It’s 2021, and a lot has changed over the years for the better in the movement towards gender equality. Women increasingly feel empowered and ready to break the glass ceiling across industries. From CEOs to heads of state and from world-class athletes to influencers, women are at the forefront of change. They are joining the workforce in increasing numbers and taking up higher and more reputable positions on the corporate ladder.
However, despite women acquiring positions of power, there is still scope for progress when it comes to financial literacy and financial independence. Most money decisions, including investments, are still taken by the men in the family, irrespective of who the breadwinner is. Additionally, according to a 2018 study by the Pew Research Center, women earn just about 85% on average of what their male counterparts earn in the United States. Not only do they earn less, but, as per the same study, they also save less, live longer, and have more long-term health care expenses in retirement.
These statistics indicate the importance of financial planning for women. Careful, organized, and timely financial planning helps build wealth gradually. With a few simple financial planning tips, women may find it easier to manage their money and save for retirement.
In this article, we will explore five such tips women must implement to build their wealth, as well as how they can implement them.
Five Financial Tips for Women to Build Wealth
1. Get actively involved in your financial planning
Irrespective of whether you are a breadwinner in your family or not, it is highly recommended that women get involved in their family’s financial planning and decision-making process, as it is always better to be aware of the circumstances determining your family members’ overall financial habits. Step out of your comfort zone and be at the forefront of planning for your budgets, savings, and investments. For some of you, your spending habits will help you understand why your savings are small; for others, you may find out that you’ve been paying hefty hidden charges on financial planning and mutual funds, a cost that you could have easily done away with. Hence, knowing the state of your family’s finances will help you make informed decisions when creating and achieving your financial goals.
It is also good to take some time out to get up to speed with the developments in the financial space in investing. According to a 2018 Federal Reserve survey, women, on average, are not very comfortable making retirement investment decisions and show lower levels of financial literacy compared to men. Only 32% of women with a bachelor’s degree are comfortable managing their investments. If you are a woman who finds involvement in financial matters discomforting, the first step you can take towards being involved is reading up on investments. If you are not confident in educating yourself, we highly recommend enlisting the services of a financial advisor. Asking for professional help can be the difference between making a change to better your financial health and struggling to build funds and create wealth.
2. Establish short and long-term financial goals
To achieve financial freedom, an executable financial plan needs to be put in place that includes both short-term goals and long-term goals. Short-term goals are those which you can achieve within a year or two, such as funding a large electronic appliance purchase or saving for a family vacation. Long-term goals like saving for your retirement or putting children through college can take several years to achieve, which requires a more meticulous approach.
Don’t forget to consider the rising future costs when making executable plans. Factor in your healthcare costs, your family’s expenses, rising inflation costs that can make regular daily living more expensive, and so on. If you are offered a 401(k) or 403(b) plan where you work, it is highly recommended that you enroll in them, as it is an excellent place to start saving for the future. These plans are set up so that money is deducted directly out of your paycheck even before you get to see it. You can’t spend an amount you don’t have!
Here is a checklist of a few things that you could use as a guide to set up a saving plan for yourself:
• Gain an understanding of your household’s overall finances: Gather all your bills, and write down everyone’s monthly income and expenditure. Break down these expenses into needs and wants, and assess if you can cut back on certain expenses.
Read our article on 20 Tips to Spend Less and Save Money for some actionable tips on how to maximize your savings and limit your everyday spending habits.
• Plan periodic budgeting discussions with your family: Budgeting can be a family activity! It is beneficial to make your kids aware of and to involve them in certain financial planning fundamentals so that they too learn fiscal prudence as a way of life. Budgets provide a realistic picture of your finances. Once you know your monthly statement of earnings and expenditures, you can look for ways to improve your savings. It is also a good opportunity to automate deductions so that you can save before you spend. Aim to save at least 10% of your income.
• Take control of and manage your debt: Understand how debt works and understand repayments. Many debt counselors say that people often take on loans without realizing that they have to pay a lot more than they borrow because of the interest. While it is rarely a good idea to have loans, certain circumstances are unavoidable. Hence, it is good to keep an eye out for opportunities to pay off your loans at the earliest.
• Identify an appropriate investment policy for your financial needs: The kind of investments that are best for you at your level of income, lifestyle, and risk capacity will differ from someone else’s. Find out what works for you. If needed, you may speak to a financial advisor to assess your investment options. Some investments work for everyone – such as employer-sponsored plans. If your workplace offers the benefits, it is highly recommended to sign up for them. If not, consider enrolling in a retirement plan.
• Invest with care and monitor your progress regularly:Monitoring your investments at regular intervals is key to a good investment plan. Many millionaires vouch for this as the secret to their wealth. It is simply not enough to invest and forget about it. You need to check in once in a while to see how your investments are performing. Having a good investment strategy is key. Buying a group of the top global companies in the world and holding them for the long term is my strategy. Your aim should be to increase the value of your investments as time goes by. Note here that the value of money decreases with time. Therefore, it is crucial to invest wisely so that your portfolio can beat inflation and cross tax hurdles to create wealth for you in the long term.
3. Assess your risk tolerance
Risk tolerance refers to the level of risk an individual can withstand. This level varies from person to person, depending on factors such as age, income, number of dependents, their lifestyle, etc. A woman in her late 20s who does not have dependents may take higher risk with her earnings and invest in ‘risky’ assets such as private equity. However, a mompreneur (a mother who is an entrepreneur) will need to consider how much money she can afford to set aside and risk losing in a worst-case scenario. This is where risk management comes into the picture. Risk management will help you make calculated investments that buffer your portfolio from risks. Your investment decisions, nonetheless, should be tied to your financial goals. Gauge your capacity to take risks. If you are closer to retirement, it is generally not a good idea to be involved in high-risk investments. Note that there is a difference between how much risk you’re willing to take and how much risk you can afford.
4. Avoid falling into the consumer debt trap
Certain debts such as a home mortgage or college loans might be unavoidable in the path to achieving the goals you have set for yourself; in such cases, it is possible to manage your debt with a plan to budget for them. These debts are considered good debts because they are seen as investments.
However, there are also bad debts that you must avoid as much as possible. Credit card debt is one such bad debt. In January 2021, revolving debt that was mostly credit card debt was a staggering $965 billion in the US. This, however, is a continuation of a downtrend in credit card debts. It has dropped from over $1.1 trillion, a record set in February 2020.
Carrying credit card debt can be expensive. As interest rates go higher, the cost of carrying credit card debt also increases. A majority of credit cards have a variable annual percentage rate (APR) that changes based on an underlying rate that is indirectly related to the Federal funds rate. Many credit cards use the prime rate as the index rate. Every time the Fed raises interest rates, credit card interest rates soon follow, typically rising by the same amount as the Federal funds rate increase. As such, the interest quickly adds up, and you end up paying or owing a lot more on credit.
How to avoid falling into credit card debt
• Avoid purchasing things you can’t afford. Once you carry a credit card, it is easier to buy things you don’t need or can’t afford. It is essentially spending before you even have the money, which can add up to a lot of debt in the long run. Hence, it is recommended that you avoid going beyond your current means as much as possible.
• Always pay on time. Staying on track saves you a lot of money. Once you miss one payment cycle, the next payment will be much higher – a two-month payment plus late fees. It can get tougher and more challenging to catch up with your pending payments. If you notice a pattern in your inability to pay off your credit card bills, it is a good time to pause and budget accordingly before taking on more expenditures.
• Limit the number of cards you own. Owning several credit cards can impact your purchase decisions and might influence you to spend more than you can earn. Hence, it is good to limit the number of credit cards you own to prevent yourself from getting into a difficult situation beforehand, rather than having to deal with future worries.
5. Build an emergency fund
A 2020 MetLife survey states that more women than men say they live paycheck to paycheck (55% of women versus 44% of men). Also, according to the Federal Reserve, American women are more likely to report that they cannot bear an emergency expenditure of $400 and would have to employ some form of borrowing. This highlights the importance of setting up an emergency fund.
An emergency fund is a rainy day fund, also called a contingency fund. It is recommended to have at least 12-18 months of pay set aside as easily accessible money to pay for large and unexpected expenses, such as an unforeseen medical expenditure or even an unprecedented layoff from work.
Every time you receive your salary, it is a good practice to take some money out and transfer it to a separate bank account that you will not dip into unless a situation demands of you. Consistency is the key to creating a good emergency fund.
To sum it up
When it comes to financial planning today, women are often found having to balance ensuring a comfortable lifestyle for their family while also planning for a secure financial future. It is never too late to educate yourself on the potential to grow your finances, how best to save and invest your income, and to build towards your financial independence. Keep a tab on your income and expenditure, save for a rainy day, and invest in the right opportunities. Sometimes, it can be overwhelming to assess your financial state and build a good financial plan for the future. However, with steps in the right direction and with the right kind of guidance, you can certainly build wealth over time. Do not hesitate to reach out to a financial advisor for help.