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Planning

Whether you’re taking care of multiple children, a disabled spouse, or elderly parents, you’ve likely experienced the high cost of dependent care firsthand. With expenses from babysitters to after school programs, it can be difficult to stay ahead of all your other financial obligations while spending on dependent care.

To help make dependent care more affordable, President-elect Donald Trump has included a new provision in his child care plan: the Dependent Care Savings Account. It’s a tax-favored account that anyone with dependents can contribute to in order to save for eligible expenses. Read further to learn exactly what it is, how it works, and who will benefit from it.

What Is The New Dependent Care Savings Account?

Trump’s child care proposal includes creating a Dependent Care Savings Account (DCSA). Parents can contribute up to $2,000 per year to this tax-favored account. Contributions are tax deductible and grow tax-free. Much like a Health Savings Account (HSA), money in a DCSA doesn’t expire. Unused contributions can even be used for a child’s college education expenses once he/she reaches 18.

How Does The Dependent Care Savings Account Work?

DCSAs will be available to everyone regardless of employment status. They won’t be tied to employer accounts.

As previously stated, the maximum annual contribution for DCSAs will be $2,000. Unlike employer-sponsored Dependent Flexible Spending Accounts, unused money in a DCSA will be allowed to carry over year after year. In this way, substantial amounts of money can be accumulated for future dependent care expenses.

Examples of eligible dependent care expenses include:

  • Children
    • After school programs
    • Babysitters
  • Disabled  Spouse
    • In-home care
  • Elderly Parents
    • Adult day care
    • Assisted living

The exact details on how claims will be processed and reimbursed have not been released yet. We suspect it’ll operate similar to an HSA, but on a federal level.

Who Does The Dependent Care Savings Account Benefit?

Anyone who spends money on dependent care can take advantage of the DCSA and reap the tax benefits.

It should be noted that dependents include disabled spouses and elderly parents, not just children. This broadens the applicability of the money put into the account and makes it all the more easy to use it for eligible expenses.

Low-income parents will receive an additional benefit when using DCSAs. The government will match half of the first $1,000 contributed each year. That’s $500 in additional benefits each year.

Trump hasn’t laid out the specific details on how he plans to fund the government match for contributions made by low-income parents. That, however, would come at a large cost. Over 40% of American households have children. If every low-income parent contributed to DCSAs up to the government match, he would need to find a viable way to fund all of those accounts.

His general answer to the funding question is that it’ll be “offset by additional growth.”

Final Thoughts

It’s important to note that in order for DCSAs to have a large scale impact in reducing the cost of dependent care for American families, parents will need to take advantage of the account and contribute to it. Given that participation in FSAs and HSAs has been increasing, the outlook seems promising.

The $500 government match for low-income parents is a lofty provision but may be underutilized in reality. Low-income families may have a hard time coming up with the disposable income to contribute to a DCSA in the first place.

President-elect Trump’s child care plan, specifically the creation of the Dependent Care Savings Account, depends largely on utilization rates. We have our eyes peeled to see how this change affects finances for the U.S., especially families with children or elderly parents.

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Certain expenses can sneak up on you, especially if you don’t run into them too often. For example, a new passport costs $110, but renewal only comes around once every 10 years. Other recurring bills like property taxes, car registration, and insurance payments can also make an unexpected dent in your wallet when they pop up. Do you really even consider these types of things when configuring your budget?

There are many ways to budget for these kinds of costs and make sure that you’re financially prepared. The central idea is to assess all of your potential expenses that occur less frequently than a month, do some simple math, and put away enough money each month to cover them when they pop up.

Getting Organized

When it comes to financial planning, attention to detail is key. And the first step to planning for annual expenses is to have a detailed budget in place.

I prefer to use a spreadsheet for mine, but there are many tools that can help you build a budget. I pair my spreadsheet with Mint to help me automatically track my spending and compare my monthly spending against the budgets I’ve set for myself.

I strongly recommend that you use an automated tool like Mint or the new YNAB if you’re concerned about recurring costs (which you should be!). No amount of planning can fully prepare you for all of the different expenses that come about in a year. It’s especially easy to forget something small or things that come around every 2+ years.

For example, I recently had to renew a few internet domains that I keep as a hobby. While checking out online, I realized I hadn’t budgeted for them at all this year. They just hadn’t come to mind when I was logging things like insurance premiums and membership dues. Once I implemented Mint, though, the app showed me these charges and, in a sense, forced me to rebudget.

My budget spreadsheet has two sections. The upper section has categories like rent, clothing, car payments, and other monthly expenses, along with their associated monthly cost. I’ve then made another column to extrapolate those numbers to show how much I pay annually. This is just to give me a better sense of where my money is going as a whole.

The second section flips this model. Instead of categories, I call out explicit purchases. These include things like new eyeglasses, and I estimate how much I expect to spend on them annually. I then divide that number by 12 to see how much I should be socking away each month to cover their cost. At the bottom of that section, I can simply total the monthly estimates. That way, I know much I need to budget each month to cover all of these costs for a year.

Some expenses don’t happen once a year, so you may need to do some simple math to properly estimate them. For example, your insurance may be charged biannually. Just make sure to do the right math to treat these costs like other annual expenses.

The same goes for purchases that happen every few years, like the passport example mentioned at the start of this article. Saving for a passport renewal at $110 every 10 years costs you a whopping $0.92 per month. Which would you rather prepare for: an unplanned $100+ expense hitting your account, or simply putting less than a dollar away each month?

Getting Disciplined

Once you understand how much you should be saving each month, it’s time to start putting it away. I made a second savings account with my bank, just for this purpose. On the first day of each month, I transfer my magic monthly number from checking into that account. It’s no different than how one might transfer a few hundred dollars into a primary savings account, an IRA, or another taxable account. Instead of a second savings account, you can keep track of this through a spreadsheet or other document you’d prefer. However, I find having a discrete account to be really beneficial.

Of course, one hurdle here will be that when these expenses come up for the first time, you won’t have saved enough yet to cover them. Think carefully about what kinds of expenses those are, and make sure to properly save for them as an aside to this process. I also prefer to inflate my monthly number by a bit (~10%) just in case. It never hurts to be overprepared, and that can really help when something you hadn’t thought of (like that pesky passport renewal) catches up to you.

Once you’ve calculated your annual costs, you might be surprised at how much you need to be saving each month. For some of you, it might be hundreds of dollars that you hadn’t previously budgeted. You need to be disciplined in saving that money each month, or you risk putting yourself into potential debt. Stick to transferring that money on the first of each month! I like to make mine an automatic transfer so I don’t have to remember it. And throughout each month, carefully track which costs hit you that aren’t in your normal monthly budget, so you can recoup that money to pay your bills.

My way of tracking recurring costs is by creating a new unique category in Mint called “Annual Expense,” or something similar. I then tag things like eyeglasses or my Amazon Prime membership with this different category. At the end of each month, Mint easily tells me how much I spent on these kinds of expenses, and then I transfer that amount from the second savings account back into my checking.

This allows me to then have enough to make the credit card payments for those charges. It’s a surprisingly simple system (just like most things when it comes to budgeting), but it takes discipline and organization.

Finally, don’t get complacent. This system only works as well as you maintain it. That means that when an unexpected cost comes up, it’s time to get to work. Appropriately budget for it, change your monthly magic number, and plan ahead for what comes next. Yes, it’s work, but that’s what good financial planning is all about. And let’s be fair here: the “work” is actually quite easy.

Your Plan

The method I’ve outlined here works great for me, but I’m curious what works for you. The fundamental strategy of planning for annual costs is to determine what you need to save each month, and put that money somewhere. These expenses will be different for everyone, but you should certainly know where yours stand.

Please chime in if you have a different system for planning, as we’d all like to hear about what’s been effective for you. It’s often hard to think about these kinds of recurring costs, causing people to disregard or fail to save for them. A system that’s easy to understand can go a long way to protecting your financial future.

For reference, here are all the annual costs for which I currently budget: Amazon Prime, license and passport renewal, internet domains, new eyeglasses, vacations and travel, car registration, property tax, gym membership, Xbox Live, veterinary costs, a new cell phone, car maintenance, holiday and birthday gifts, and a local film festival.

What other/different expenses do you see each year?

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In chemistry, a catalyst is something that triggers a reaction — but the nature of the reaction itself depends on having the right elements in place to respond to the catalyst.

What brought to mind that tattered remnant of high school chemistry was thinking back on buying my first house.

I’ll explain how I got from home-buying to chemistry — and, in the process, hopefully share some pointers about what elements should be in place when you buy a home and what catalysts might trigger you to react to those elements.

The chemistry of home-buying

The reason I’m talking about home-buying in terms of chemistry is that there is more to buying a home than pure dollars and cents. Don’t get me wrong. The financials are important, and I’ve written a fair amount about some of the financial aspects of home-buying. However, what is equally important is your personal outlook.

Generally, the elements of your personal situation fall into place bit by bit over time, and you might not really notice how they are developing. It can take a catalyst to set everything in motion.

In my case, the catalyst was simple: Our landlord tried to raise our rent by $50. That doesn’t sound like much today; but at the time, it was 12.5 percent of the rent we were paying previously. More than that, it was a catalyst to us. We realized that renting meant being subject to that unpredictability every year when the lease term ended.

Once that catalyst sparked the idea of buying a home, all the right elements were in place for us to follow through on our decision. My career was progressing well, I had gotten married and we planned to have kids, and we had family roots in the area. If it hadn’t been for that catalyst, though, I’m not sure how long it would have taken for it to occur to us to buy a house. So, we have our landlord to thank.

Here’s how the chemistry of home-buying might come together for you.

How to know if it is time to buy a house

Here are some of the right elements for buying a home:

  • Career stability. This does not necessarily mean that you plan on staying in the same job, but that you have in-demand skills and that there is a healthy job market for those skills within commuting distance of the house you plan to buy.
  • Commitment to your area. It could come down to the weather, family and friends, arts and entertainment, or all of the above, but you need to figure out where you want to be for the long haul. It’s okay to be restless when you are young, but it is better if you aren’t that way after you buy a house.
  • Clarity about your household. It might take several years before you start to have clarity on what your household will look like in the future: Will you marry? Do you expect to have kids? Will elderly parents come live with you at some point? The more clarity you have about the size of your household in the years ahead, the easier it is to know what kind of home to buy, though it is always wise to make choices that build in a little flexibility as well.
  • Knowing yourself. Life plans and personal tastes take a while to evolve. Don’t rush into home-buying unless you have a good handle on what you want for the long term.
  • Affordability. This is an entirely different area of discussion; but if the dollars and cents don’t add up, not all the elements for buying a home are in place.

Catalysts can help you decide

Given the right elements, what can trigger you to act on them? Here are some possibilities:

  • A jump in rents. As I mentioned, that did it for us. It changes the current comparison between renting and owning costs, and makes you think about stabilizing your housing expense for the future.
  • Low mortgage rates. You should look at today’s mortgage rates as an opportunity that might not always be there. If home-buying is in your future, you might want to accelerate the timing to take advantage.
  • A change in household. Getting married or having a baby might mean you have to find a bigger place anyway, so you might think about doing that by buying.
  • A strong raise in pay. A meaningful bump-up — beyond the standard annual cost-of-living type of adjustment — could not only give you the financial means to buy a home, but it might also be a sign that your career is well enough on track for you to make that kind of commitment.

In short, besides the math of affordability, buying a home comes down to the chemistry of your personal situation. Perhaps if we had known so much was riding on math and chemistry, we all would have paid more attention in high school.

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For the first time in several years, at the beginning of 2014, I shared my personal and financial plans for the year. I had navigated away from sharing personal data on Consumerism Commentary, leaving an opening for Naked With Cash. Over the course of the past two years, eleven readers shared their financial goals and progress with monthly updates, much like I had done from 2003 to 2011.

I wanted to share my financial and personal goals for 2014 because I had gotten away from some of the more personal aspects of life while business need prevented me from sharing some of the details, like income and net worth. It was time to regain some control, so in 2014, I shared more than just my financial goals, but peered into my life for some thoughts on personal development in addition to some new business goals.

My first goal for the year was to grow my consultancy business. I started the year off with a bang, with a few bloggers who were looking to grow their websites — to generate income. I am not interested in marketing myself in this sort of fashion, but I let the community know I was available. I may have taken the wrong approach — rather than setting a high value on my time as a “blog business coach” and pricing my time at a rate commensurate with the fact that I grew a website into a multi-million dollar business in a very competitive environment, I presented myself as someone who would be willing to work with anyone’s budget.

One particular client lasted only two sessions, until he realized that the type of coaching I was offering was not what he wanted. And then he never paid the invoice. And then I ran into him at a conference. And he said he wished he had listened to my advice in the first place. People don’t seem to want to talk about the big picture and look at their overall approach to their business — they just want a checklist. That wasn’t what I was interested in providing, so I moved on. I decided to focus on other areas of my life.

So in terms of income for 2014, my primary source has been writing for Consumerism Commentary. Since I sold the website in 2011, I’ve moved from an employee of the company that purchased the site, writing and advising on a variety of matters, to a paid-by-word freelancer with a responsibility for writing several articles a month plus a flat monthly fee for managing the website’s editorial system. And as the company’s budget for the website continued to shrink, I wrote less. Because I had committed to the second series of Naked With Cash, those four posts a month became the bulk of what Consumerism Commentary had to offer readers in 2014. Unfortunately, several of the Naked With Cash participants and experts did not match my commitment for whatever reason, and for me, the series was a big let-down this year.

That’s the main reason I’m not bringing it back in the beginning of 2015.

Another goal in 2014 was to explore forming a nonprofit organization. I’ve made some progress. I put together an initial board of directors (or trustees) and we’ve had a few meetings. I’ve formed the business entity, registered with the State of New Jersey, and successfully applied for 501(c)3 status. The mission, at least for now, is to support the development of young people into financially capable human beings through effective behavioral education, behavior modeling and reinforcement, and advocating for industry responsibility.

Here’s the issue: we can all agree that financial literacy is a problem in the United States. And as more and more newly-graduated adults find themselves starting their “real lives” in more debt they could possibly handle, there must be some type of education that could be provided to all children of a certain age in this country so they can avoid making poor choices with money and see financial success much sooner.

That theory has been proving wrong. Curricula in financial literacy aren’t ineffective. They have an effect, but it’s not a positive effect. Children who have the “benefit” of financial literacy in their education actually perform worse when managing their own money as adults. There have been a number of studies that come to this conclusion, but other studies conclude that even at best, financial literacy education doesn’t improve financial conditions later in life.

So the goal of my nonprofit is to take another path, recognizing that people don’t learn financial behaviors from courses in school or class trips to a bank. Children learn financial behavior from their role models. And the children at the most risk for future financial distress don’t have positive role models. How do you get positive role models into communities where that might not exist in a family setting? One possibility is working with organizations that all ready provide role models, like Big Brothers Big Sisters. Any other attempt to introduce community-acceptable role models into low socio-economic status neighborhoods might be too much of a challenge.

There is a long path ahead for this nonprofit idea. I’ve also concluded that I have no interest in spending the rest of my life fundraising, so that is one concern. But in the coming year, I’ll explore this further.

At the end of last year, I set aside some money as a donation to my alma mater. I strongly feel that my college education played an important role in forming my identity as an adult, even if like many people my degree and course of study aren’t related to what I do today professionally. I mixed my passion for personal finance with my undergraduate major in music education and came up with an interesting solution. Because I believe that degrees that require internships can be somewhat unfair for students who can’t afford to spend a semester working for free, I took the first step in establishing an annual stipend for an internship. This way, a student who has an opportunity who work with one of the best arts organizations, most of which are located in expensive cities, doesn’t have to worry as much about how they’re going to pay their bills during that internship period.

My interaction with the university also provided me with an interesting opportunity. Last year, I visited my undergraduate college’s new entrepreneurial program and gave a talk to a number of students, sharing my experiences as an “accidental entrepreneur.” My story was significantly different than those of the typical business leaders invited by the university, so it may have helped the students think a little differently about their potential path as, well, mostly start-up founders.

This past year, I continued my personal training and improved my nutrition. This year, I’ve seen some physical improvements. This hard work, working with a personal trainer three times a week and changing the way I eat, is starting to pay off. I thought I would have seen results faster, but I’ll take what I can get.

I wanted to spent more time this year focusing on my personal relationships. When I wrote these goals, it was just a few weeks after a long-term, long-distance relationship ended. It was a couple of months before I entered a new, even longer-distance relationship. I spent a lot of time traveling this year. And I found myself really needing to be the best partner I could be. We’re very happy together, but distance in a relationship can be very painful. Besides a romantic relationship, there are other people in my life, friends and family.

When I set these goals at the end of last year, I intended to do a better job maintaining some of those relationships. Balancing that has been difficult as I try to spend as much time as possible with my girlfriend, as time with her is too rare.

With whatever time I had left for myself, I intended to spend the year working with photography. I did, and my skills are ever improving. I even sold a print of a photograph of San Francisco’s AT&T Park before even trying to sell prints. I still spend most of my effort on portraiture, and you can see some of my work here (and buy prints if you are so inclined). I don’t intend to make a living from photography, mostly because I would hate to do wedding photography, and that’s where the money is. But it has provided me a nice artistic outlet.

I have also begun volunteering with a local nonprofit organization that runs a drum and bugle corps — a highly competitive marching band consisting of only brass, percussion, and color guard that places very high performance demands on the young people who participate. I’m getting back to my roots in music just a little bit.

Financially, my struggle this year was to live off of income from working rather than income from my investments. I barely made it. I’ve depleted my cash-based savings, but I’ve managed to leave my investments alone. The investments come from income before selling my business and proceeds from the sale of that business. I’ve only withdrawn from those accounts for taxes, for sales broker fees (for the sale of the business), and for legal fees. Since inception, the account has grown over 25% even taking those withdrawals into account. I’m in a position where I can just live off the income from the investments for the rest of my life, and starting in January 2015, I may need to begin living partly off these investments.

Some of my friends can’t understand why I haven’t been doing this already. I’m successful, financially independent, yet I’m continuing to work and live mostly like I did several years ago when my business was first starting to grow. I haven’t figured this part of my life out yet. Maybe that will be a goal for next year.

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12 Alternative Financial Resolutions for 2014

by Luke Landes
New year hat

New Year’s resolutions have become so cliché that the process of making them has become a joke. People settle for mundane goals for the year like “losing weight,” “quitting smoking,” and “getting out of debt.” These are great goals, of course, but most who think about these only when the calendar changes soon forget their […]

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My Personal and Financial Plans for 2014

by Luke Landes
Model

The last time I shared my personal goals and plans with Consumerism Commentary readers was at the very beginning of 2011. I went so far to declare that 2011 would be the year that everything changes, a subtle homage to a television program called Torchwood. Anyway, I was right; in 2011, my life changed, but […]

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How Is Your Budget Doing These Days?

by Phil Cioppa

This is a guest article by Phil Cioppa of Arbol Financial Strategies, LLC. Phil has over 10 years of financial service experience and specializes in asset management strategies, insurance planning and taxation issues. A budget is an important part of any financial plan, and right now is the best time to take another look at […]

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A Different Environment for 2012 Goals and Resolutions

by Luke Landes

I’ve exchanged some of the stress and risk in my life for a more comfortable situation. At the end of October, as some readers have been aware, I relinquished my ownership of Consumerism Commentary. There was an announcement in the Wall Street Journal that I’ll link to below for those who are curious about some […]

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Reflecting on My 2011 Goals

by Luke Landes

A little less than a year ago, I mentioned that 2011 would be the year that everything changes. It’s a phrasing that I borrowed from Torchwood, but it was relevant for me as well as to the television program’s concept. I’ll have more to say about this year’s changes later. At the time I created […]

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Full-Year Budgeting for Teachers

by Luke Landes

The school year within the United States public education system lasts about ten months, so some teachers face an interesting budgeting issue that most American workers do not. The first issue is handling a below-average paycheck. Compensation for public school teachers varies wildly depending on years of experience and location, but for the most part […]

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