he way money moves may seem mysterious, but it is really quite simple. Money In. Money Out. It is the same for the largest multi-national corporation as it is for each of us.For most working women, the primary source of Money In is our paycheck. Women have an earning disadvantage—how serious is it?
1. What does a woman who works full time, year-round earn for every dollar earned by her male counterpart?
a. 65 cents
b. 72 cents
c. 78 cents
Answer: b. 72 cents (US Bureau of the Census, 1999)
2. What is the average lifetime earnings loss for women earning 72 cents on the dollar?
a. $50,000
b. $100,000
c. $250,000
Answer: c. $250,000 (Older Women’s League (OWL), 2001)
Let this number sink in. One-quarter of a million dollars.
The Institute for Women’s Policy Research (www.iwpr.org) reports that eliminating the wage gap would cut the poverty rate among married women and single mothers in half. Eliminating the wage gap is a laudable goal, but meanwhile we need strategies to move us in that direction. Women are closing the wage gap by increasing their work skills and their time in the labor market. We are entering better-paying occupations in large numbers, partly due to equal opportunity laws.
What can you do to narrow the wage gap? Expect to be fairly compensated. Believe in—and demonstrate—the value of your skills and experience. And support public policy that attempts to bring wage parity.
In addition to the wage gap, there are major differences in the work patterns of women and men.
3. How long does a woman who is out of the work force for one year have to work to recover lost income, pension coverage, and career advancement opportunities?
a. 2 years
b. 3 years
c. 5 years
Answer: c. 5 years (US Department of Labor, 1998)
4. What percentage of women with children are in the work force?
a. 50%
b. 60%
c. 70%
Answer: c. 70% (Institute for Women’s Policy Research, 2000)
The Institute for Women’s Policy Research also reports that mothers represent the fastest growing group in the labor force.
A study of 55 employed caregivers by the National Center on Women and Aging found the loss in lifetime earnings from cutbacks in work hours, missed promotions, lost opportunities to advance or improve job skills, and lost retirement benefits from Social Security and pensions totaled over half-a-million dollars!
Knowing these facts can strengthen our resolve to find innovative ways to minimize the financial impact of stepping out of the work force. Regardless of long-term financial repercussions, some women will choose or will be required to leave paid employment to provide care for children, frail parents, or other family members.
What are your Money In facts? How much money have you earned in your working lifetime? How much do you plan to earn in the future? Because the marketplace provides income parameters for different careers, you choose an income range when you decide on a career.
There are strong pressures in our society to spend, spend, spend. The bumper sticker “I owe, I owe, so off to work I go” rings true for many of us.
Where does your money go? It may be helpful to know about the three categories that financial planners use to answer that question. Fixed expenses are the basic costs of housing, food and clothing. Discretionary expenses are beyond the basics and can be thought of as lifestyle purchases. The third category is savings and investments.
You may know people who consistently save and invest. You are more likely to know people whose fixed and discretionary expenses gobble up their income with nothing left over to save or invest.
BUYING ON CREDIT
Since a good portion of our Money Out is disbursed through credit cards, here are some questions about credit card use.
5. What percentage of households carry a credit card balance month to month?
a. 22%
b. 33%
c. 44%
Answer: c. 44% (Kiplinger’s Personal Finance, 2001
6. What is the average credit card debt per household that has at least one credit card?
a. $4,942
b. $8,123
c. $10,942
Answer: b. $8,123 (cardweb.com, 2001)
7. What is the average annual interest rate charged for credit cards?
a. 12.03%
b. 15.02%
c. 17.09%
Answer: b. 15.02% (cardweb.com, July 2001)
If you are among the 44% who carry a credit card balance month to month, make plans to drop out of that statistic. If you need a reminder to pay your credit card balance every month, put this note on your card with lots and lots of tape: Using a credit card is the same as getting a loan.
The inability or failure to pay credit card balances in full each month can greatly increase the actual cost of items purchased with credit.
8. How long will it take to pay off the credit card purchase of a $1,000 computer? (Your credit card has an 18% interest rate and you make minimum payments of $20 a month.)
a. 3 1/2 years
b. 5 1/2 years
c. 7 1/2 years
Answer: c. 7 1/2 years
By the time you make the last payment, how much would the computer really have cost, including interest charges? $1,800.
Credit card bills are not the only bills that must be paid. Missed or late payments of any kind can hurt your credit rating.
9. What percentage of adults thought that paying bills late would not present a problem when applying for a mortgage?
a. 10%
b. 20%
c. 30%
Answer: c. 30% (National Housing Survey, Fannie Mae Foundation, 1999)
Late payments on your credit report may keep you from qualifying for a mortgage—or the best mortgage rate. Know your credit history. Directions for ordering your credit reports are included in Action Steps and Resources on page 14.
SAVING AND INVESTING
Your net worth is calculated by subtracting the value of everything you owe from the value of everything you own. One of the most powerful financial goals you can have is to increase your net worth each year. Shedding credit card debt and other installment debt improves your net worth. So does savings and investing. Have you heard the phrase, “It takes money to make money”? Well, if you are earning an income, you have what it takes! All you need to do is commit yourself to saving and investing.
Many women ask “once I have saved some money, where should I invest it?” Savings and investments are very different—and you need to have both.
Savings are dollars that need to be safe and liquid, to be used for planned purchases and emergencies. The amount of savings you need depends upon your personal circumstances, but three to six months’ living expenses is a common rule of thumb.
Any dollars over and above your savings goal are available for investment. When we talk about investing, we are talking about investments that provide higher returns than savings accounts but also carry a higher risk, such as mutual funds, stocks and corporate bonds.
We’ll discuss investments in more detail in the “Stepping into the Stock Market” section.
Emergency Savings Account
The first place to put savings is in an emergency savings account. Saving for vacations or major purchases is a great idea. But having an emergency account is crucial. This account absorbs those unexpected expenses—home or car repair or medical bills—and keeps them off your credit card.
- Write firm guidelines that will keep you from drawing down on this account for non-emergencies.
- Shop for a high rate of interest at a reputable financial institution where your deposits are secure.
- Even if you are paying off your credit card debt, put a few dollars into this account regularly—no matter how small
- Track your progress.
10. What percentage of Americans are earning money on their money through savings and investing?
a. 33%
b. 43%
c. 53%
Answer: a. 33% (Save The Dream.org, 2000)
11. On average, how much do single women save out of every $100 in earnings?
a. $1.50
b. $3.50
c. $5.50
Answer: a. $1.50, or 1.5% of their earnings (Bureau of Labor Statistics and The WEFA Group, 1993)
Single or not, decide how much you are going to save from your next $100. What percentage of your income would you like to be saving and investing one year from now?
Consider increasing the amount of your current savings by 1%—that’s one more dollar for every $100 you earn. When you have met that increase, try to save an additional 1%. Serious savers and investors put away 10% of their income.
Savings Options
Is a regular savings account the best place for your savings?
12. What is the average interest earned for a savings account?
a. 1.1%
b. 2.1%
c. 3.1%
Answer: b. 2.1% (Consumer Federation of America, 2000)
At this rate, your savings account will grow, but slowly. And two beasts—taxes and inflation—can devour your interest earnings.
13. Historically what is the average annual inflation rate?
a. 1.7%
b. 2.7%
c. 3.7%
Answer: b. 2.7% (Bureau of Labor Statistics, 2001)
The dollar that is in a savings account today will not have the same purchasing power in one year, five years, or 10 years. If you let too much money sit in a low-yielding account for a long period of time, your interest may not keep up with the loss of purchasing power. There are other choices.
A good place to start is at your bank or credit union. Ask about interest rates and minimum deposits for money market accounts and Certificates of Deposit (CD). A Certificate of Deposit offers a rate of return higher than a savings account, in exchange for your
agreement to keep the money in for a specific number of months or years. Usually, the longer the time period, the higher the interest rate. The minimum amount to open a Certificate of Deposit may be as low as $250. Money market accounts do not require you to leave your money for a set period of time, but usually have a much higher minimum balance.
You may want to split your savings into a series of Certificates of Deposit with different maturities, such as three month, six month and one year. This is called laddering, and ensures that money is coming due regularly should an emergency arise.
Certificates of Deposit are also available through stockbrokers, often with a higher interest rate than you can find at a local bank. Think twice before buying these Certificates of Deposit, as they are not FDIC insured. Another option is money market mutual funds, which you can buy from a stockbroker or directly from a mutual fund company. These also are not FDIC insured, but pay higher interest than bank money market accounts and are generally considered less risky than a brokerage Certificate of Deposit.
Finally, don’t forget about US Savings Bonds. Series EE and Series I can be purchased for as little as $50—available from most banks or directly from the U.S. Treasury. They offer a good rate of return, which is tax-deferred until you cash in your bonds. The EasySaver plan allows automatic deductions from your bank account to purchase bonds on a regular basis. This feature is a powerful one, especially for those of us who are still developing a savings habit. For information on purchasing savings bonds online, see Action Steps and Resources at the end of the Web site. Automatically directing dollars from your paycheck into a savings or investment account is a great financial strategy. Save it before you “see” it.
Once your emergency savings are in place earning a higher rate of return, you have satisfied an important short-term goal. What about long-term investing? Long-term investing is required for every woman who wants a financial Happy Ending.
From Saver to Investor
Once you have established a regular savings account and have investigated accounts that pay higher interest, you are ready to begin investing for the future. Are women making a successful transition from saver to investor?
Five out of 10 women surveyed:
- Described themselves as “more a saver than an investor”
- Claimed to lack the time, money, and knowledge necessary to invest for retirement
- Postponed financial decisions owing to the fear of making a mistake
14. What percentage of women surveyed said they were motivated to save and invest by “a fear of not having enough money in old age”?
a. 23%
b. 53%
c. 93%
Answer: c. 93% (Women and Cents Study, 1995, The National Center for Women and Retirement Research)
If you are motivated by fear to save and invest, you can see that you have lots of company. Fear can stop us from doing what is in our best long-term interest. Or fear can get us going. We decide.
From Fear to Optimism
Beliefs about our financial future—and ourselves—profoundly affect our quality of life. Our families, friends, the media—the entire culture—shape our financial expectations. But it isn’t written anywhere that we have to hold on to these expectations if they don’t serve us well. We can create new ones.
Research supports what we intuitively know:
- Certain attitudes and psychological traits within a woman’s personality play a profound role in financial decision-making.
- These attitudes and traits shape the ways that women perceive money, investment opportunities, and money-management tasks.
The following four personality traits have the most influence when it comes to making smart money choices. For each trait, rate yourself using the scale below:
|
Trait
|
Rating
|
||||
|
low
|
middle
|
high
|
|||
| Assertiveness |
1111111
|
2222222
|
3333333
|
4444444
|
5555555
|
| Openness to change |
1111111
|
2222222
|
3333333
|
4444444
|
5555555
|
| Spirit of adventure |
1111111
|
2222222
|
3333333
|
4444444
|
5555555
|
| Optimism about the future |
1111111
|
2222222
|
3333333
|
4444444
|
5555555
|
Choose any trait that you ranked yourself “3” or lower and make a decision to move your rating up a notch.
The Power of Investments
We know the average rate of return for savings accounts is 2.1%. To graduate to being an investor, we need to know about the performance of other investment options. The three major asset classes are cash (such as Certificates of Deposit, savings and money market accounts, which we have already learned about), stocks (also called equities) and bonds.
15. What is the average annual return of stocks, government bonds, and cash when we take the long view—from 1926 to 1998?
|
Average Annual
Rate of Return |
Savings / Investment
Category |
||
|
3.7%
|
a. cash
|
b. stock
|
c. bonds
|
|
5.2%
|
a. cash
|
b. stock
|
c. bonds
|
|
11%
|
a. cash
|
b. stock
|
c. bonds
|
Answers:
a. 3.7% cash (Treasury bills),
c. 5.2% bonds (30-year government bonds),
b. 11% stock (large company stock) (Ibbotson Associates, 1998)
How much does a better rate of return really matter? Over the long term—a lot! It’s based on the power of compound interest—that means interest is figured on your original investment, plus the accumulated interest you’ve earned. The chart below shows the impact of investing $100 each month at different interest rates, starting at different ages. The amount shown is the total you would have at age 65 if you made no withdrawals and the interest rate remained constant. You can see just how much a better rate of return can mean to YOU.
Stepping into the Stock Market
Seeing these returns, why would anyone invest in anything other than stocks for the long term? One answer, for many women, is the fear of losing money. Even though the average return for stocks is 11% annually, some years the return was much lower and even negative. Other years the return was much higher. That’s one of the rules of the market place. As the potential for a higher return increases, so does the potential for loss. Of course, the average return of stocks for the past seven decades is not a guarantee of future returns.
Another reason is something called diversification—more simply, don’t put all your eggs in one basket! Whether you are investing through your company’s retirement plan or on your own, it makes sense to put money into several different investments—and not all into stocks.
Surveys consistently find that women choose lower-risk investment options in their retirement plans, such as bonds, and receive lower long-term returns. A tendency to choose safer but lower-yielding investments may add years to our working careers and delay our Happy Ending. It is important to have both types of investments working for you. An all-bond portfolio will give you safety, but at too high a price. An all-stock portfolio is too volatile for even the most aggressive investor.
|
$100/month
|
Age 25
|
Age 30
|
Age 35
|
Age 40
|
Age 50
|
|
3.7%
|
$109,717
|
$85,743
|
$65,811
|
$49,242
|
$24,015
|
|
5.2%
|
$160,813
|
$118,792
|
$86,372
|
$61,362
|
$27,180
|
|
11%
|
$860,012
|
$492,830
|
$280,451
|
$157,613
|
$45,469
|
16.What percentage of women (in 1998) had their retirement plans invested mostly in bonds?
a. 10%
b. 20%
c. 30%
Answer: b. 20% (Employee Benefit Research Institute, 2000)
If your Happy Ending depends on maximizing your investment return, you owe it to yourself to research stock ownership. A good place to begin is to own shares in a suitable stock mutual fund. Among the dizzying number of stock mutual funds are the stock index funds. There are many appealing reasons for considering these funds—including their low management fees. Do your homework. Less risk is associated with diversified mutual funds (those with a mix of different types of companies) rather than sector funds (those that are restricted to one type of company).
Do you qualify to participate in a 401(k) plan? If so, begin your contributions as soon as possible, even if that means splitting your available dollars with the emergency account. Be sure to take advantage of matching 401(k) contributions from your employer. Talk with your benefits representative to learn more about the investment options and contribution rules for your plan. Learn, invest, and track your 401(k) account. Once you see how the program works, devise a schedule of increasing your contributions. Some planners recommend gradual increases until you reach the maximum contribution limit. When you put money into your 401(k), you make a long-term investing decision. To create a Happy Ending at the conclusion of your working career, save and invest consistently—no matter what. Living from paycheck to paycheck is no way to live. Join others who save and invest. Their money is making money through the power of compound interest.
All investing requires some homework. There are many ways to learn about how the stock market works. One option is to get some friends together to form an investment club to research and invest in stocks. According to the National Association of Investment Clubs, all-women investment clubs outperform the investment returns of all-male clubs. We are capable of becoming savvy investors.
Women at Retirement
The facts describe women—not all women, but an alarming number of us—earning less than men for doing similar work. We move in and out of the work force with devastating financial repercussions. We spend too much. We save and invest too little and are not maximizing our return on savings and investments. The cumulative effect is expensive.
17. What is the average monthly Social Security benefit earned by women?
a. $676
b. $846
c. $1,046
Answer: a. $676 or $8,112 annually (Fast Facts and Figures about Social Security, 1999)
Retired male workers earn an average monthly benefit of $877, or $10,524 annually. The wage gap and work history of women translates into a benefit gap.
The “three-legged stool” is often used to identify the sources of income needed for a financially comfortable retirement. The three legs are Social Security, employee pensions, and personal savings. We know the average Social Security income for women. How about employee pensions? As you might guess, women receive less in pensions than men receive. Some of this disparity can be explained by the interrupted work patterns for women. Many employer pension plans “vest” after five years. According to “Focus on Women: The Importance of Your 401(k)” the average job stay for women is 4.6 years compared to 5.1 for men.
That leaves one more leg on the stool—personal savings. Remember the average savings rate of 1.5% for single women? What are the long-term implications of minimal savings?
18. What is the average amount that single women over age 65 receive in monthly interest income from their personal savings or investments?
a. $55
b. $95
c. $295
Answer: b. $95 (Social Security Administration, 1999)
Minimal Social Security benefits, pensions and personal savings means many women over age 65 live in or near poverty.
19. Of this country’s elderly poor, what percentage are women?
a. 30%
b. 50%
c. 70%
Answer: c. 70% (National Center for Women on Aging, 1999)
Especially startling is the plight of women who are elderly and widowed. Over half of elderly widows now living in poverty were not living in poverty before their husband died.
20. How many years on average do women outlive men?
a. 3 to 5 years
b. 5 to 7 years
c. 7 to 9 years
Answer: b. 5 to 7 years (U.S. Department of Labor,Pensions and Welfare Benefits Administration, 2000)
Among other things, living longer means our money has to last us longer.
Today’s elderly women did not grow up with the financial information, opportunities, or choices that we have today. If we are going to break the cycle of women living in or near poverty (annual income of $7,990), we must make smart decisions that will provide us with our desired financial future. U.S. Bureau of the Census, 1999
