Unlocking Financial Independence: A Guide to Financial Planning for Women | INVESTEDMOM
Did you know that a whopping 75% of women are concerned about their ability to save for retirement? Even though women tend to seek financial advice more often, many of their investments often perform better than their male counterparts!
Financial planning for women is a complex topic that considers elements that men don't have to worry about, such as lower income due to wage gaps, breaks in employment due to motherhood, and the likelihood of longer life expectancy.
Financial literacy is essential to guide decision-making, make proper goals, and set you up for financial stability regardless of what the future holds. In this guide, we will discuss why financial planning is essential for women and how to get started on your investment strategy today.
Importance of Financial Planning
Planning for your financial future is something that every person must consider, but it is even more essential for women to start investing at a younger age. Why is this, you may ask? Many elements impact a woman's future financial situation.
Lower Pay
Even with all the work that has been put into ending the gender pay gap, women still earn less money than men. According to Forbes, in 2022, women earned 17% less than men, which equates to 82 cents for every dollar their male counterpart earns.
This means a woman must put away a higher percentage of their salary to get the same value each month. For example, most financial advisors recommend putting away 10% of your salary. A male making $100,000 a year equates to $10,000, but only $8,200 for their female counterpart.
This may not seem like a lot until you put these same values away for 20 years. The male will have $200,000 vs. the woman's $164,000, which doesn't even consider interest and dividends from investments.
Less Working Years
To complicate things further, women also tend to spend less time in the workforce. According to The United States Department of Labor, more women take leave than men, their average leave is longer than males, and they are less likely to receive pay during their leave.
In addition, women are more likely to take extended leave from work to raise children and take more time off to care for elderly loved ones.
These reduced years may result in less time to put away the same amount of money necessary for retirement. Also, because Social Security benefits are calculated by an individual's highest 35 years of earnings, it will lower future retirement income from Social Security if a person doesn't have 35 years in the workforce.
Longer Life Expectancy
As of 2021, life expectancy in the United States was 79.3 years for females and 73.5 years for males. A longer life expectancy means not only do women receive less pay resulting in a lowered ability to meet financial goals, but we tend to have less time in the workforce, receive less Social Security, and live longer.
You're probably wondering how you can even begin to climb that hill, right?! The good news is with proper financial education comes excellent financial decisions, which will set you up for a successful future.
Starting with Financial Planning
Financial planning is a lifetime commitment that you can start today! Essentially, you’ll want to create a financial roadmap. Here are the steps you’ll take to begin your financial planning.
Write Down Your Goals
Aside from just saving for retirement, what other financial goals are you trying to reach? These include things like buying a new car, paying off debt, saving up for the down payment for a new house, or even saving up for a vacation.
Knowing your larger expense goals and their desired timeframe up-front is essential to ensure that you aren't setting aside so much money you start to fall short in the other areas of your life.
Evaluate Your Cash Flow
Take the time to go through your monthly income and expenses. You need to know your monthly income from all sources and your expenditure. Separate your fixed costs and variable costs.
Fixed costs do not change month to month and include things such as a mortgage, rent, insurance, and anything that requires a monthly payment that stays the same. Variable costs change month to month and may include things such as utilities, gas, groceries, dining out, and personal expenses like getting your hair done.
Knowing how much you spend each month on essential needs like food and housing is vital so you know what extra cash flow you can allocate to investing and non-essential expenses like travel.
Once complete, you can start a budget using your cash flow information and financial goals. A financial advisor can help you throughout this process and use your desired timelines to set achievable goals.
Importance of Saving
Saving and investing though different, are both essential to secure your financial future. Savings involves setting aside money for short-term goals and emergencies, while investing primarily aims to grow your wealth and achieve long-term goals such as retirement.
Many apply the "Pay Yourself First" concept. This concept means you prioritize savings and investments by treating them as non-negotiable expenses as long as your essential bills are paid first. Paying yourself first means you will consistently contribute to your financial goals.
Some excellent strategies to help increase your savings include:
Automate your savings by setting up automatic transfers that are transferred as soon as you receive your paycheck,
Develop your budget around your savings goals,
Start small and gradually increase over time to give yourself time to adjust,
Find out how much you are spending on unnecessary expenses and cut back on them,
Use windfalls such as bonuses, inheritances, and gifts wisely by using them to boost your savings,
Limit impulse buying by making yourself wait before making purchases, so you have time to consider them,
Downsize, declutter, and sell items no longer in use, and
Continually monitor and track your progress to stay motivated and make adjustments.
Building an Emergency Fund
An emergency fund is essential to ensure your financial future. This money acts as a buffer in the event of unexpected expenses and emergencies. An emergency fund helps you avoid high-interest debt, offers you stability, and can even provide opportunities if investment or career opportunities come your way that require money.
How much should be in your emergency fund? If you search the internet, you will see various answers. The truth is it varies from person to person based on monthly expenses, family size, job stability, and risk tolerance.
An excellent place to start is aiming for three to six months of living expenses. If you have dependents or a less stable career, aiming for six months provides extra financial security.
To get started:
Assess your monthly expenses
Set your savings goal
Create a separate account specifically for your emergency fund
Start small, especially if it's overwhelming. Even $500 is a good start.
Make regular contributions
Investing Basics
Now that we have discussed saving let's talk about the basics of investing and investment strategies. Investing is placing your money into various assets with the goal of generating returns over time. Unlike a savings account, investments have the potential to provide additional income.
Types of Investments
There are a variety of options available that will help you reach your financial goals. These include stocks, bonds, mutual funds, and ETFs.
Stocks
When you purchase stocks, you essentially get partial ownership of a company and benefit from its growth and profitability. Stocks are a great option because you don't have to have a lot to invest, and they have higher returns long term. They are, however, volatile and not a great option for a short-term investment.
Bonds
Bonds, on the other hand, are debt securities issued by governments, municipalities, and corporations. They typically offer lower returns but are less risky than stocks.
Mutual Funds
Mutual funds are typically managed by a financial advisor and offer a more diversified portfolio because they can include a mix of stocks, bonds, and assets. The mix helps to spread risk but be aware you may need more money upfront, and there will be fees if a financial advisor manages it.
Exchange-Traded Funds (ETFs)
EFTs are similar to mutual funds, but you can trade through stock exchanges. They typically offer lower fees than mutual funds while keeping a diversified portfolio.
Every investment carries a level of risk, so selecting investment options that meet your risk tolerance and diversifying so you aren't putting all of your eggs in one basket is essential.
Planning for Retirement
Planning for retirement is essential to ensure you have financial resources once you stop working. It allows you to maintain independence, accumulate savings, benefit from compounding, and adapt to changes in life circumstances. Several savings options include 401K, IRA, and annuities.
401K
An employer typically offers a 401K retirement savings plan where you contribute a portion of your pre-tax salary. Many employers will also contribute to your 401K, which helps you accumulate more money faster.
Individual Retirement Account (IRA)
An IRA is a savings account you can set up through an employer or yourself. Traditional IRAs are tax-deductible, and earnings grow tax-deferred until withdrawal, while Roth IRAs are tax-free because the contributions are made after taxes.
Annuities
Annuities are financial savings that provide a stream of payments over a specific period of time once cashed out.
Each option has specific benefits, eligibility criteria, and tax implications. If you are unsure how they will apply to your individual situation, contact a financial advisor who can guide you through the process.
Insurance and Estate Planning
Insurance is essential to protect against events that lead to financial hardship. Different types of insurance address risks like health, life, disability, and property. Assess your needs and choose coverage that aligns with your situation and goals.
Will and estate plans outline how you want to distribute your assets after death. Ensuring your assets are distributed as intended and loved ones are cared for is critical. Consult an attorney to ensure documents are legally sound and align with your state's laws.
Your insurance needs and estate planning will change over time as you continue to acquire more assets and grow your family, so ensure you keep it up-to-date.
Start Planning Today to Secure Your Financial Future!
As women, it is essential to start financial planning early because we have more barriers that affect our saving potential. Start by writing down your goals, knowing your cash flow, and building an emergency fund before you start your investment strategy.
Once you are ready to invest, look into the options that work best for you during that time and slowly diversify over time. If you need help taking control of your financial future, let’s chat! I am here to help guide your efforts and ensure your money is working for you and your future.
Meet the Author:
Inge was born and raised in Cape Town, South Africa, and moved to Canada in 2010 looking for a better life. She always had an entrepreneurial spirit and started her first side hustle when she was 9 years old – selling fudge at school during lunch breaks.
It wasn’t until much later that she realized that saving isn’t enough to get ahead. She was always very interested in real estate, but saving up for a down payment was grueling and slow, and the demands of life kept getting in the way.
She started investing in herself and upgrading her skills while learning how to invest. She quickly became debt free and compounded her money at a staggering rate.
It wasn’t until she became a coach that she realized how significant an impact she can make in people’s lives by sharing her journey, learnings, and processes.
So here she is, advocating for everyone who is invested and wants to build their wealth, especially the mommas!