Full transparency: Before I had kids, I looked at day care graduation photos with a certain level of judgment and cynicism.
It seemed silly to me, like participation trophies. I liked the idea of celebrating just one major graduation, which represented the culmination of all a child’s academic achievements over the years. But then I had kids, and a realization hit … the graduation is not for the child. It’s for the parents! With two kids, day care is our largest monthly expenditure. Coming in well over our mortgage, we often feel the strain of juggling the cost of day care, our daily expenses, and savings for family vacations and retirement. So, I assure you that when it’s time for my children to graduate day care, I will be celebrating with the rest of those parents I used to silently judge!
In the meantime, I’m taking advantage of any and all opportunities to reduce the financial sting and plan for the much-anticipated moment when this monthly expense drops from our household profit and loss statement.
What I’m doing now
If your employer offers a dependent care FSA, take advantage of it! This type of account allows you to set aside pre-tax money for eligible dependent day care expenses. Essentially, money is withheld from your paycheck and goes into an account (before tax) to be used for day care, summer camp, nursery school, preschool, etc. You simply pay out of pocket, then submit claims to reimburse yourself. This is free money and a no-brainer. Note – these accounts do not roll over from year to year. Use it or lose it.
What I plan to do
It’s never too early to start saving to a 529 plan! Just like any investment account, compounding returns mean that the earlier you start, the more your investment will work for you, even if it’s only $25 per month at first. I get it: It’s hard. But it is very important to have accounts open and a funding strategy in mind by the time your kids are wrapping up day care. My personal goal is to divert the day care expenses that I am currently paying directly to our daughters’ 529 plans. I’m already accustomed to spending that money, so it should be painless to switch it over to savings. Otherwise, I risk lifestyle creep, and the money is consumed in any number of other ways. And since I intend to send my kids to public school, I will still have 13 years to grow and build their 529 plans. If you decide to take the private route, the 529 plan may still be a good option since $10,000 per year in private school tuition can be paid out of it. My colleague Ben Blake goes into more detail on 529 plans here.
What you should always be doing
This accumulation phase of life can be hard. How do you save for education and retirement, get away once in a while, and not take a vow of poverty? It is doable, but not without a meaningful understanding of your monthly budget and some real discipline. If you are struggling to save and pay bills, my recommendation is to start budgeting! It is empowering to be fully informed and able to hold yourself accountable for your day-to-day financial choices. Talk to your Parsec advisor about setting you up with a budgeting tool to help you get on track!
Of course, strategies vary depending on your own situation and goals. No doubt this can be a challenging phase of life, but your Parsec advisor is available to help you stay on track.
This article appeared in Parsec’s Q2 2020 newsletter available at parsecfinancial.com/newsletters/graduations-2020.