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Making Up For Lost Time: Prepping for Return to Normal Spending in 2022

Making Up For Lost Time: Prepping for Return to Normal Spending in 2022

I originally wrote this blog post in July 2021. I am updating the post as a great deal has changed in our lives since last summer. We are still dealing with the impact of COVID on a daily basis; albeit, it is in many different ways. Our consumer habits are much closer to pre-pandemic patterns. We are dining in restaurants and shopping in stores. Travel is returning to more normal levels as well. All of that said, we are still a country very much dealing with this virus. Our hospitals are better equipped to handle life-threatening cases and, fortunately, those case numbers are falling. We are still seeing friends and family members test positive at a high rate, and we are frequently utilizing home testing kits to determine the cause of symptoms. I believe that most people are coming to the realization that COVID will be us, in some form, for many years to come.    

Through the first year and a half of the pandemic, we heard the phrase “new normal” ad nauseam. Pundits and media types love to tell us that this is a different time, situation, or environment than we have ever seen before. I tend to look skeptically at these prognostications because history has a way of repeating itself. However, this won’t be a new normal as much as a move toward “back to normal,” not only in our personal and social lives but also in our financial lives. 

In the chart above, 2020 became one of only two years since 2000 that Americans’ personal savings rate eclipsed 10%. Click here for the interactive chart. Source: Statista.com

Savings Rates Are Off Of Their Early Pandemic Highs

We all were forced to adjust our lives and adapt to a COVID world. We all stayed at home more and limited our exposure to crowded situations. A silver lining emerged from this very difficult period in our lives by way of our personal savings rates. Personal savings rates in the United States skyrocketed in 2020. The savings rate in 2020 was almost double that of 2019 and more than doubled the respective rates of 2016 and 2017

That’s changed over the last year. Savings rates have fallen off of their pandemic highs, dropping in all but two of the last 13 months since March 2021 and trending below the 10-year average. The recently released rate for the month of April shows that the savings rate for Americans hit its lowest level since 2008 (4.4%). This is likely a result of people’s spending habits returning to pre-pandemic levels as well as an increase in the cost of goods. Inflation is having a very real impact on household budgets. For this reason, we should review our cash/emergency savings levels and determine if we need to allocate more of our income to short-term savings accounts. The economy is facing headwinds that we haven’t seen in some time, and we should all be prepared for a possible slowing of economic growth. 

The Challenging Beginning to 2022

The domestic stock markets are dealing with myriad economic issues as we near the mid-year point. Supply chain issues caused by COVID shutdowns are still generating disruptions with companies trying to deliver finished products and keep shelves stocked. As a result, companies are having to forecast lower revenue projections, and the equity markets are reacting negatively. This, in conjunction with a bond market facing strong indications from the Federal Reserve of significantly higher interest rates, is stressing the fixed income markets and yielding an uncertain second half of 2022. The country is also seeing a shift away from work-from-home employment to workers going back to offices, stores, and production facilities. This puts pressure, particularly on technology companies such as Zoom, DocuSign, and others, which soared in the WFH environment and are now struggling to adjust to employees traveling back to work.

Assess Your Financial Situation 

Your financial life is in a different place than it was at the beginning of 2020. 

We are all attempting to find the correct footing for ourselves and our families in this post-pandemic, but still lingering COVID world. From a financial perspective, it is important to keep in mind that correctly positioned emergency funds are imperative. It is difficult to predict how 2022 will finish and where the economy will sit at this time next year. For that reason, reviewing your financial plan and understanding the impact of recent market downturns have had on your plan is critical. Prioritizing your financial situation during these times will most likely produce better results as the country hopefully gets beyond this current phase of COVID. 

Nate Condon, Financial Advisor

The Year of Impossible Choices: 2022 Market Outlook and 2021 Review

The Year of Impossible Choices: 2022 Market Outlook and 2021 Review

In last year’s market outlook, I described the current state of global monetary policy as a giant exercise in price control, specifically, control of the cost of capital. An environment in which perpetually falling rates and equity premiums favor longer duration growth stocks, but hardly resulted in what might be described as widespread prosperity. 

The (short-lived) revenge of the bottom half

During the grand re-opening of 2021, for a brief moment, dare I say it, things seemed to be going well. Bolstered by massive government stimulus and a strong job market, something remarkable happened to the average American household: they got richer.

While household wealth rising is not surprising given equity, real estate, and cryptocurrency gains, what was truly remarkable was the relative gain attributable to the bottom 50% of American households, whose share of total wealth rose above 2.5% in Q3. While the percentage remains low in absolute terms, we had not seen this metric rise above 2% since the 2008 crisis, and 2.5% was last witnessed in the early 2000s.

A tight labor market, marked by the “great resignation” (an unusual number of people quitting their jobs), has certainly contributed to the slight, but noticeable, narrowing of inequalities. For the first time in years, the labor market appears to have shifted in favor of workers, who may be in a much stronger position to secure higher wages, strengthening their ability to accumulate wealth. Direct COVID relief payments and expended child credits also contributed to this continued improvement in household wealth.

Unfortunately, before anyone could celebrate a resurgence of the American middle class, a much bigger story would steal the headline: the return of inflation. In the short term, moderate levels of inflation can have a beneficial effect on the job market, support asset prices, ease debt burden, and even reduce income inequality. In the long term, however, the upside risk to inflation makes me less than enthusiastic about the potential for a continued trend in narrowing wealth inequalities. 

While higher inflation means that everyone, in aggregate, gets poorer, some might get hurt more than others. Over time, cost pressures are likely to favor owners of productive assets at the expense of small savers and wage earners. A recent analysis by the Penn Wharton Budget Model already highlights the increasing burden on middle-income family budgets, who spent about 7% more in 2021 for the same products they bought in 2020 or in 2019.

The era of low inflation never started, now it may be ending

The return of higher inflation, in the form of her CPI numbers, was heralded as a momentous shift in the economic environment in 2021. After all, inflation has not been a major concern in most of the developed world in the last decade, some have even suggested that we lived in the era of low inflation, and central bank action certainly focused on fighting the perceived threat of deflation first and foremost.

I was never a huge believer in the idea of a “low-inflation era.” To be sure, we may have had moderate levels of inflation on average, but more importantly, we’ve had an era of uneven, patchy inflation, where falling prices in some areas were offset but rapid increases in others. 

What charts like the one above highlight, is that the supposed low-inflation era has, in fact, been an era of selective inflation. An era in which, broadly speaking, the price of things we don’t really need, like toys and electronics, has collapsed, but the price of things we need (say, food, housing, and healthcare…) has continued to rise. 

In this environment, it is perhaps no surprise that middle-class households hardly seemed to reap the benefits of low prices. All else being equal, and despite the prevailing inflationist narrative: no inflation is good, deflation is even better (how often have you complained about prices at the store being too low?). For two decades deflation has been limited to a relatively small segment of largely discretionary expenses, while higher costs in other products may have actually reinforced inequalities.  

Regardless of how the Consumer Price Index is composed, it is also important to recognize the limitation of the CPI (our policy makers’ main tool in measuring inflation). CPI is a complex set of data maintained by the Bureau of Labor Statistics. Over the years, its methodology has been revised multiple times, and most recent adjustments have tended, in my opinion, to make monetary policy look better. Some of the most convenient CPI adjustments include: substitutions (the idea that if something is too expensive, we’ll just buy something else, say lemons instead of bananas…) or, even better: hedonics (an adjustment made when a price increase isn’t actually deemed to be a price increase, but just a reflection of improved product features). Not to mention the fact that shelter, one of the largest components of CPI, is for the most part not collected using a market-based mechanism. Instead, most of the CPI’s shelter data comes from something called Owner Equivalent Rent (OER). OER is basically a survey of homeowners, who get asked a simple question about how much they think their property could be rented for (imagine calling your parents who’ve lived in their house since 1976, and asking them what they think the rent is). 

Regardless of how much I doubt inflation numbers, what became obvious in 2021 is that no amount of adjustments could make inflation look benign. Since March 2021, CPI inflation started exceeding the Federal Reserve’s 2% target and has continued to rise ever since.

In August 2020, the Federal Reserve implemented a new flexible approach to inflation, effectively warning the market that it may allow inflation to “run hot” for a while if it deemed necessary. We are now in our ninth month of excess inflation, and just how much more of these inflation numbers will be tolerated is unclear. 

Over the last few years, central bank officials have often felt the subtle (or not so subtle) pressure to keep their policy stance accommodative (remember Donald Trump praising Janet Yellen for being a “low-interest person?). But politicians and the general public can be fickle, and the pressure to remain accommodative can just as easily morph into a pressure to tighten. If inflation continues to take hold, being a low-interest rate kind of person may not look so flattering anymore.

The trillion-dollar checking account

I have long been telling clients that the pandemic could, somewhat counterintuitively, be the catalyst for higher inflation. By pushing governments and central banks to implement a combination of both extremely loose monetary and fiscal policy, they may just have poured fuel on a fire that had been simmering for years underneath the low CPI numbers. While 2020 saw unprecedented levels of new debt issuance and stimulus, a lot of promises only reached full implementation in 2021, which may explain the sudden, but somewhat delayed, change in inflation dynamics. 

The U.S. Department of Treasury’s general account with the Federal Reserve (effectively, the government’s checking account) spent most of 2020 swelling up to unprecedented levels: normally fairly steady at a balance of around $300 billion, it reached a balance of $1.8 trillion in mid-2020 at the height of the pandemic.

In contrast, 2021 was truly the year of the great spending spree, when checks were finally cashed, even as treasury bill issuance slowed. $1.6 trillion was promptly spent in a matter of months between February and July 2021. As Citi’s market strategist Matt King highlighted back in February 2021: the flood of cash created by the drawdown in the treasury’s general account (TGA) risked tripling the amount of bank reserves, and pushing rates even further towards zero or negative territory: “surfeit of liquidity and a lack of places to put it – hence the rally in short-rates to almost zero, with the risk of their going negative.” As King further notes, “if relative ‘real’, inflation-adjusted Treasury yields fall, it could weaken the dollar sharply (…) at the global level the TGA effect will indeed prove highly significant.

As shown above, real yield would indeed fall throughout 2021, to levels unprecedented in modern history, and one of the side effects of negative real yield may have been to propel the now-familiar “risk on” investment theme to new heights. We all thought money was cheap at -1% real rates in February, how about -6.5% In November? 

The treasury department wasn’t the only one spending. As it turns out, American households too were fast and loose with their checkbooks. Individual savings rates had risen during the pandemic and remained relatively elevated well into the beginning of 2021. Since March 2021 however, saving rates have fallen back to their pre-COVID levels.

Against this backdrop, it is perhaps no surprise that the “buy everything” ethos, long limited only to financial assets, now seems to have spread into housing, commodities, energy, various consumption goods, and even used cars.

With gains of nearly 50% since December 2020, the Manheim Used Vehicle index outperformed both the S&P 500 and the Dow Jones in 2021.

Impossible choices

Over the last decade, central bankers have been almost entirely focused on supporting the economy. With the threat of inflation only a distant concern, there has been basically no downside to perpetually flooding markets with free money. To be sure, central bankers have been fairly successful in averting deflationary fears and consistently driving down real (inflation-adjusted) rates. With short-term rates at zero and longer-dated bonds at historic lows, many observers felt that yields had nowhere else to go. Real, inflation-adjusted rates have no such lower bound. And as much of what the recent spike in inflation will be heralded as a change of regime, in many ways, it can also be seen as the culmination of a broader trend in lower real rates that started many years ago – and arguably as far back as the mid-80s.

With real yield deeply negative, and central bank balance sheets at all-time highs, 2021 brought the scale of global monetary policy to yet another record-breaking year. However, for the first time in over a decade, inflation may truly force central banking officials to tighten policy this time. So far, policy response in the U.S. has been mainly limited to tougher talk and a planned reduction of the pace of asset purchases (the now-famous “tapering”). While FOMC guidance does indicate an expectation of multiple rate hikes in 2022, the Federal Reserve will be walking a very fine line as it looks to change course.

One of the paradoxes of the current environment is the continued flattening of the yield curve. A flood of bank liquidity may have contributed to the collapse in real short-term rates but has not resulted in any real upward shift in long-dated bond yields. This could be interpreted in numerous ways. Perhaps the bond market is simply not buying the idea of long-term inflation or may think it raises the probability of a policy mistake (excessive tightening leading to a deflationary crisis), or perhaps the Federal Reserve’s bond-buying program has simply distorted bond prices to such a degree that rates no longer reflect any realistic growth and inflation expectations. Whatever the case may be, hiking rates in this environment would mean running the risk of yield curve inversion: a situation where short-term rates would exceed long-term rates. While not always predictive of a crisis, an inverted yield curve generally sends a very negative signal and isn’t consistent with a healthy economy, in which opportunity cost should correlate positively with time.

Central banking officials are very aware of the risk, and the issue of curve flatness was explicitly brought up by members of the FOMC in their December meeting. There is a certain common-sense logic to the idea that, before resorting to traditional monetary tightening policies (raising short-term rates) the Federal Reserve should first get rid of the more exotic, experimental, crisis-time measures, such as quantitative easing. Doing so may allow long-term interest rates to rise, resulting in a more constructive environment in which to hike short-term rates. After all, if the economy is strong, to the point of raising rates, why have QE at all? That does not seem to be what committee members are thinking. In fact, according to their latest minutes, they seem intent on doing the exact opposite: begin to raise rates as early as March 2022, and then tackle balance sheet reduction. Even so, balance sheet reduction would not resemble a complete termination of their bond-buying program, but would probably involve a monthly cap on the amounts of “runoffs” (treasury bonds allowed to mature without being reinvested). Assuming that the monthly cap on runoffs does not exceed monthly maturities, the net effect of this policy may be that the Federal Reserve will be continuing to buy billions of dollars worth of bonds every month for the foreseeable future. Presumably with the hope that slowing the pace of balance sheet reduction will act as a buffer against the possible negative effects of rate hikes. 

In this balancing act between tapering and rate hikes, one might perhaps perceive a subtle acknowledgment that central bank officials have made themselves into de-facto custodians of stock prices. After all, their previous attempts at an interest rate hike cycle in 2018 ended in a 20% market sell-off and had to be promptly reversed. At today’s valuations, a similar sell-off would wipe out nearly 10 trillion dollars of value from the S&P 500 alone. Ultimately, the message buried in the complex mix of central banking rhetoric may simply be that the Federal Reserve intends to stay behind the curve in its attempts to tackle inflation. That it intends to tighten policy slowly, while remaining accommodative and relying on the magic of negative real rates to support asset prices and the economy, tightening without tightening. Exactly how long they can get away with this in the face of higher inflation is anyone’s guess. Given the huge political stakes around issues of wealth inequalities, and with midterm elections around the corner, I expect pressure on the Federal Reserve to ramp up over the coming months. Backed into a corner, central banking officials may just have to pick between continuing to support market valuations and curbing cost pressures. However things turn out, 2022 may very well be the year when investors and US households alike realize that free money does have a cost after all.

Syl Michelin, CFA

2022 Investment & Market Outlook Guide

Syl Michelin’s piece is part of Walkner Condon’s 2022 Investment & Market Outlook Guide, a comprehensive reflection of 2021 and glimpse at the factors impacting the year ahead in 2022.

Another Banner Year or Start of a Drop? The 2021 U.S. Real Estate Market Outlook

Another Banner Year or Start of a Drop? The 2021 U.S. Real Estate Market Outlook

The challenges of 2020 were numerous and seemed unrelenting at times. It was difficult to find the silver lining in a year full of grey clouds. That said, there were a few bright spots in the financial world. The three major U.S. stock indices were all positive for the year as well as the domestic real estate market. Despite the headwinds of COVID, high unemployment, and strained budgets, real estate values continued to push higher with low inventories and historically low-interest rates helping to fuel the fire. The housing market will correct at some point, as all markets do, but will 2021 be the beginning of the drop or another banner year? 

A Brief Recap of 2020 

The U.S. real estate market posted another strong year of sales in 2020. The energy from 2019 continued right on through the majority of 2020. Due to COVID ramping up in the U.S., the first quarter and the beginning of the second quarter forced real estate professionals to adjust from in-person showings and open houses to a more virtual environment. Buyers adapted well to these changes and continued their frenetic pace. Attractive interest rates and low inventories created the perfect environment for sellers to receive top value for their homes.     

The Factors That Could Derail The Housing Market

The landscape for the 2021 real estate market looks quite encouraging, according to many of the experts in the industry. There are a few factors that will have a significant impact on the real estate market. These three factors are especially important because any one of them could be the impotence for a market cool down: 

1. COVID – We have all adjusted our lifestyles to best protect ourselves from the pandemic by reducing contact with others, limiting our travel, and wearing masks. However, if the pandemic really begins to accelerate or a new strain is introduced and causes panic, we could see people limit their exposure events further. Furthermore, if job losses increase, this could make potential buyers and sellers pause any housing activity. This could have a big impact on people’s willingness to go through the buy/sell process.

2. Remodeling – The “new normal” of working remotely and being more self-sufficient at home is creating a perfect environment for people to remodel their existing homes to better fit this lifestyle. People are renovating kitchens, finishing lower levels, and adding offices and workspaces to adapt. This runs counter to the idea of selling a current home and upgrading to a home with those features already in place. The demand for remodeling will likely create the momentum for another positive growth year in that sector.

3. Jobs – The U.S. economy has struggled with high unemployment as a result of the pandemic. Typically, high unemployment will absolutely slow down the real estate market, however, the housing demand stayed strong throughout 2020 in spite of high unemployment. That said, if the unemployment numbers worsen into 2021, then housing may start to feel the effect. 

The Tailwinds That Could Power The Market Through 2021

1. Housing Inventory – For the majority of markets in the U.S., the number of houses on the market isn’t enough to satisfy the number of people looking to purchase a home. This imbalance has helped to push values higher and keep the real estate market momentum strong over the last few years. However, if this imbalance corrects itself by a jump in new construction or more people deciding to sell their homes, the market would adjust and values would flatten out. The chief economist at Realtor.com is predicting new home starts will be up 9% in 2021. However, it doesn’t seem likely to slow the demand in 2021 as both of those variables take time to influence the market.

2. Interest Rates – Mortgage rates have been trending down over the last 2+ years as the 10-year Treasury yield continues to fall. The relationship between mortgage rates and the 10-year treasury is quite strong and has been decades. The friendly interest rate environment being utilized by the Fed is likely to continue, at least into, if not through the year 2021, which will keep mortgage rates at or near all-time lows. This is a huge motivating factor for buyers looking to purchase a home.

3. COVID Vaccines – While the initial rollout of the COVID vaccine is running at a slower pace than what was predicted, the experts believe that we will be back on track within the next month or two and hopefully have the majority of Americans vaccinated by mid-year. This could go a long way to instill confidence in the general public and provide additional fuel for an already hot real estate market, especially if real estate professionals can resume in-person showings for the late spring and summer months. The summer months could be phenomenal if consumer confidence accelerates. 

Outlook for 2021

Barring any unforeseen circumstances, as we all struggled with in 2020, the trends are leaning towards another strong year in the real estate market. We are likely to see the tailwinds mentioned earlier prevail for the entirety of 2021 and demand should continue at the previous year’s pace as a result of not enough inventory. Real estate markets, especially in the Midwest, tend to correct slower than the stock or the bond markets. The coastal markets in the U.S. do move faster and will be more susceptible to unpredictable events; however, the momentum is still strong across the country. The variables are in place for demand to outpace supply and attractive financing options to continue for at least 12 more months.

Nate Condon

2021 INVESTMENT & OUTLOOK GUIDE

This piece was part of Walkner Condon’s 2020 Review & 2021 Investment Outlook Guide, a comprehensive interactive PDF covering a wide range of subjects and trends, including the S&P 500, electric cars, and more. To read the full guide, please click the button below.

How to Hire a Nanny During COVID-19

How to Hire a Nanny During COVID-19

As those with children at home are well aware, the COVID pandemic greatly changed childcare in 2020, and those effects are still being felt as we move into 2021. Many schools are still not meeting in person, daycare centers are either closed or their services are interrupted, and generally speaking, most families’ “normal” childcare setup does not resemble what it looked pre-COVID-19. Not only do many families have to watch their children now that they are home, but they are expected to guide them through their school curriculum and still perform at their day job remotely.

Some families that pay for childcare saved quite a bit of money during the initial pandemic shutdown in early 2020 since they no longer had to pay the recurring childcare bill. However, as more families are back to work in 2021, childcare costs are again part of the monthly budget. I frequently have conversations with my “young family” clients that are expecting a baby. They commonly ask about the costs of childcare and want to plan for the increased monthly expenses. Unless your family is in the fortunate situation of having one spouse stay-at-home or have extended family in the area to help care for your children, you are probably going to have to pay childcare costs. A lot. “A lot” as in nearly the amount of a second mortgage in many cases. I’ve mentioned how expensive it is to raise children in a past blog post.

Instead of focusing on the fact that childcare is expensive, let’s focus on strategies to help reduce some costs, have more flexibility, and (potentially) be an alternative childcare option for those that are worried about how daycare centers etc. are handling their COVID-19 procedures and the exposure to more children. Additionally, we will outline how to go about hiring a nanny and some considerations that come along with that decision. Remember, I’m not an epidemiologist, doctor, public health figure, or the like. Rather, I’m your friendly neighborhood financial advisor that has simply received input from clients informing me that they like the idea of hiring an in-home nanny for multiple reasons: one of which is more control of who their child is coming in contact with in this COVID era (and even post-COVID era now that there is some light at the end of the tunnel with vaccines being rolled out). 

If my family decides to hire a nanny, where do I begin? 

First and foremost you will need to find someone that has demonstrated caretaking qualities, is trustworthy, and aligns with your family’s values. You should interview several candidates. You can find candidates through Care.com, local “Mom” groups, or by simply asking others in a similar life stage that are already in your network. If you are going to do a “nanny share” – where you and another family (or two) collectively find a nanny to watch your children as well as the other family’s children – ideally, you find a family that you get along with and have similar or complementary schedules. Joining a nanny share can considerably cut your costs, especially if you have additional children. For example, if you have one child and are paying $300/week for that child to go to daycare, your second child could very well double your weekly payment to $600/week for both children! With a nanny share, it is expected that you should give your nanny a pay increase when you have additional children, but it isn’t expected to double their pay. 

OK, we found a trustworthy nanny, now what?

I would recommend “doing it by the book”, and formally establishing an entity to pay your nanny. This means legally paying your nanny. To be more clear, this means NOT paying them cash under the table! I believe that there is a social obligation to your nanny when you hire them. Some of these responsibilities include withholding taxes for them and paying into unemployment. By formally reporting wages for your employee and paying into Social Security, you provide earnings history (in case they apply for a loan, for example) as well as help them earn Social Security credits. In the situation where you need to lay off or furlough your nanny, paying into the Unemployment Insurance program will allow them to collect unemployment benefits. During Safer-at-Home orders in early 2020, many families furloughed nannies. Assuming they are eligible, your nanny can receive some sort of income through the state unemployment program during their furlough. 

You are considered a Household Employer and your nanny is considered a Household Employee. Many simply establish a sole proprietorship in their name. This is the easiest route but could potentially expose you to more liability (vs. establishing an LLC, for example. You may want to discuss this with an attorney, as I cannot give legal advice). You will have to register for an Employer Identification Number (EIN) online through the IRS. One thing that is overlooked is for the Household Employer to have their nanny complete an I-9 form to show that their employee is authorized to work in the United States. 

I have my EIN, how do I handle taxes and unemployment insurance?

You will have to register your Household Employer through the state. If you pay your nanny more than $2,300 in gross wages to your nanny in 2021 (or $1,000 in any calendar quarter), you are required to withhold and pay Social Security, Medicare, and Unemployment Insurance taxes (see the IRS Household Employer Tax Guide). In Wisconsin, there are a couple of steps to do this. For Unemployment Insurance, you register through the Department of Workforce Development (DWD). You will also need to complete your Business Tax Registration through the Department of Revenue. One common misconception is that your nanny is a 1099 employee; this is not true! Your nanny is a W-2 employee. You should have them complete a W-4 form upon their hire (and associated state form, like Wisconsin’s WT-4) for withholding. 

When it comes to paying taxes, you will have to submit your nanny’s wages on a quarterly basis in Wisconsin. However, as a Household Employer, if your tax liability is low enough as determined by the Department of Revenue, they may change your filing requirement to annually. The Department of Revenue will send you a letter if this is the case. A common mistake is to submit your quarterly Unemployment Insurance payment to the Department of Workforce Development and neglect to submit your quarterly payment to the Department of Revenue, or vice versa. You need to complete both of these items every quarter (or every year, if you have an annual filing requirement). If you are a sole proprietor, you account for your nanny’s federal income taxes withheld taxes when you file your annual tax return, via Schedule H. A good habit is to automatically put your nanny’s withheld amounts in a savings account, knowing that you will have to submit those taxes at some point. You could also withhold an additional amount from your personal wages to help account for any extra taxes that might be due when you file your tax return. 

Now that I’m an employer, what risks are involved?

Being an employer with an employee exposes you to some risks. You should definitely consider a Workers Compensation Policy to protect you and your family in the case of your nanny getting injured or ill while on the job. Become familiar with the laws in your state, as some states require Household Employers to procure a Workers Compensation Policy. The State of Wisconsin does not require you to have a Workers Compensation Policy. 

How do I pay my nanny?

The mode of payment isn’t necessarily as important as tracking your nanny’s gross wages, taxes withheld (federal, state, Medicare, Social Security, etc.). For example, paying them by physical check or even Venmo is fine. I would highly recommend using a software such as NannyPay or HomePay. This will make it much easier for you to track and report quarterly wages to the state, generate a year-end W-2 for your nanny, or provide them with pay stubs. If you use a desktop version of payroll software (that’s correct, there are still desktop software options in 2021. Not everything is in the cloud!), be sure to back up your files frequently on an external hard drive. It would be a huge hassle to re-create your nanny’s wages and withheld amounts if your computer crashes. 

What else should I be on the lookout for?

Review options through your employer’s benefits package that might give you a tax break. I’m specifically thinking of a Dependent Care FSA. Most families that hire a nanny will pay their nanny more than $5,000 (the maximum a married filing jointly couple can contribute to a Dependent Care FSA in 2021) in a given year, you might as well take full advantage of using an FSA so you can pay a portion of child care expenses income tax free. Work with your accountant (or Walkner Condon Tax Services) to see what other tax breaks might be available to you, such as the Child or Dependent Care Tax Credit.

Have I talked any of you out of hiring a nanny? Seems like a lot of work, doesn’t it? It can be more work and more responsibility; however, speaking from experience, I think it is actually quite manageable. I know that my family (and some of my clients) have saved money by going the nanny or nanny share route. If this is something that you would like to learn more about, please reach out to me! I can give you my perspective as a financial advisor as well as my personal perspective since my family has decided to choose a nanny share setup over daycare.

Mitch DeWitt, CFP®, MBA

 

The Slow Pace of Fast Change in a Post-COVID World

The Slow Pace of Fast Change in a Post-COVID World

One of my favorite (perhaps apochryphal) quotes comes from the French novelist Gustav Flaubert who, while surveying Paris during the Franco-Prussian War of 1871 declared, “After all of this, we will still be stupid.” And while Flaubert’s view of human nature is perhaps slightly more negative than mine, I do think that one of the things at which we excel as a species is overstating the long term effects of recent or current events.  

That quote came to mind when I saw this morning’s headline from the Wall Street Journal: “Europe Lease Deals Suggest Traditional Office Will Endure in Post-Covid World.” The assumption at work in this headline is that a universally accepted truth in a post-COVID world has been that real estate rentals were going to take a hit, as businesses would all shift to work from home via Zoom and the various other productivity apps that link us. However, as this article suggests, the shift away from traditional offices to full-time remote working will likely not happen overnight.  

We have seen a sharp decline in travel in this pandemic, since even in the best circumstances, airplanes tend to be petri dishes of disease. However, this is not the first time that the industry has faced an existential crisis. Recall the predictions about the industry’s demise during the climate of fear immediately after 9/11. Students of history will remember that not two months later, a plane crashed outside of New York City, and, in December of 2001, the infamous shoe bomber was also arrested, compounding the fear of flying that was already in the atmosphere. Similarly, in an article in the Financial Times, airline experts believe that the industry will change– more point-to-point flights, perhaps fewer giant planes– but that ultimately, according to former head of British Airways Sir Rod Eddington, “if we get a vaccine, people will be back to normal in a year.”

None of this is to say change won’t happen– perhaps men will start washing their hands after going to the bathroom more— but the changes will be more subtle and less dramatic than we think. And, like taking our shoes off when we board airplanes, they will likely soon become the new normal.  

Perhaps the greatest confirmation of the fact that the ways of the world will be slow to change is that I, who passionately embraced working from home (almost as much as my dog), am writing this to you from our office on the corner of Glenway and Monroe.    

 

Keith Poniewaz