5 Financial Planning Moves for Women in Their 20’s
July 16, 2012Whoever said, “Life is short” did a disservice to thousands of people. Life is not short. Life is long. Research on longevity shows that in married couples that live to age 65, life expectancy for at least one of them is age 94. When you think about it, 94 years is a very very long time. Someone who is 94 years old this year would have been born in 1918 – does anyone know what was going on in 1918? We were in the middle of World War I, Mississippi was the first state in the Union to ratify prohibition, and Woodrow Wilson was the President of the United States. In the 1910s, only 14% of homes had a bathtub, only 8% had a telephone and the speed limit in most cities was 10 miles per hour.
A more productive way to view life is that it is long and it actually gets better with age. Take a note from the old throw back Star Trek episodes where Dr. Spock greeted his friends with “live long and prosper.” That is a much better motto than “life is short.” If life is long, you might as well build wealth along the way to enjoy it. Here are some ways women in their twenties can do so.
Stash your cash. This is true for everyone but I highlight it for young women because our latest research shows a wide and growing gender gap in having an adequate emergency fund. While 63% of men report having an emergency fund, only 43% of women do and this gap is widening. The emergency fund being the foundation of financial wellness, it’s important for women to get this as a priority early in life. Remember, always have an emergency fund with at least three months expenses so you never have to borrow, whether it is from a credit card to make ends meet or it is a personal loan. First of all, borrowing money is expensive but it also takes a toll on your psyche in the form of confidence. When you rely on yourself, it’s a confidence builder.
Skim 10% off the top. Carve out 10% of all of your income — salary, bonuses, gifts, items sold, etc. and then invest it. Get in the habit of always savings a minimum of 10% of everything that comes in. I was a fortunate young woman in that I had generous grandparents who usually gave me a nice Christmas check and another one on my birthday. I always saved half and spent half and that habit is ingrained with me. This habit is especially important for women since we have a longer life expectancy – we have to support ourselves longer. We also may be out of the workforce or work part time for a period of time to raise children, which may reduce or delay retirement savings. Starting early can make up for that.
Avoid credit card debt. I can say this since I am a girl – we love to shop! For many it is a hobby! An expensive one, I might add. That is fine unless you are going into debt to do it. Remember, credit card debt is empty debt. I heard someone say once that the definition of a credit card is something used to buy things you don’t need with money you don’t have. I smile when I think about that, probably because it rings true! The average credit card balance (for those that have a balance) is $15, 956. The average interest rate for purchases is 12.78% — on that average balance the cost per year is about $2,000. If you could invest it instead, even at a rate of 6%, it would grow to over $300,000 in 40 years for retirement and give you over $1,000 a month in income – for life!!! If life is long, you want to invest for it rather than waste money on credit card interest!
Remember your biological clock and be open to changing values. Beware of boxing yourself into a corner with high overhead. Women have special considerations – we are the child bearers. This is something men can definitely NOT do for the family – it is a wonderful unique gift of being a woman. Prepare for it. In your twenties, you may not want to have children right away or maybe you think you may never want children, but remember that you may change your mind in your early thirties.
All I am saying is to consider leaving open the mommy track – financially – when making long term decisions such as buying a house with a mortgage that takes two incomes to make. That may eliminate the possibility to either be a stay-at-home mom or to work-part time when your kids are little. A low overhead allows more flexibility.
Gain a working knowledge of investing. You’ve heard “good is the enemy of great” from the landmark book Good to Great by Jim Collins. When it comes to investment knowledge, “great is the enemy of good.” Truth be told, you don’t have to be a great investor to do well. You just need to be good. Good is actually all you need. If you wait to invest until you gain a master’s degree knowledge level, you may never end up investing and simply lose the opportunity to make money by procrastinating. Another reason for becoming competent about investing is that getting a slightly higher return of even 1% or 2% more makes a bigger difference to a 25 year old than a 45 year old.
Twenty five year old who earns 4% per year on 401(k) savings of $5000 per year for 40 years: just under $500,000 balance
Twenty five year old who earns 6% per year on 401(k) savings of $5000 per year for 40 years: just over $820,000
Those aren’t even “great” returns – just good ones.
Now, if you have a passion for investing, then go for it. If you don’t, at minimum gain a working knowledge of investment basics – stocks, bonds and mutual funds. Learn your risk tolerance and how to determine if your investments are the right fit for you.
When you hear someone say, “you only live once” or something that sounds way too close to “what happens in Vegas stays in Vegas,” (which is a great marketing campaign but a dangerous motto to live by), remember that life is long and in some cases very long but hopefully in all cases…full of wonder. Saving and investing for that long life makes it all the more wonderful along the way.
Resources:
Quick Guide to Stocks, Bonds and Mutual Funds
Financial Finesse- Personal Finance Blog Forbes.com