5 Ways Women Can Take Control of Their Finances
Women’s individual and collective experiences, situations, challenges and solutions vary widely. This makes it nearly impossible – and irresponsible – to apply a “one size fits all” approach to women’s wealth management. But one thing we do know, our paths to achieving financial stability and success can vary greatly from those of men. Rather than proposing rigid investment strategies, let’s explore five approaches professional and breadwinning women can employ to take control of their finances. I attempted to remain agnostic to tax filing status or dependents.
1. Close your personal wage gap
Despite breadwinning women’s continued achievements, perseverance and pure grit, the gender wage gap is still a “thing” in 2022. In 2020, women working full time were paid 83 cents to a man’s dollar in the same occupation. In fact, a recent article from the National Women’s Law Center reports the gap is widening for many women based on race and ethnicity. While this is upsetting based on principle alone, the wage gap’s detrimental impact on women’s ability to amass wealth accumulation can be devastating. For example, any employer-sponsored retirement plan’s company “match” and your social security benefits are directly related to how much you earn.
One of the best moves to secure your ability to save and invest in your financial future is to know your own worth, then make sure your wage reflects it. In their award winning book, “Women Don’t Ask”, co-authors Linda Babcock and Sara Laschever assert that by neglecting to negotiate a competitive salary for a first job, a woman may sacrifice over a half a million dollars in earnings by the end of her career. This is why it’s imperative you take steps to close the wage gap for good by advocating for the person’s wage you can influence the most – yours! Negotiating a raise can also help cushion your bottom line in the long run.
The last thing I suggest in developing a plan to close the wage gap is reaching out to a female colleague to see if she’d be open to sharing her experiences. Flushing out a sound strategy with someone whose trudged the path before can go a long way in building your own approach. If women are to steer their course towards financial and merit-based equality, we must identify the problem, propose solutions and begin to implement change. That change starts with us.
2. Save smarter
Through countless studies and research papers, a New York Times report conclusively proves what we’ve known all along: women make fantastic investors. Women are savvy; we know that time in the market is a much better strategy than trying to time the market. It’s smarter to focus on achieving long-term wealth. This may mean structuring an investment portfolio for the future or solidifying a liquid emergency or opportunity fund. Some wealth acceleration opportunities such as home ownership or an inheritance are circumstantial, but most are not.
Breadwinning women work hard, and their money should work hard for them too. I always encourage maximizing contributions to an employer sponsored retirement plan (401k, 403b, etc.) and building an investment portfolio. Deploying stock-based compensation such as stock options and restricted stock units is another wise choice.
I urge women to direct the course of their wealth building potential by tuning into their long-term risk tolerance through asset allocation and using asset location to their benefit. These two underemployed but intelligent investment strategies can help your money work smarter.
Asset allocation and market risk tolerance: The internet is inundated with outdated “rules of thumb” to use in determining the appropriate proportion of equity (stocks) or fixed income (bonds) to use in a portfolio. While general guidelines can certainly help simplify a task at hand, the stakes are too high for women to blindly apply these strategies to their financial future. The investing and retirement planning landscape has changed dramatically in recent decades, as we (especially women) are living longer while “safe” investment yields are decreasing.
Instead, let’s adopt a modernized philosophy – one’s financial goals determine their asset allocation. In his CBS News article, author Larry Swedroe defines asset allocation as “the process of investing assets in a manner reflecting one’s unique ability, willingness and need to take risk.”
Risk consists in three parts:
- Ability to take risk: Investment time horizon, need for liquidity, stability of earned income and the flexibility to adapt.
- Willingness to take risk: The eat well/sleep well trade-off. Taking more risk is required to enable the possibility of higher expected returns (eat well). However, if investors take more risk than they are emotionally able to handle, they will be unable to sleep well during the inevitable stock market downturns.
- Need to take risk: The rate of return required to achieve financial objectives [and goals].
By utilizing the evidence-driven approaches of asset allocation and market risk tolerance, women are empowered to personalize their investments to their specific needs, wants and wishes. This allows more autonomy and confidence for the long haul.
Asset location: How you save can significantly impact the rate at which your investments grow and accumulate. With such busy lives, it can be tempting to set your investment strategy to auto pilot by picking a cookie cutter target date fund. But what if you could maximize your potential net return just by strategically choosing the most optimal type of account to hold your investments?
An article from TheStreet delves into why equity investments receive beneficial tax treatment in comparison to earned income and other ordinary income-producing positions, like alternatives and bonds. Asset location comes into play to determine the most tax-efficient type of investment account to hold your investment positions. For example, sheltering tax-inefficient assets (bonds and alternatives) in tax-deferred accounts and placing tax-efficient assets (stocks) in taxable accounts can generally reduce your effective tax rate and give you more control over taxable events.
3. Take control of your student loan repayment strategy
It’s often said that “good debt” is any loan used to leverage an asset, such as a mortgage to purchase a house or a business loan to grow a company. Women student loan borrowers – who invested in their education also invested in their greatest asset – themselves! While the long-term earning potential and intrinsic benefits are sound, the devastating emotional and financial impacts of student loans often overshadow them. Student loan repayments can impact the ability to save for retirement by having to repurpose those dollars to meet minimum payments. For both your mental and money health, make a commitment to take control of your student loans.
Most women would not execute a major change to their investment portfolio without sufficient deliberation or purchase real estate without first conducting a thorough inspection. Prior to deciding what to do with your student loans, it’s important to understand what type of loans you actually have, the amount you actually owe and your current repayment plan. While your loan servicer’s statements and loan documents are nice, the most effective tools for assessing the current state of your student loans are either your credit report (for private loans) or the National Student Loan Data System (NSLDS®) database report (for public loans).
The “best” repayment strategy depends on a variety of factors, but most important is your big-picture financial goals. There are many paths available, and all the options have tradeoffs, risks and rewards depending on your circumstances, financial values and personal goals. Define them, or enlist the help of a professional to discover your options or eligibility for forgiveness.
4. Protect the Golden Goose: You
Protecting your current wealth – and the potential growth of your wealth – during your earning years is essential to sustaining it. Your ability to contribute to your saving strategy towards your financial goals and protect future earning potential should be a key consideration in your financial plan. And yet, women breadwinners tend to be underinsured. In addition to striving to close the wage gap, we should also take an interest in closing the gender insurance gap. According to a 2020 study by Life Insurance and Market Research Association, only 47% of women have life insurance, compared to 58% of men. And when women are covered by life insurance, the average level of coverage is significantly lower.
Spend some time revaluating your risk management policies. As your income and wealth grow, it’s important you have sufficient life insurance to cover any liabilities or to create a legacy. If you can no longer work due to a health-related issue, disability insurance is critical to support your current standard of living. If you own a company, consider business overhead expense insurance, which pays a benefit to the business should you become disabled. This will ensure the continuity of your life’s work. Obtain adequate property and causality insurance, and as your wealth grows, consider adding an umbrella policy.
5. Work with professionals that get YOU
They say it’s lonely at the top, but you don’t have to plan your financial future alone. Should you choose to partner with a wealth advisor or financial counselor, collaborate with a professional that intrinsically understands the unique financial challenges professional women encounter. An advisor should be committed in educating you on all your options so you can feel empowered in your money matter decisions. Partner with a compassionate professional that validates, encourages, and helps you plan for your ambitions, endeavors and specific goals. Anything less is just noise.
If you take one point away from this article, I want you to remember this – you are your biggest advocate! You are worthy of reaching your financial dreams to live your best life. While all of wealth management journeys are different – we all want to end up in the same destination – happy, fulfilled and living our best life.
For more than a decade, Cogent has been advising successful professionals, high-achieving entrepreneurs, and similar highly motivated individuals and their families on how to mitigate unexpected risks in their financial plans. Let us assist you in better understanding where you are at, what may stand in the way of your getting there, and how to leverage an evidence-based investment portfolio to convert well-laid plans into decisive action.
At Cogent Strategic Wealth, we offer a fresh approach to helping you Design | Build | Protect Life on Your Terms. What would your best evidence-based investment portfolio look like? To find out, sit down with us today for a Cogent Conversation. We’ll listen to what success looks like for you, explore any challenges your family faces, suggest how to protect your portfolio from inflation, and help you build and manage that portfolio every step of the way.
Don’t manage your family’s financial future all on your own. Book your Cogent Conversation today!
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© 2022 Buckingham Strategic Partners® This article was written by Becca Craig and previously appeared in Buckingham Strategic Partners Perspective