Irvine • Dallas

COVID-19 has brought to the forefront the importance of financial stability.  In fact, the lack of financial security has a direct impact on our psyche as well as our pocketbooks.  We know that women have been hit harder than their male counterparts during the recession, with labor participation down significantly for women.  Therefore, understanding women’s relationship with money can help them get ahead and hopefully avoid some of the common mistakes that are made with their resources.

First and foremost, upbringing has a lot to do with any adult’s relationship with money; yet few of us truly utilize what we learned about money growing up.  In addition, many women have found themselves at a disadvantage due to their parents’ lack of financial education.  One of my clients was lamenting that her father always told her she would not have to worry about money because she would eventually receive an inheritance.  Because she believed her father, she never focused much on her own financial well-being. In her mid-50s, she realized that while her father had great intentions, her inheritance would be spent on his long-term care needs, leaving her without the money on which she was dependent.

Tip #1:  Many women learn the hard way about financial matters in adulthood.  Oftentimes it is a matter of facing the fear of money head-on and talking to a financial advisor about your financial situation.  Think about why money is important to you and what it represents in your life.  While your parents or your spouse may say you don’t need to worry about money, there is never any substitute for your own financial independence.

As a result of the pandemic, one woman business owner I know had revenues that contracted 70% last year.  She clearly qualified for a Paycheck Protection Program (PPP) loan.  Instead, she took $50,000 out of her retirement account rather than apply for the loan because she felt others would need those PPP funds more than she did.  This action resulted in a double hit. She borrowed against her retirement, which means that money is not invested in the market so she’s essentially losing money.  In addition, she will have to pay back that loan in her retirement plan with interest to herself.  If she had applied and received the PPP loan, it most likely would have been forgiven.

Tip #2:  Leverage can be a tool to help business owners grow.  While too much leverage can put a business owner at financial risk, too little leverage can be the difference between growing your company and becoming stagnant.  For individuals, the same principle of reasonable leverage can apply.  In a low interest rate environment, it may not make sense to pay off a home mortgage.  Instead, creating a cash flow analysis may show that keeping a low-interest rate mortgage has a better financial planning outcome.

For example, one of our clients went through a divorce and thought she should pay off her home mortgage.  However, in doing a cash flow analysis, we were able to illustrate to her that the better outcome was to refinance the mortgage to a lower rate and keep her liquid assets to create the cash flow that she needed to live.

Tip #3:  Many women want to be more conservative with their money to the point that their portfolio may not outperform inflation. Since women have a longer life expectancy and have a greater risk of inflation with their portfolio, they should understand that longevity is one of their greatest risks, not short-term volatility. The way to look at volatility is that it is a healthy breather in the markets, an opportunity to invest more cash and a temporary decline that will correct itself and go to new highs.

Also, historically, women have a longer life expectancy than men.  Therefore, the impact of inflation on women is of greater concern.  We know that equities outperform inflation more than fixed income.  It would seem that women might allocate a greater amount of capital to equities. However, the opposite tends to be true.  One of my clients is a very savvy business woman but has a misconception about volatility and the way that markets work.  She expects that each new high on her statement should never retreat from that level.  When she sees a statement that shows a decline, she tends to panic, even though she is ahead of her net invested amount.  The technical term for the fear of an account continuing to decline indefinitely is called recency bias.  Yet, short-term declines should not alter your long-term goals.

To many women, investing is a language that it is difficult to understand.  So, it becomes confusing to know who to trust.  How can you trust someone who speaks in a language that you do not know?  On top of it all, there is a cost to investing with a professional and many people are worry about paying for advice that they get stuck in paralysis.  For many women, the task of finding a financial advisor can be daunting. However, instead of giving up on getting professional advice, there is a way to vet financial advisors and find one that has your best interest in mind.

Tip #4:  Here are three questions to ask a financial advisor:  1) How are you compensated? 2) How will you educate me on my investments? and 3) How will I know that I am making progress towards my financial goals?

The most common question I get asked is, “How much do I need to retire?”  To which I respond, “How much do you spend?”  Unfortunately, many people do not know how much they spend, and since spending habits vary widely, there is no one size fits all approach.  No matter what your lifestyle is or how you spend your money, if you overspend what you can afford, it will lead to financial demise.  It is important to remember that debt is a black hole out of which it is hard to crawl out

Tip #5:  Understand what you spend and make sure you can afford the lifestyle you are living.  Pay off credit cards each month and make sure you are saving 15% or more of your income for retirement.  If you are already retired, track your spending and discuss a spending plan with your financial advisor to make sure your spending habits align with the resources that you have.

30 years ago, when I was deciding on a career path, I pursued financial services because I wanted to be financially secure and to help other women achieve financial independence.  Along the way, I have made many of these mistakes that I help women overcome every day. I didn’t grow up understanding financial matters and as a young adult I spent more than I made, which put me in credit card debt. The good news is that it is never too late to make changes that can help us to become financially empowered.  While achieving financial security can be hard work and take a concerted effort, once you get there, you’ll reap the benefits for years to come.