Financial How-To's Archives

HOW DO YOU AVOID COMMON FINANCIAL MISTAKES?

Executive Summary:

Women have been programmed to think they aren’t good with money so we end up in a – I have to, but I can’t – destructive mental loop. This lack of confidence and resulting inaction can lead to a number of costly mistakes:

Failure to do long-term planning
Focusing on numbers rather than goals
Not recognizing the power of a budget
Underestimating other kinds of risk
Investing too conservatively

Setting long-term goals, creating a spending and saving plan, and taking appropriate investment risk is a better recipe for success.

Common Money Mistakes That Cause Financial Insecurity

Ever notice it is hard to have a good day when you have a bad attitude? That’s one of the problems with women and money. Women have been programmed to think they aren’t good with money according to prominent psychotherapist, Olivia Mellon. Unfortunately, financial security is a top concern. So, we end up in a – I have to, but I can’t – destructive mental loop.

An extensive Australian study concluded that the Golden Triangle of Happiness consists of relationships, purpose, and financial control. So, in my view common mistakes women make center around not having a strong relationship with money. One way to change your mindset is to align your deeply held values with your money. After all, when you can separate the emotional baggage, money becomes a very useful means to a purposeful end.

What are some common financial mistakes?

Lack of long-term planning

Women tend to focus on the short-term for a variety of reasons. Time constraints, caregiving responsibilities and a tendency to be risk adverse are some. But prudent financial planning is really about the future, and it usually takes a long-time horizon to prepare for retirement. Without a plan how can you set adequate savings targets today that will create financial security tomorrow?

Focusing on the numbers

When people do plan, I have found the tendency to focus on the numbers rather than also considering important life goals and sense of purpose. It’s a little like dieting. Unless your plan is motivating and maintainable, it will sit in a desk drawer somewhere rather than becoming a new way of life. On the flip side, over planning is just as unfortunate. As a planner I had clients that were afraid to spend anything. They had to be encouraged to live their lives and reassured that their financial plan was strong enough to take special trips, renovate the house or help with their grandchildren’s college. That’s the art of financial planning. A good planner considers things that could go wrong so that a client can feels comfortable with reasonable spending when things go right. Setting an expectation of spending flexibility also helps people feel more in control of their financial situation which leads to a better quality of life.

Not recognizing the power of a budget

If you don’t know what you are spending, it is difficult to be in financial control. Even if you aren’t going into debt it can lead to indiscriminate rather than thoughtful spending. And it is difficult to make good decisions on big ticket items. You may have the cash flow at the time but aren’t considering sporadic expenses or the monies you planned on contributing to a retirement plan. Another issue is that spending often meets underlying psychological needs. Sometimes it is a necessary expense but other times it is an unconscious way of dealing with feelings you aren’t totally aware of. Like purchasing things online, you don’t really need because it makes you feel better. It’s fine if it fits into your budget but not if it prevents you from doing things that are more important to you. The key is to spend thoughtfully as part of a plan.

Underestimating risk

Another issue with short-term planning is a failure to invest. Women’s natural aversion to risk doesn’t help either. But fear of a volatile stock market isn’t the only risk you should be concerned about. If you don’t invest or have other substantial income — inflation can lead to significant loss of purchasing power in retirement. And women typically live longer than men. So, if your nest egg isn’t growing over the years, you run the risk of being unable to maintain your lifestyle and at worst, running out of money.

Investing too conservatively

Even if you do invest, portfolios need to take reasonable risk to be successful. You put money in a bank account for safety. You invest in the stock market for growth. Both have their place. When you have a short-term purpose for your money safety matters. But when you have a long-term goal, such as saving for retirement, it is essential that you get a reasonable return on your investments. Basically, you are taking on more risk for higher expected returns — or profit. Unfortunately, many women are reluctant to invest because they are fearful, lack knowledge and are short on time. I think fear is the main driver because the stock market must seem like a house of cards to many. But that isn’t true. While not every stock or mutual fund will be successful many will. And it helps to realize that a stock is based on tangible company assets such as real estate, equipment, and valuable employees. Having a well-diversified portfolio of stocks, paying reasonable fees, and staying in the market for the long-term has historically led to a successful investing experience.

The harsh reality is that once a woman reaches the point where she has to pay attention to her financial situation it can be too late. Sure – maybe you will be lucky and inherit something or have a partner that plans adequately for both of you. But do you want to bet on that? According to Social Security “the overall elderly poverty rate is almost two-thirds higher among women than men”. And sadly, even if you do have a robust retirement nest egg there are plenty of people out there that are willing to commit fraud or simply give you bad financial advice. You need to know enough to make, or at least partner in, making good decisions. And it’s not that hard! The goal of the Lady Money program is education and empowerment. Anyone can learn to take charge of their financial future with or without the help of an accredited professional.

February 11, 2023

Financial How-To's

WHY IS FINANCIAL CONTROL SO IMPORTANT?

Personal Finances is often the broad term used for managing your money and planning for the future. As a financial advisor I referred to a snapshot of someone’s various financial components as their Current Financial Situation. In a recent podcast interview on Financial Literacy my guest referred to this as “knowing where you stand”. Regardless of what you call it, it is difficult to make good financial decisions and achieve your financial goals without some basic financial knowledge.

Where do you stand financially?

This is your starting point. Do an inventory of a) what you have (your assets) and of b) what you owe (your liabilities). Assets minus Liabilities equals Net Worth. Your net worth reflects where you are financially at the moment. You want your number to be positive (more assets than debt) and you want your net worth to be growing over time.

You also need to know how much is coming in and how much is going out, so you have a sustainable spending plan (budget). Think of this as a reality check. If you don’t know where you stand you cannot make informed financial decisions or track your progress. This leads to stress and that nagging feeling of not knowing whether you are going to be OK or not.

How do you get there?

Reesa used a big picture workbook she created for her financial literacy courses. I have a simple budget form as part of the Lady Money Personal Discovery Workbook for creating a thoughtful spending plan. But you can also use paper & pencil, computer spreadsheets or online budget apps. You don’t have to get it down to every latte either – a rough idea works fine.

The reason writing it down is important is that most people think of saving after the fact. Seeing if there is something left makes achieving saving targets a less than assured outcome. It is also more likely that you will spend indiscriminately rather than thoughtfully as part of a prioritized plan.

How does Social Security fit in?

For many of us Social Security represents a sizable portion of our retirement income. And the inflation adjustments your benefit will receive makes it especially valuable. It is important to be on top of several aspects. One – just as you should know your net worth you need to be aware of your estimated Social Security benefit. You should also periodically check that any annual earned income is properly reported so you get your fair due.

It is also a good idea to get a professional opinion on when to claim benefits. 40% of women claim their Social Security benefits at the earliest possible age (62) even though it means a reduced benefit for life. Sometimes there are good reasons such as health issues or cash flow needs. But in many cases, it is because women don’t really understand their options. Social Security does not give advice so if you are not knowledgeable you may construe a conversation on the process as encourage to take a benefit. I also think people underestimate their life expectancy. Many of us have health issues after age 60 but it doesn’t mean we won’t persevere and live a long life.

What else do you need to know?

You need to put it all together to make sure you have enough in retirement. Your net worth tells you if you are on track. Your spending plan (budget) ensures you hit your savings target and your spending is thoughtfully in alignment with your personal values.

Your estimated Social Security benefit is part of the equation in determining if you can continue your current lifestyle after any earned income stops. Roughly you take your current annual budget and subtract your estimated annual Social Security benefit (and any other income you are expecting). What is left needs to be covered by your investment portfolio. There is some debate on this but for broad brush purposes expect to be able to withdraw 3-4% a year from your investments. If you come up short, you will need to increase your savings targets. You may be fortunate enough to receive some sort of inheritance but as a financial planner I usually didn’t count this because there are no guarantees.

You may want to consider hiring a financial advisor to create a comprehensive financial plan for you. They will be more thorough and may have options you haven’t thought of. They can also help you decide when to take Social Security during that transition between stopping work and claiming benefits. The best choice is not necessarily intuitive.

Getting “Your House in Order”?

This is about more than money. Just as you plan for replacing your income when you retire you need to plan for when you can no longer care for yourself. You need to plan for when you die. Many people don’t like to talk about this, much less address it. So, I will just say that an important part of financial planning is estate planning. Because I can tell you from personal experience, it is much harder to deal with this during a difficult life transition or after a profound loss.

Once you “know where you stand” you will find it easier to make thoughtful spending choices, be more motivated to save for your future and have a better idea of what your financial goals need to be. Financial success is more about having a big picture plan that is appropriate for your particular financial situation and in sync with your life goals than having down every single detail.

Resources…

Reesa Manning Interview https://lady-money.simplecast.com/episodes/take-financial-control-an-interview-with-advisor-reesa-manning

January 15, 2023

Financial How-To's

WHAT DO YOU REALLY NEED TO KNOW ABOUT FINANCIAL LITERACY?

Money is a dilemma, isn’t it?! We weren’t taught about it in school. It isn’t a polite discussion topic. And historically it is supposed to be firmly in the male domain. What’s a woman to do! Well – smart women break the “rules”.

As advisor Reesa Manning points out in our recent podcast conversation, women need to know about their money. We are often the last ones standing and life is full of surprises. Self-preservation can come down to learning the basics as well as getting a firm handle on your own financial situation now rather than in the middle of a crisis. If this sounds daunting it doesn’t have to be.

So, what is Financial Literacy?

Think of financial literacy as the foundation of your relationship with money. It is the ability to understand and effectively use critical financial skills, including managing personal finances, budgeting, and investing. Financial literacy supports important life goals, such as saving for retirement, using debt responsibly, and/or starting a business.

You would think we would be farther along considering that the concept of financial literacy has been around since the birth of our nation. Ben Franklin wrote a piece in his almanac titled “Hints for Those that Would Be Rich”. His closing comment was a version of the famous “A penny saved is a penny earned”. Informal instruction on money management is documented in the 1800’s. But “personal finance as a serious educational topic only started in the 20th century,” opined an early Chartered Financial Analyst. Unfortunately, we still have a long way to go considering a recent FINRA literacy study determined only 34% of the participants got 4 out of 5 basic financial questions right.

Several of the questions Americans failed to answer correctly had to do with compounding of interest, inflation, and diversification. These are critically important concepts for women because they tend to live longer, earn less and are by nature more risk adverse.

Are you familiar with the magic of compounding of interest?

The concept probably originated in Italy in the 17^th century. It meant “interest on interest”. And that’s actually the whole idea. Compounding interest is a miracle compared to simple interest on just the investment principle. An example may give you a clearer picture. Using the “Rule of 72” an investment earning a 6% annual rate of return will double in 12 years. Compounding is a powerful tool for building wealth, giving you the ability to maximize the growth of even modest savings. The earlier you start the more impressive the results.

Unfortunately, compounding of interest is a double-edged sword. It works both ways making consumer debt difficult to pay off. If you haven’t seen the math it would take you over 10 years to pay off a $5,000 credit card debt with an average interest rate while simply making monthly minimum payments.

Why is inflation so dangerous?

Right after the fear of running out of money is the worry that you won’t be able to maintain your lifestyle. The villain is inflation. It is one of the main reasons you invest rather than keep your money in a low interest-paying savings account. Investing gives us the opportunity to earn more than inflation over the years so our purchasing power increases with the rise in the cost of goods. If you are having trouble embracing investing it may help to realize there are creditable risks other than the stock market.

Are you sure you really understand diversification?

We all know the saying – “Don’t put all your eggs in one basket!”. But there is a little more to diversification than that. If you have a well-diversified portfolio, you have spread your investment dollars across a wide range of different kinds of assets. This is an area where you might need a little help from a professional. Most people can see that they have a number of funds but may not know what kind of funds they are or what’s in them. The point is understanding that proper diversification is important because it reduces risk and makes the investing experience feel like a much smoother ride. Diversification keeps us in the game and the peace of mind is not overrated!

Is financial literacy a life skill?

Absolutely! Learning how to manage your money is critical to achieving financial security. And security makes it possible to live your life with a strong sense of wellbeing. The stakes are high for women. In addition to longer life longevity, women often earn less due to the gender pay gap and time off for caregiving duties. Mastering money gives you the best chance for a happy ending – with or without Prince Charming. And it is a confidence booster. Who doesn’t want to be in charge of their own destiny! When you feel in control of your financial situation it gives you options. And not just the freedom of choice. It opens up possibilities to do something incredible.

So, what is stopping you? It is not as hard as you might think. You really just need some basic knowledge about general financial concepts — not a lot of complicated details. This is what Reesa meant by learning to tell time rather than trying to build the clock!

Resources…

Reesa Manning Interview https://lady-money.simplecast.com/episodes/take-financial-control-an-interview-with-advisor-reesa-manning

December 19, 2022

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