Despite our best efforts, people still think of finance as being the man’s domain. The truth is that everyone needs to understand personal finance, so they can manage their money the right way. Even those who choose a wealth manager or financial planner to handle their investments still need to know the basics.
We all know that women tend to live longer than men. It’s likely that at least one point in her life, a woman will not have a partner to rely on to handle her money for her. She needs to be able to do it herself. Even if she eventually chooses to have a company, or a spouse or someone else, take over the money management.
When she’s learned the fundamentals, she can tell if it’s being handled appropriately. What if she never learns how to manage her money? Not only will she be in trouble when she has to handle it by herself, but she won’t know if the person she’s delegated to is knowledgeable and capable of doing the job right!
Of course your sons need to know how to handle their finances too, and the advice below goes for both men and women. However, some issues such as longevity are harder on women and their money than they are on men, generally speaking.
The four cornerstone questions of personal finance
Briefly, the key things to know are: How much comes in? How much goes out? What do I (or we) own, and what do we owe? Both partners in a marriage need to be clear about the answers to these key questions.
How much income, from whatever sources, is coming in? Millennials and younger generations may have side hustles or more than one income stream for each spouse. Even if there’s been an agreement that the separate income streams are (essentially) separate property, both should know approximately how much each is earning. If one spouse tries to hide or minimize it, that’s a red flag to the other spouse.
How much is being spent? Couples may designate “play money” that each spouse can spend on whatever pleases them. It’s important to make sure that the expenses are not exceeding income. Whether or not there’s play money involved.
What’s owned? As we noted in the earlier article, tasks including dealing with the money are usually split between bother spouses. Sometimes one spouse handles daily money management activities like grocery shopping, and the other handles the investments. Either way, both spouses need to know how much is in the investment and retirement accounts.
What’s owed? Both jointly and separately. How much credit card debt is outstanding, and how much of that has both your names on it? How much in student loans? Loans on vehicles, lines of credit, including HELOC?
What’s the current mortgage balance? Whatever the appraised value of the house, the amount actually owned (equity) is the value less the outstanding mortgage balance.
Neither spouse should sign any kind of agreement unless they know what they’re signing. And they’re OK with having their name on it.
For example, if your spouse can’t get a loan without you co-signing, do you know why? And are you comfortable with having your name on that debt? Creditors will come after you for payment, if your spouse falls behind on payments they agreed to make. You could very well see your own credit score drop as a result.
How to create a spending plan
In olden times this was known as a “budget”, but no one likes that word anymore! Each dollar of income should have a job. Savings, debt repayments, and fixed expenses must be covered first before dollars can go to things like entertainment.
Anyone with a household to run needs to know how important it is to keep expenses lower than income. It’s the only way to save money and avoid living paycheck to paycheck. The wider the gap between income and expenses, the more money that can be saved and invested.
You need the analysis skills to look at your current spending and determine where you can cut back, if you’re currently living on credit cards because your income isn’t enough. Also brainstorm ideas for making more money.
The more money saved and invested, the sooner the household is financially independent.
How to invest money
Most people have financial goals, such as retirement. Workers in the US typically no longer have pensions. They’ll rely on Social Security, and their own savings, when they reach the point where they can’t or don’t want to work any more. Which means the retirement bucket needs to be sizeable!
As a rule of thumb (known as the 4% withdrawal rule), a million-dollar portfolio invested 60% in stocks or stock funds and 40% in bonds will generate about $40,000 per year for a retirement period of 30 years without running out of money.
In addition, many people may have other goals, such as buying a house or rental property. Or owning their own business. Etc. Understanding and using the power of compounding is key to achieving all these goals.
As Einstein said, compounding is the eighth wonder of the world! Money doubles in about twelve years, given a return of 6% when simply left alone to grow. It takes eighteen years if the return is 4% (rule of 72). Start with $10,000 and end up with $20,000 by doing nothing (except investing it correctly.)
Investing is dependent on risk tolerance but also on how soon the money’s needed. Longer timeframes, such as retirement for those in their 20s, 30s and 40s, require more stocks in the portfolio. When you don’t have to take the money out for a long time, you can afford to ride out the inevitable dips. No risk, no reward!
Money kept in cash (and lately, bonds) lose ground due to inflation. They’re poor investments for long-term goals. By contrast, when you need the money in five years or less, a stock market drop is bad for the portfolio. Those short-term goals need more bonds and cash to protect against drops.
It’s key for women particularly to understand that even after they retire, they still have a long term timeframe (10+ years). Their money needs to last past retirement. Therefore, they still need a fair amount of stocks in their portfolios to hedge against inflation after they stop working.
Matching the investment to the risk that’s being faced is key. Many investors are afraid of stock market drops, but that’s not the actual risk on a long term timeframe. Inflation is.
Conversely, inflation is not an issue when you need the money within a year. A stock market drop is.
Good news for women investors
When looking at equity investing, women on average outperform men. (Though too many women don’t take enough risk in their portfolios.) Women don’t tend to trade as much, and are better at leaving their portfolios alone to grow and compound. They generally don’t do as much short-term trading. Which tends to generate fees, but not returns.
Women’s style is very well-suited for long-term investing. All women should embrace themselves as investors, and start earning some rewards by taking on more risk.
Want to invite your daughter to your next financial planning meeting with your Platt Wealth Management advisor? Send us an email or call 619.255.9554 to schedule your next appointment.