The Rx for Women’s Financial Health
For many women, thinking about finances just isn’t a priority. Perhaps we think a spouse or partner is watching out for us. We may be busy trying to balance work and family. Or maybe we’re just afraid because we see so many options and so many risks—with so much riding on each decision. So what is the cure for this disease? Women need to conquer their concerns and take control of their own financial health. Statistics such as these tell us why:
• The average age of widowhood is 56.
• Seventy percent of baby boom women will outlive their spouses.
• One out of every two marriages ends in divorce.
• By 2020, 80 percent of people over the age of 65 who live alone will be women.
While those numbers are alarming, there are five simple steps women can take to help ensure their financial future. (And, yes, these steps apply to men, too!)
Step 1: Know what you have and where you have it
Consider yourself a “company” for a moment and develop an income statement and balance sheet. For the income statement, add salaries, interest from savings and any other “incoming” money. Then subtract out fixed expenses such as rent or mortgage payments and variable expenses such as groceries or utilities. Don’t forget to subtract out money for savings every month — pay yourself first.
After determining your net income, develop a balance sheet. Add your assets, such as cash, investments, and the value of your home, and subtract out liabilities. These may include what you owe on your home, credit card debt, and loans. The result is your net worth. As you go, record where you have your money and other assets. Note where you keep important documents and share that information with someone you trust.
Step 2: Understand debt
Debt sometimes gets a bad rap, which is unfortunate. Most of us couldn’t afford a home without incurring debt—that mortgage helps us achieve our goals. But debt can be costly, as anyone who has ever run up credit card bills would know. To keep debt under control, your mortgage should be 30 percent or less of your gross pay. No more than 10 percent of your take-home pay should go to cover your other debts.
Step 3: Invest
To make sound investment decisions, consider your financial goals, assess the risks and rewards of various options, and evaluate the effects of diversification and time on your expected returns. Asset allocation (diversifying your portfolio among stocks, bonds, and cash) is the key to successful investment planning. Studies have shown that as much as 90 percent of your portfolio’s return comes from the asset allocation decisions you make—not from the selection of an individual stock or bond.
Generally, the higher the possible return on an investment, the more risk you take. Consider the types of risk that can affect your choices—and don’t forget the risk of inflation. If your portfolio does not provide you with a return that beats inflation, your purchasing power will erode over time. Fortunately, you don’t need to make investments without sufficient information. Financial advisors at banks and other institutions can assist your decision-making.
Step 4: Plan for retirement
OK, you’ve heard it before, but have you done it? Do you routinely save for retirement? Are you saving enough? To determine how much you’ll need when you retire, estimate the amount needed for the lifestyle you desire — a rule of thumb is 75 percent of current income. Factor in the number of years until your retirement and how many years you expect to live in retirement. Finally, factor in inflation. There are many free “retirement calculators” on the web that can help you perform these calculations.
Once you determine your goal, subtract what you will receive from Social Security and from any pension plan you may have; this will clarify what you need to save. Put money away first in tax-exempt vehicles like your company’s 401(k) or an IRA. The earlier you start saving, the better, but it’s never too late to start.
Step 5: Plan for the worst
Following the first four steps will put you on the path to financial well-being. Still, there may be some crises beyond your control. You could lose your job, or your partner could leave—or unexpectedly die. Don’t wait for the crisis to hit to take action. Start today. Set aside three to six months of living expenses. Review your life insurance and disability insurance. Make sure your will or trust is up to date.
It’s well worth the effort. Planning today will help ensure your financial health tomorrow. tpw
• The average age of widowhood is 56.
• Seventy percent of baby boom women will outlive their spouses.
• One out of every two marriages ends in divorce.
• By 2020, 80 percent of people over the age of 65 who live alone will be women.
While those numbers are alarming, there are five simple steps women can take to help ensure their financial future. (And, yes, these steps apply to men, too!)
Step 1: Know what you have and where you have it
Consider yourself a “company” for a moment and develop an income statement and balance sheet. For the income statement, add salaries, interest from savings and any other “incoming” money. Then subtract out fixed expenses such as rent or mortgage payments and variable expenses such as groceries or utilities. Don’t forget to subtract out money for savings every month — pay yourself first.
After determining your net income, develop a balance sheet. Add your assets, such as cash, investments, and the value of your home, and subtract out liabilities. These may include what you owe on your home, credit card debt, and loans. The result is your net worth. As you go, record where you have your money and other assets. Note where you keep important documents and share that information with someone you trust.
Step 2: Understand debt
Debt sometimes gets a bad rap, which is unfortunate. Most of us couldn’t afford a home without incurring debt—that mortgage helps us achieve our goals. But debt can be costly, as anyone who has ever run up credit card bills would know. To keep debt under control, your mortgage should be 30 percent or less of your gross pay. No more than 10 percent of your take-home pay should go to cover your other debts.
Step 3: Invest
To make sound investment decisions, consider your financial goals, assess the risks and rewards of various options, and evaluate the effects of diversification and time on your expected returns. Asset allocation (diversifying your portfolio among stocks, bonds, and cash) is the key to successful investment planning. Studies have shown that as much as 90 percent of your portfolio’s return comes from the asset allocation decisions you make—not from the selection of an individual stock or bond.
Generally, the higher the possible return on an investment, the more risk you take. Consider the types of risk that can affect your choices—and don’t forget the risk of inflation. If your portfolio does not provide you with a return that beats inflation, your purchasing power will erode over time. Fortunately, you don’t need to make investments without sufficient information. Financial advisors at banks and other institutions can assist your decision-making.
Step 4: Plan for retirement
OK, you’ve heard it before, but have you done it? Do you routinely save for retirement? Are you saving enough? To determine how much you’ll need when you retire, estimate the amount needed for the lifestyle you desire — a rule of thumb is 75 percent of current income. Factor in the number of years until your retirement and how many years you expect to live in retirement. Finally, factor in inflation. There are many free “retirement calculators” on the web that can help you perform these calculations.
Once you determine your goal, subtract what you will receive from Social Security and from any pension plan you may have; this will clarify what you need to save. Put money away first in tax-exempt vehicles like your company’s 401(k) or an IRA. The earlier you start saving, the better, but it’s never too late to start.
Step 5: Plan for the worst
Following the first four steps will put you on the path to financial well-being. Still, there may be some crises beyond your control. You could lose your job, or your partner could leave—or unexpectedly die. Don’t wait for the crisis to hit to take action. Start today. Set aside three to six months of living expenses. Review your life insurance and disability insurance. Make sure your will or trust is up to date.
It’s well worth the effort. Planning today will help ensure your financial health tomorrow. tpw