Regardless of age or level of wealth, most of us can agree that money is one of the biggest stressors in our lives. Despite this uncertainty, research reveals that only 43 percent of investors report having an annual financial review or check-up.1
Many investors avoid these check-ups because they don’t feel confident or capable when it comes to managing their finances. This lack of confidence appears to be most prevalent among women investors. Research has shown that while women are mostly confident in their short-term financial picture (budgeting, paying bills, etc.), they have less confidence when managing their long-term financial picture.2
This is an important finding to note and could be a potential roadblock to planning for the future. Studies have shown that women live longer than men, and therefore, will likely be in charge of both the short and long-term finances at some point down the road.3
The time is now for women to empower themselves and take control of their total financial picture. Here are four ways to get started:
Make Your Financial Health a Priority
Whether it is for their children or parents, many women are caretakers. Between responsibilities at home and at work, we live our day-to-day lives in a balancing act, while managing multiple tasks and hoping not to drop the ball. Often, the less pressing tasks — such as reviewing our finances — get pushed down to the bottom of our to-do lists. However, it’s crucial to ensure your financial health takes precedence, as well.
Women should consider setting aside time for themselves every week or at least three times per month to work on their financial health. Consider devoting as much attention to your financial health as you do to your physical health. Similar to how you schedule your doctor’s appointment on your calendar, consider doing the same for your finances. Your short-term financial tasks, such as your budget or spending plan, should be reviewed on a weekly, biweekly or monthly basis. Long-term financial tasks, such as a review of your life insurance policy or retirement plan, can be handled annually. Mark these tasks on your calendar today.
Create a Budget and Track Your Spending
Start by tackling your day-to-day spending first. Since many women have a leg up on paying their bills on time and covering monthly expenses, managing spending can be an instant jump-start to improving their overall financial picture.
First, set aside time to itemize your inflows and outflows. Inflows refer to the funds that are received within a given period, while outflows include the funds that are disbursed within a given period. Make sure to involve your spouse, your children or other family members who contribute to your household spending and earning. It is important that you bring them into the planning process and get their buy-in to ensure that everyone is sticking to the same spending plan.
Once everyone is in agreement, compare your income to your expenses to arrive at your net cash flow. If you find that your expenses are negative (i.e., your outflows exceed your inflows), take action and adjust accordingly. Evaluate your spending and see where you can cut back. You may choose to start with the expenses you could live without, or discretionary spending. This includes your daily trip to Starbucks, last-minute purchases at the grocery store (put down the People magazine!) or eating out at restaurants.
Perhaps your net cash flow and spending plan are positive (i.e., your inflows exceed your outflows), but the surplus is not enough to include an annual vacation expense for the year. That means it is time to make trade-offs. Are there expenses that can be reduced or eliminated? Can you choose brands that are less expensive? Can you opt to bring your lunch to work, as opposed to eating out? By adjusting your spending habits, you can restructure your spending plan to accommodate more of your “wants”.
Once you have created your spending plan, compare it to your actual spending. Often, this discrepancy can be the most informative part of process. I remember sitting down with a friend who admitted to me that she had no idea where her money went each month. I reviewed her spending for the previous quarter, and to her utter surprise, she had spent three times more on groceries than she had realized. Many of us fail to realize how much we spend, and how each expense — such as a weekly trip to the store — can add up. That is why it’s so important to stick to a clear, defined spending plan.
At the same time, it’s important to ensure that your plan is realistic. A good way to stick to your plan and make sure it reflects your actual spending is to compare it to the outflows listed on your quarterly bank statements. Be conscious of expenses that can be trimmed down. If creating and tracking a spending plan seems daunting to you, consider reviewing online budgeting tools, which can compile your financial information and track patterns in your spending and saving.
Start Contributing to a Retirement Plan
Planning for the future is where most women struggle with their financial planning. This is particularly concerning, as a growing number of women are making the financial decisions in their respective households. Forty-four percent of women are the primary breadwinners in their households, while 27 percent of married women report that they personally manage financial and retirement planning responsibilities on behalf of their families, up from 14 percent in 2006.4 These metrics, coupled with their increased longevity over men, make it all the more imperative for women to start thinking about their own long-term financial security, including retirement.
If your current employer offers a retirement plan, such as a 401(k) or a 403(b) plan, start contributing today. Even if you can only contribute $50 per month, it is important that you start sooner rather than later. As each year passes, consider increasing your retirement contributions by five to 10 percent.
If you’re worried about falling behind on this task, consider upping your contributions around your birthday each year. When you add another candle to your birthday cake, consider increasing your annual contributions by one or two percentage points. If you are not employed but your spouse is, you may be eligible to contribute to a traditional individual retirement account (IRA). You may contribute up to $5,500 annually, while those age 50 and older can contribute an additional $1,000. An experienced tax or financial advisor can help you coordinate your contributions and ensure that they fit into your overall financial plan.
Create an Estate Plan
While estate planning is important for members of both sexes, it is particularly essential for women, considering most will survive their spouses. In the event that you pass away or become incapacitated, it’s important to ensure that your wishes are carried out the way you had intended. Your estate encompasses everything you own when you die, including your home, personal property, investments, bank accounts, retirement plans, and any interests in a family business or partnership. If you don’t have an estate plan indicating who should assume control over these assets, they may be subject to probate, which is the legal process of distributing property in an estate. This process can be costly and timely, so it’s important that you have a plan in place.
There are two vehicles that can help direct who receives your assets: a will and a living trust. A living trust can hold your assets when you are alive and when you die. A trust can also enable a successor trustee to carry out your wishes if you pass away or in the event of your incapacity. When you pass away, assets held in a trust can bypass probate, which means they are not a matter of public record, and consequently, you may not owe taxes on them. A will specifies how your wealth should be distributed after your death and allows you to name a guardian for any minor children. It can also be amended at any point during your life.
When structuring your estate plan, it’s also crucial to assign someone you trust to be your durable power of attorney and your health care power of attorney. The former is someone who acts on your behalf in financial and legal matters, while the latter is someone who acts on your behalf in medical matters when you are unable to communicate those decisions yourself.
To make the most out of your estate plan, you will also need to have a clear understanding of the tax laws surrounding the transfer of assets, particularly between spouses. If you are married, it’s important for you and your spouse to regroup with your advisor to structure your estate in the most tax-efficient manner possible.
One provision to account for is the unlimited marital deduction, which allows a spouse to transfer an unlimited amount of assets to their surviving spouse tax-free. While it can be beneficial, it’s important for women not to rely on this deduction, as it could result in unnecessary taxes should they become widowed. Once the assets are transferred, they will be counted toward the surviving spouse’s estate, and therefore, subject to taxes.
In this type of situation, opting to gift those funds to charity or to existing family members, as opposed to taking the deduction, may be considered.
As you wrap up the planning process, remember to take time to periodically review your beneficiaries to ensure they are up-to-date. Estate planning can be extremely complex, and it’s important to broach the process carefully. Collaborating with a financial advisor and an estate planning attorney can help you navigate the process and ensure your estate planning strategy accurately reflects your situation.
Your financial health is an ongoing process, one that requires as much as attention as the other important tasks you’re balancing. As women, we have every reason to feel empowered about our financial health; compared to previous generations, we are living longer, earning more money and have more options when making financial decisions. Whether it’s a spending plan, a retirement plan or an estate plan, taking steps to get your financial house in order will give you the confidence you need when planning for the future.