Since my last post, we’ve entered a new year and many of us have made new year’s resolutions.  One of the most common resolutions is to lose weight, so this got me thinking about the financial benefits of dieting.  This is NOT dieting advice, so don’t think I’m going to give you the answers to maintaining a healthy weight or eating right.  I’m am merely going to reflect on a few observations I’ve had over the last year or so.

What I’ve discovered is that over eating is expensive!

This past year, I survived a few different attempts at dieting, starting with a vow to eat “cleaner.”  This meant fewer processed foods, more vegetables, and simple preparation of meats.  It was probably similar to a Paleo type diet, but instead it was driven primarily by the need to simplify so that I could count calories more easily.  What I found was that my perception of portion sizes was way off, which was causing me to go through much more food each week than I should have – racking up nearly $2,500 a month between meals at home, at work, and the occasional dinner out for our 4-person family.  But with my meal planning, I was down to under $1,000 a month in groceries, saving myself around $1,500 per month!  I was flabbergasted!  That’s around $18,000 per year in savings.  I could buy a car for that kind of cash or, even better, greatly improve my ability to save for numerous goals.  As a financial planner, I was hooked immediately.

I started by talking to my doctor and determining the right number of calories, protein, and carbohydrates for my body type and my goal weight.  Then I created a schedule that showed what foods I would eat each day, entering them all into an app that gave me estimated nutrition information.  I balanced and traded until it was right, then created a shopping list from my plan.  Here is what the schedule looked like:

(I purposely made this hard to read because I’m not providing diet advice!)

As part of my plan to simplify, I scheduled meals so that I was eating leftovers from the previous night’s dinner at lunch the next day.  I didn’t plan for elaborate (high calorie) recipes, but I did try to vary the preparation to keep it more exciting, looking up recipes that were simple, low-calorie, and tasty.

The first thing I noticed was that I could stretch the same amount of protein I used to eat at one meal to two meals, cutting those expenses in half.  With protein being the most expense part of my meals, the savings were significant.  Also, I used to go out for lunch every day for a sandwich or a few items on the buffet, but now I was bringing my lunch every day.  That, in itself, was saving me a lot of cash as well – with lunches that usually ran $10-$15 now costing me around $3.  Each of the changes I made added up over the course of the week to save me a whopping $375/week.

I then started shopping online.  I paid a small fee for the grocery store to collect all the groceries for me and I would pick them up.  This served multiple functions: (1) it helped me to avoid temptations to buy other things – I only got what I planned to get and it was exactly what I needed (2) it saved me a ton of time – with putting extra time into planning, it was nice to cut 2 hours of effort out of my schedule to shop for groceries (3) it helped me to see the financial impact – the online shopping tool listed all the prices and I could evaluate my options from the quiet of my living room, rather than standing there in front of the food in the store (4) I could repeat my order if I wanted to – for weeks where I didn’t feel like planning, I could copy an order from a previous week and it was already planned.  All these are great reasons to shop online.  Yes, there were some glitches, but still well worth it.

Now, not all diets are like this.  Many are more expensive and might result in spending more money than before, depending on the type of diet, whether you pay for counseling, etc.  So it’s up to you to figure out your own path.  However, there may be more significant financial savings once you reach your goal.

About the Author:

Greg Caramanica is the managing member and COO of Arlington Wealth Planning, LLC, a Registered Investment Advisor located in Arlington, Virginia.  Mr. Caramanica is a CERTIFIED FINANCIAL PLANNER™, providing financial planning , insurance, and tax services.

The federal government has passed a new tax law that will take effect in 2018.  One of the changes is that they are limiting deductions for state and local taxes to $10,000.

What does this mean?  This means that when you go to pay your taxes for 2018 (filed by April 15th, 2019), you will only be able to deduct $10,000 of your state and local taxes on your Federal tax return.  For example, if you paid $13,000 in state taxes and $7,000 in property taxes in 2018, you will only be able to deduct $10,000.  So, while in past years you would have been able to deduct the full $20,000, you will be limited to $10,000 in 2018.  If your marginal tax rate is 28% (for example purposes), then the net effect will be $2,800 in more tax owed to the Federal government for this particular line item on your 2018 federal tax return.

But the impact of the new tax bill on your total taxes goes beyond just the state and local tax deduction limit.  There are other changes to the tax law that will impact your net taxes.  For instance, if you are in the 28% tax bracket in 2017, you will likely be in the 24% tax bracket in 2018, saving you 4% of your taxable income. So, you should look at all the changes to the tax law to determine what the net effect on your taxes will be.  Here is a website that will allow you to enter your numbers to get a preliminary look:  http://www.foxbusiness.com/politics/2017/12/19/tax-calculator-what-tax-reform-means-for.html.

As a result of the change to the state and local tax deduction, people are rushing to prepay their 2018 state and local taxes.  The reason is that there is no limit to the deduction in 2017, so if you pay it in 2017, you can deduct it on your 2017 taxes.  Local governments are reacting to this rush in different ways.  Read more about whether your local jurisdiction is allowing prepayment in this article:  https://wtop.com/local/2017/12/jurisdiction-accept-prepayment-real-estate-tax-new-law-kicks/

But should you prepay your taxes if they allow it?

First and foremost, you should consider your specific tax situation to answer this question. But if it turns out that you will benefit from prepayment and your local jurisdiction allows it, you’ll have to come up with that payment quickly – by the end of the week!

From a financial planning perspective, it makes sense to think about saving a potential $2,800 (given the example above). But with this example, you’d have to pay $10,000 by the end of the year.  The first question is: Do you have that amount of money laying around?  The section question is:  Are you willing to forego access to that $10,000 in return for $2,800. The business case is sound, but does it fit into your budget?

With this example, you would pay the $10,000 right now, then have to update your withholdings for state taxes to increase your paycheck by $833.33 per month, slowly getting paid back your $10,000 over the course of the year.

Plugging this scenario into a calculator:

• Cash flow 0: -10,000 <– your initial payment
• Cash flow 1: 10,000+2,800 = 12,800 <– you get your $10k back over the course of the year, plus $2,800 in federal tax refund (that you wouldn’t otherwise receive next year)
• IRR: 28% <– this is the 1-year return for your $10k prepayment

If you are using your emergency fund to pay for this, you are increasing your risk in the case where you would need those emergency funds in 2018.  Otherwise, why would you have $10k lying around?  Perhaps you got an end of the year bonus or other windfall – these are probably the folks that are really considering this option.  But others may be thinking about cashing in investments to prepay their state and local taxes.  This comes with a whole set of other considerations – what the investment is for, the investment horizon, short term and long term capital gains taxes, taxes and penalties on qualified accounts, timing, transaction fees, etc.

But your scenario may be different.  Your dollar amount might not be $10,000, your tax rate may be different, and your tax benefit may be different, so please run your specific numbers through a cash flow analysis.

– These are just a few items to consider among several.

I encourage you to run the numbers to determine if prepayment is right for you, or call your financial advisor.

Greg Caramanica, CFP®

My family and I just got back from an amazing week long trip to Europe and it didn’t cost us a fortune!  But how?  Surely, travelling to German Christmas markets (see picture above) in the height of the Christmas season would not be cheap – or so we thought.

A great strategy (that I share with many of my clients) for managing family finances is to have a primary credit card that both husband and wife use to charge most of their everyday expenses.  This creates a centralized view of spending that makes it easier to identify when you are spending more than your budget allows and apply the brakes when needed.

This is not to say that you won’t have other credit cards.  You will likely need a  backup that you can use in case your main credit card gets stolen or is otherwise not usable.  It’s smart to use this backup credit card for monthly subscriptions and other recurring fees that you don’t want to be disrupted if your main card stops working (which may happen more frequently if you are using it for everything else).

If you are using a main credit card for the majority of your everyday family spending, it is best to pay it off monthly or else you’ll start to accrue finance charges that will negate the benefits of this approach.  You’ll also need to increase your emergency savings to cover a whole month of typical credit card spending, so that you can still pay your credit card balance from the previous month if you lose your job (or other disruption in income).

Using credit cards for everyday spending is not for everyone.  If you have a tendency to overspend when using them, there are other techniques and approaches that may suit you better. Talk to your financial advisor to determine the right technique for you.

But if it works for you, consider the potential travel benefits!  If you choose a credit card that has a travel rewards program (preferably with a low or no annual fee), you could build up benefits each year when using the card for the majority of your everyday expenses, which can add up quickly!

In our case, we were able to pay for four seats, round trip, from Washington D.C. to Munich, as well as a full week’s rental car with our travel rewards.  This shaved over a thousand dollars off the cost of our trip, leaving us with expenses related to food, beverage (gluhwein!), lodging, and souvenirs.  Lodging for most of the trip through AirBnB helped to trim that cost down even further – as well as a favorable exchange rate.  In the end, we probably spent less than $2,000 for a week in Germany.  And we had a great time doing it!

We also travelled to Austria to see the amazing Alps, pictured here:

If you’d like to talk more about this strategy and other strategies for affording the things you want in life, give us a call!

Danke (German for “Thanks”),

Greg

The end of year holidays are a joyous time that provide happiness to a great number of people. It is a time when we think of others and a time when the emphasis is on giving.

How do you survive the holidays, financially?

You might not like it, but the best way to control your spending is to create a plan and stick to it. This can be difficult for some, especially in the midst of the holiday season when the air is filled with excitement and the marketing machine of tv, radio, and print advertising perpetually encourage you to spend more.  The idea of constraining your spending during the holidays can stir up many emotions, leaving you with mixed feelings.

Even though planning your holiday spending can be uncomfortable, we can all agree that our loved ones and friends would certainly not want us to go into debt. If they found out that we spent months recovering our bank accounts after the holidays, I’m sure they would rather have something smaller or less expensive instead.  Could you imagine the guilt they would have if they found out they were the cause of your financial distress?

The balance of affordability and generosity is important. The holidays are certainly a time to give and feel good about bringing happiness to others. A proper financial plan can give you a feeling of freedom, knowing that you are spending in a responsible way and purposefully carving out time and resources for others without getting yourself into debt.  It’s the no-guilt holiday approach. Doesn’t that sound amazing?

When should you create your plan? Well, the best time is in the beginning of the year, in January to April.  This is the time when all your final numbers should be available about your prior year’s earnings, taxes, and spending when the buzz of the Holidays is no longer a factor.  Creating a plan outside of the holiday season will reduce the negative emotions.  Then, next year, you can look back on that plan and take your own advice, from a less emotional you, about how much to spend.

So, what can I do now?

Well, you can certainly take the time to prepare a rigorous plan during the holidays, but it’s better to wait.  In the meantime, create a preliminary plan just focusing on holiday spending.  You can do this by quickly looking back at last year’s spending and vowing to spend less.  This is especially important for those of us who spent months paying off credit cards or dipped into savings a little too much, sacrificing other financial goals we had been saving for.

If you review last year’s spending and didn’t feel like you needed to cut back, then congratulations, you are one of the few that fit into this category. Just make sure you are being honest with yourself!

In summary, a sound approach for surviving the holidays, financially is:

1. Take a quick look at last year’s spending and vow to spend less this year.
2. Create a quick budget from these numbers, understanding how much you can spend on each person.
3. Shop online if you can, so that you aren’t subjected to the messaging and spending environment as much as you would be if you went to the stores.
4. Stick to your plan when buying gifts this year!

Then, in the first quarter of next year:

1. Take stock of your earnings and spending for the previous year.
2. Build a robust financial plan where you are honest with yourself about your financial goals and how you plan to accomplish them, taking everything into account and prioritizing. As part of this, create a budget for the year, including next year’s holiday spending with a clear mind, free of the holiday “buzz”
3. And then, stick to your plan!

Happy Holidays everyone! Be safe!

Arlington Wealth Planning is a Registered Investment Advisor (RIA) and I am an Investment Advisor Representative (IAR).  Many people may be wondering what that means and why it matters.  Well, it’s a long story, but I will shed some light on the meaning here.

My understanding is that there are two main ways one can register themselves as a financial planner.  He or she can either be a Registered Representative (RR) or an Investment Advisor Representative (IAR).  Here are the big differences:

Registered Representatives:

• Work for a “Broker/Dealer” that is a FINRA member firm. The Broker/Dealer provides compliance and access to the investment marketplace.
• Are required to pass FINRA exams, such as the Series 7 (General Securities Representative) and the Series 63 (Uniform State Securities Law), and maintain them through continuing education and further examination
• Are usually paid through commissions.  For example, Registered Representatives would only get paid if you invest through them and typically they would receive commissions from the investment company.
• Typically are held to a standard of “suitability,” which means that they must provide investment advise that is suitable to the client’s needs

Investment Advisor Representatives

• Work for a Registered Investment Advisor (RIA) that provides compliance and access to the investment marketplace. In our case, Arlington Wealth Planning is the RIA and I am the IAR.
• Are required to pass FINRA exams, such as the Series 65 (Uniform Investment Advisor Law), and maintain them through continuing education and, possibly, further examination
• Are usually paid through fees.  For example, the customer would pay the advisor for services provided, at a pre-agreed upon price.  This payment is usually paid directly to the RIA and is not commission related (e.g. not paid as a result of selling an investment, but rather as a result of providing a service).
• Are typically held to a standard as a “fiduciary,” which means that they must have the client’s best interest mind, given their entire financial situation, when making recommendations.

Those two definitions may sound similar, but the last two bullets are significant – how we get paid and the standard to which we are held.  There is a trend in the financial planning industry toward fee-based compensation (the RIA/IAR model).  For instance, recently, the Department of Labor (DOL) published it’s Fiduciary Rule (currently on hold), which attempts to prevent retirement investments from being provided through the commission model (without a special contract).  The justification is that there is a perceived conflict of interest for financial planners who earn a commission on the sale of investments, in that they may be drawn to recommend investment products that pay them more commission.  While suitable, the product might not be the “best” product for the customer when you consider the rest of their financial picture.

This is where the standard is important.  The suitability standard simply means that the investment recommendation must fit the client’s need.  For instance, the client could ask the financial planner to invest $10,000 into a mutual fund.  The planner’s job, under the suitability standard is to find the mutual fund that best suits the client’s investment horizon, risk tolerance, objective, etc.  However, the fiduciary standard is different.  Under the fiduciary standard, the planner would collect information about the client’s entire financial situation to determine whether a mutual fund is what should be recommended in the first place.

This example is fairly simple, but the situation can become quite complex.  In our experience, the general sentiment of the people we serve is that they would rather pay a fee than a commission for financial planning.   We at AWP agree.   The fee-based business model makes more sense to us, as fees correspond to services rendered, and not to products sold.   Tying compensation to services means that there is more of an incentive for planners to provide quality service, not just to push more product.  We hope this means that customer service in the financial industry will be more important – like it is for us.