lingo. They may offer phone service much less expensive than AT&T, but after a closer look I also discovered disadvantages:

  • VOIP companies still charge a regular fee for their service
  • it takes some effort to install the hardware, if you want to have a traditional home phone
  • smartphone apps are easy to use, but the ability to answer incoming calls may be a challenge for apps with poor smartphone operating system integration
  • ability to call traditional land line or cellular phones typically costs more or not present at all
  • call quality may vary significantly

There are also companies on the market, which use their own proprietary communication protocols and by that reason does not exactly belong to VOIP family (but may be still referred as VOIP because they still use Internet for voice communication): Nettalk, Ooma and Skype are among the most famous. The first two providers offer an adapter, which can be used with normal phone devices and completely eliminates the problem of incoming calls. While Nettalk is charging around $40 per year for unlimited calls in US and Canada, you can use Ooma for free (some tax is still collected). On the downside, initial cost of Ooma hardware is higher than competitors. Although the prices went down and currently you can buy Ooma Telo for less than $100. As regarding Skype, it is quite popular for free Skype-to-Skype video communication, but hard to use to answer incoming calls and on my opinion can not be considered as a home phone alternative. Also, there is an additional cost to call the land line number using Skype.

Besides alternatives I already mentioned, there is another provider: Google Voice. In fact, after doing some research I found that it is much superior to others, by the following reasons:

  • all calls in US and Canada are free, including calls to traditional land line and cellular phones
  • Hangouts app, closely integrated into Android OS, accepts incoming calls in the same way as with traditional cellular providers
  • relatively cheap international calls, just in case if you need it
  • work with one phone number also provided by Google: it can be forwarded to any other phone number
  • supported by large company with virtually unlimited resource
  • Obi phone adapter is available for easy integration with Google Voice (as well other VOIP service): it can work with any traditional phone replacing the land line

Apparently, I found what I was looking for. And I use the setup (Obi + Google Voice) for more than six years. It is a reliable and high quality service, and it costs nothing except the initial one time cost of Obi adapter (which is less than $50). Also, I am using Hangouts app from my smartphone when I am not at home. There is Obi app available from Android and iOS stores, but its functionality is very limited and it is not stable. But I still use it when calling from iPad.

All above is about the home phone service. But what about cellular service? The home phone setup I use allows me to handle the most part of my calls. But for occasional calls and emergency, I also have Lycamobile service. This virtual network operator uses T-Mobile as a cellular service. By that reason, any phone which can work on T-Mobile is good for Lycamobile. They have a few reasonably priced plans available on their web site, however the best and cheapest plan is the one they offer by default: you just need to add money to your balance and this pay-as-you-go service will work automatically. The rates are available at international plan page: basically it is 5 cents per minute for all calls within US. This plan is ideal for very low usage like I have. Again it is possible because of the free home phone setup I have. In total, I pay less than $1 per month for the phone service. Which I consider as a free service. Of course, there are completely free cellular providers currently available on the marker: FreedomPop, RingPlus. But they all have hidden fees and other tricks to charge you: remember, this is a business for profit. So far, I found that setup I use does not have much competition.

Unfortunately, there is still a problem with Lycamobile: it relies on T-Mobile cellular coverage. I found this coverage insufficient in the area where I live. In fact I have very limited T-Mobile coverage at my office. By that reason, in addition to Lycamobile I currently use Verizon prepaid plan. This is a data only plan designed specifically for tablets: you must have a Verizon tablet for the initial setup. Then you can insert Verizon SIM card into any phone working with Verizon and it will cost $20 per month for 2GB of data, which is far from free but still much less than other plans from Verizon or AT&T. And the coverage is excellent. I can turn it off any time I want, and turn it on again.