Women and Personal Finance
The conversations that women have over tea or coffee during social gatherings are different from discussions that men on average have. Topics like budgeting, finances or analyzing prices of commodities are hardly talked about. Decisions related to long term goals (investment and retirement) are usually made by male figure in the family. This is prevalent in developing nations where men are the sole breadwinner and women are their dependent. Nevertheless, it is essential for women to have a basic understanding of money management whether they are working or not.
There can be unexpected difficult times such as loss of a job, insolvency of husband’s business, accident, house damage, outliving husband etc. which can place burden on the finances and require a woman to make monetary decisions. Therefore, having financial literacy is a matter of necessity, be it a simple decision of choosing between two clothing brands or selecting the right life insurance plan.
Some helpful tips and advice is mentioned below to encourage women to become familiar with personal finance and develop confidence in making financial decisions:
1) Understand types of money: We all know money is a tool to purchase goods and services but it is neat to categorize money depending on the speed and ease (liquidity) with which a person can use it to buy things. M1 money consists of the cash in hand and in current account which is used for day to day expenses whereas M2 consists of saving deposit, short term bonds etc. which can have constraints on time or amount withdrawn. A person can make an excel sheet to easily track and divide money depending on its type and quickness to withdraw when in need. Women can discuss with financial representatives of their bank to know the functions of different accounts, google money supply, or start participating in money discussions that family members have to gradually build on their financial knowledge.
2) Allocate money for present and future: Whatever income household is earning; it is important to create a monthly budget for current spending and saving the remainder. Women who go for grocery shopping can do a quick activity of listing price of products they buy on a notepad and update it every 6 months. This will help in creating a realistic, closely watched budget and prevent from overspending or impulse buying. Although there is no universal rule on the portion of income that should be saved, there needs to be emphasis on saving even if it is a dollar initially to make it a habit. I personally think it is a wise idea to further break the amount saved into short term (for travelling, giving gifts, dine out etc.), long term (marriage expense, health, children’s education etc.) and miscellaneous (for things beyond control or emergency) to not panic and use resources smartly in such situations. Question related to where to save is briefly mentioned in point#4.
3) Understand concept of Time value of money (TVM), inflation and compounding effect of interest: It is important to understand that money today is worth more than the same amount in future. So, if $10 today can buy 1 tube of ice cream, in 5 years it could cost $15 or more to buy same tube of ice cream due to inflation. Therefore a person should not just save by placing money in a locker at home as its worth diminishes over time but instead invest it so that there is a compounding effect and can earn interest to at least preserve its value if not increase it.
4) Know ways of Investing and Reflect on personal risk appetite: There are different securities and accounts where surplus money can be invested depending on individual’s risk level. Consequently, a person should determine return and risk objective, constrains and time horizon for which she can invest the amount. To begin, it is advisable to talk to a financial advisor who can create an investment portfolio depending on client’s requirements. Make sure to understand the agent fees and how frequent consultation is required as cost matters. Also, read about stocks, bonds, ETFs and security trading during spare time to build financial literacy and make wise decision about savings.
5) Understand impact of taxes on finances: Taxes can be tricky as it varies from nation to nation. A person should know tax rate on income, property and products in her state or country. Net income after tax instead of gross should be used when creating a budget as this is the actual amount going in person’s pocket. Also, there are tax free saving accounts that people can benefit from where return on investment is not taxed when withdrawn. Amount of tax on securities should be known when investing to avoid disappointments later. Also, filing for tax return properly either using accountant or software can provide person with some extra money.
6) Practice staying debt free: There has been rise of credit purchases and paying in installment. This has led people to fulfill their wishes now but causes them to plunge in debt due to compounding effect of interest which they don’t consider at the time of purchase. The best advice is to try and stay debt free and spend within means. However, there are life decisions such as children education, home or car finance which require people to take debt. For situations like these, financial knowledge and management skill comes handy to create a proper payback plan. Ask financial advisor all sorts of questions until you are convinced to make big monetary decision. Also, set a monthly reminder to pay credit card expense on time to avoid interest and have a good credit score which is helpful when you need to make a big purchase in future.
7) Plan retirement (Upward concave curve): According to research, about 36% of women live on their own after the age of 65 due to longevity, divorces, or any other reason. Even if your spouse leaves with a lot of money, it can quickly drain if not invested properly. Therefore, it is advisable to make a retirement plan in an upward concave curve manner. Meaning start with investing a small amount in retirement account and keep adding more as your income increases and you age. It is better to revisit your saving and retirement timeline to update portfolio over time.
You don’t have to handle the complexities of these tasks yourself as you can get help from lawyer, financial advisor or accountant but having fundamental knowledge will enable you to have conversations with them and participate in decisions important to your life. I personally think it would be fun to take out time to discuss about personal finances with your female friends to create a learning circle and motivate other females to know their finances.
Remember the spending rule of ‘Staying within your means’ to save yourself from mental stress. After all, tomorrow’s realities depend on today’s decisions.
If you have any wise tips related to effective money management or creating interest in females to learn about their finances, I would appreciate if you can share it with the readers in the comment section.
