A 2018 study by financial firm UBS reveals that while a large majority of women will at some point be solely responsible for managing their own finances, 61% of them report not knowing where to begin when it comes to investing.
The better the job you can do articulating those relationships, interests and goals that matter most to you, the more confidence you can have in selecting the right type of investments and portfolio approaches.
The study points to two trends that raise the importance of women being more active in money management: women are living longer (and longer than men) and divorce rates for couples over 50 are rising. Between widowhood and divorce, the study reports, 80% of women will be responsible for their own financial well-being. “Some will be ready” the authors conclude. “Many won’t.”
The study further indicates that 69% of respondents believe women overestimate what it takes to be financially savvy. We agree – if you look at it as one big topic, it can be overwhelming. Instead, break it down into smaller parts. There are some basic steps you can take to get started on your financial journey. Once you begin, our observation is your comfort level will rise and over time your learning will accelerate and you will be able to competently be in control of your finances.
Regardless of your stage of life, successful financial management starts with understanding your cash flow. Begin by reviewing your income and expenses on a regular basis. Over the long run, managing how much money gets spent and directing more to long term savings is critical to building wealth. Another benefit of understanding your income and expenses is your familiarity with the topic. You can make progress without new terminology or concepts.
When it comes to investing your savings, think of investments as the tools to help make your plans happen. Start with what it is you need/want your savings to do for you. The better the job you can do articulating those relationships, interests and goals that matter most to you, the more confidence you can have in selecting the right type of investments and portfolio approaches. Again, no new terminology and no new concepts. Rather a focus on the goal becomes your anchor to which you can tie your investment decisions.
With these goals in mind, the biggest decision when it comes to investments is what is called Asset Allocation. Asset Allocation is widely considered to be the single most important factor in determining the rate of return of your portfolio. It is also the most important tool in managing risk. If it is the key determinant to both risk and return, the decision you make about asset allocation is the most important investment-related decision you make. What is asset allocation? On the most general level, it is the percentage of your portfolio that is invested in stocks (aka equity), bonds (aka fixed Income), or cash. Generally, a higher percentage in stock is appropriate when you have a long time to let it work and are comfortable with more ups and downs (volatility) in the value of the portfolio along the way. Stocks represent a share in the ownership of a company. As a shareholder, you benefit from a company’s growth and good management. You also share in the declines when things are not going as well. More bonds are typically required when you are closer to using the account to generate income. Bonds are investments in debt. You are lending an organization money, in exchange for them paying you interest and the promise to repay the money you lent them in the future. When you will need to make a larger withdrawal soon, like to pay for a car, house, or college education, having cash to cover those near term needs makes sense to avoid having to potentially sell your longer-term investments at a bad time.
Finally, identify professionals who can help. Remember, you may be single, but you aren’t alone. Assemble a team of financial advisor, accountant and attorney to help guide you as appropriate. Knowing the basics of managing your finances is important, in part so you can ask reasonable questions of your advisors and be a wise consumer. Then having advisors to turn to for counsel on the more detailed advice will help you make the most of your resources and circumstances.
Many women risk being unprepared when responsibility for their finances falls to them simply because they did not know where to start. Begin with the familiar and your goals. From there, work your way through the higher-level principles, and you will find it easier to gain the knowledge and confidence you need.