How to Calculate Your Savings Rate
Episode 108R
Episode Guide
Episode Summary:
Episode Timestamps
ChooseFI Podcast Episode Show Notes
Episode Summary
In this episode, Penny and Rebecca provide insights on 529 ABLE plans and special needs trusts, discussing their complexities and importance in financial planning for individuals with disabilities. Brad shares personal experiences, including a 28-hour travel ordeal with a toddler, while the hosts explore savings rates and methods to calculate them. Community input is invited to compile resources for special needs financial planning, emphasizing collaboration within the financial independence community.
Key Takeaways
- 529 ABLE Plans: These are tax-advantaged savings accounts for individuals with disabilities, allowing them to save for qualified expenses without losing eligibility for means-tested benefits.
- Special Needs Trusts: Essential for managing assets for individuals with disabilities while preserving access to government benefits.
- Savings Rates: Vital for assessing financial health and independence.
- Community Engagement: Valuable in gathering knowledge and support for special needs financial planning.
Actionable Takeaways
- Evaluate your personal financial situation and consider setting up a special needs trust if applicable.
- Track your contributions to investment accounts to simplify savings rate calculations.
- Engage with the community to gather insights on unique financial planning needs.
Timestamped Highlights
- Podcast Intro: Introduction to the episode topics.
- Discussion on 529 ABLE Plans and the importance of special needs planning.
- Key insight on the complexity of these topics provided by William.
- Funding a special needs trust as part of executing your will.
- Feedback from the community regarding special needs financial planning.
- Emphasizing community resources for special needs planning.
- Join the financial independence movement!
- Understanding the significance of savings rates.
- Methods for calculating your savings rate.
- Conclusion and book drawing information.
Discussion Questions
- What are the key benefits of using a 529 ABLE plan for your child with special needs?
- How can families balance savings and investment strategies for long-term financial health?
- What are the common challenges faced by parents of children with special needs in financial planning?
Related Resources
- The Simple Path to Wealth
- Design Your Future by Dominick Quartuccio
- Freelance to Freedom by Vincent Pugliese
Speaker Highlights
- Brad: Reflects on family vacations and the challenges of travel with children.
- Jonathan Mendonsa: Discusses community engagement in financial planning.
Important Terminology
- 529 ABLE Plan: A tax-advantaged savings account for individuals with disabilities.
- Special Needs Trust: A trust designed to manage assets for a person with disabilities.
- Savings Rate: The percentage of income that a person saves as opposed to spending.
Email Campaigns
- Join the conversation on special needs financial planning resources!
- Track your savings rate effectively with our best practices!
Podcast Conclusion
Participants are encouraged to engage and share resources in the financial independence community, especially in the realm of special needs planning, to help build a supportive network for those in need.
Podcast Extro: "You've been listening to ChooseFI Podcast, where we help middle-class America build wealth one life hack at a time."
Understanding Special Needs Financial Planning
When planning for the future of a loved one with disabilities, consider integrating comprehensive financial tools such as 529 ABLE plans and special needs trusts into your strategy. These instruments are pivotal in ensuring that individuals with disabilities can live with dignity and security without jeopardizing their access to essential benefits.
What are 529 ABLE Plans?
529 ABLE plans are tax-advantaged savings accounts specifically designed for individuals with disabilities. These accounts allow individuals to save for qualified expenses without affecting their eligibility for government benefits like Social Security and Medicaid.
Action Item: Research potential 529 ABLE plans available in your state and evaluate their fee structures and investment options.
Special Needs Trust: Why It Matters
A special needs trust is a powerful tool that allows families to provide for a loved one with disabilities without compromising their eligibility for public assistance. This legal arrangement ensures that funds are allocated for the beneficiary's needs without affecting their access to critical services.
Key Insight: The timing of funding a special needs trust is crucial. Funding should ideally coincide with executing your will, and care must be taken to consider tax implications, as improperly funded trusts can lead to high tax liabilities.
Calculating Your Savings Rate
Understanding your savings rate is essential for financial independence. Your savings rate is calculated as the total amount saved divided by your total income. Accurately tracking both your savings and your expenditures will give you clarity on your financial status.
How to Calculate Your Savings Rate:
- Track your income: Include all forms of income such as salary, bonuses, and returns from investments.
- Track your savings: Document all contributions to savings and investment accounts, including retirement plans.
- Use the formula: Savings Rate = (Total Savings / Total Income) x 100.
Tools for Success in Financial Planning
Online Resources and Communities
Engaging with communities focused on financial education can be immensely beneficial. The ChooseFI community, for instance, provides tools, templates, and shared experiences that enrich personal finance knowledge.
Action Item: Join the ChooseFI community to access resources and connect with others facing similar financial planning challenges.
Financial Education Materials
Invest in quality educational resources to deepen your understanding of financial independence. Books like "The Simple Path to Wealth" or "Design Your Future" by Dominick Quartuccio can provide valuable insights into wealth building and financial literacy.
Actionable Steps for Effective Financial Planning
- Evaluate Your Financial Situation: Regularly assess your financial landscape and consider setting up a special needs trust if applicable.
- Automate Savings Contributions: Consistently transfer funds into your investment and savings accounts to simplify your savings rate calculations.
- Track Your Financial Activities: Use spreadsheets or financial tools to log all transactions, ensuring that you can easily compute your savings rate.
Engage with Your Community
The importance of collaboration cannot be overstated in financial planning. Engaging with others can provide unique insights and practical advice that may not be readily available through traditional resources.
Discussion Questions to Consider:
- What benefits have you found using 529 ABLE plans in your financial planning?
- How do you balance savings for investment and budgetary needs?
- What common challenges do you face when planning for the financial future of a child with special needs?
Conclusion: Take Ownership of Your Financial Journey
Financial independence is not just about saving; it's about taking ownership of your financial journey. Understanding the tools available for special needs planning and calculating your savings rate sets the foundation for a secure future for you and your loved ones.
Your Call to Action: Start today by evaluating your financial plan, research the right tools, and engage with your community to enhance your path to financial independence. Join the movement towards financial independence and empower yourself and your family!
- Jonathan is back from 20 days with family in Zimbabwe, and Brad recaps his Christmas vacation.
- Brad and his family added 12 board games to their collection.
- William, from Monday’s episode, set out a road map for people who want or need to safe guard finances for special needs children or other dependents.
- Key: fund your trust as a part of executing your will to minimize tax liability.
- Start with a 529 Able, but as you reach $100k, begin to look at the next steps.
- Comment from Rebecca, that the 529 Able accounts in Nevada have higher fees than she preferred, so she’s funding a traditional 529 Plan and will eventually rotate it into a 529 Able.
- Every state currently has its own set of 529 Able options.
- Voicemail from Penny, who has a special needs trust and was on disability for 16 years, but has been back to work for the past 12 years and is now working to help her parents with their healthcare and financial needs.
- Financial independence is the ability to do the things that bring you joy, whether they bring in money or not.
- In 2019, ChooseFI is bringing in experts to answer specific, technical questions.
- William is helping to build the website and a more user-friendly local group site.
- Brad is going to Camp FI in Florida soon.
- How to calculate your savings rate:
- It sounds simple at first What You Save/ What You Earn. The Crux is what you consider Savings and What You Consider Income
- Four different ways to calculate:
- Gross total compensation
- Take your total savings/investments and divide by your total Gross compensation
- Take-home pay
- Take your total savings/investments and divide by your Take home pay
- After-tax compensation
- Take your total savings/investments and divide by your after-tax compensation
- After Tax Compensation with Adjustments for Pretax vs Taxable Savings
- This is similar to method 3 but it accounts for the fact that you haven't paid taxes on your pretax accounts
- Gross total compensation
- Article: How To Calculate Your Savings Rate
- Jonathan Uses Mint to track consumption and Personal Capital to Track Net worth then uses W2, Tax Return or last paycheck of the year for reconciliation. There are several flaws in this approach. Mint does a poor job by default separating investments and savings from consumption (spending) without manual help. Personal Capital is excellent at displaying current net worth but if you have lots of contributions it can get be messy to extract contributions from the dividends gains and losses over an extended period of time
- Brad uses an excel sheet with three tabs: Profit & Loss (P&L), Net Worth, Accounts.
- In the Accounts tab, Brad records savings in each account at the beginning and end of the year, and totals up monthly expenses (cost of electric in Jan., Feb., Mar., etc.).
- Does Brad track every one of his credit card expenses?
- Net worth = add up all your assets and all your liabilities.