There is a growing trend in the United States and you may be a part of it. Women are increasingly single. The rate of marriage has declined steadily since the 1960s. The corollary also holds; More women have never married. Also, the number of women who are divorced has grown slightly, particularly among older women.
Our firm works with many “independent” women. These women are single (i.e. never married), divorced or widowed. They have taught us that financial independence for women is incredibly important. But what is “financial independence?” Our clients tell us it means that they are in control of their finances, they have enough money to meet their current needs and they don’t worry about running out of money late in life.
Unfortunately, far too many women in this country are not financially independent. Let’s explore five steps you can take to move towards your own financial independence.
Establish a Budget
Start by determining how much money you need to live comfortably. You should identify your fixed living expenses which are not likely to change all that much from year to year. They will gradually rise over time, because of inflation. Examples include property taxes, groceries, insurance, and utilities. An easy way to identify these expenses is to go through your bank checking and credit card statements.
Now consider your variable expenses which are likely to vary by amount and by how often they occur. These expenses will also be affected by inflation. Examples include replacing your vehicle, remodeling your home, replacing appliances and travel/vacations. It may be a bit more challenging to quantify these expenses. One way to do it is to think about what they would cost today. Then think about how often you expect to do them over the rest of your life.
Now you need to think about your sources of income. If you are working, your salary is probably your primary source of income. If you are retired, you may have a pension, Social Security, rental income and income from investments.
Your income, after paying taxes, needs to be greater than your expenses. If that is not true, you will either be spending down savings or you will be incurring debt. If you are still working, neither of these options is a good long-term strategy. If you are retired, you need to be certain that you will not run out of savings in your later years.
Become Debt Free
If you are working and you have consumer debt (e.g. credit card or auto loan), your priority should be paying off them as soon as you can. You should pay off the debts with the high interest rates first (usually credit cards). Then move on to the debts with the next highest interest rates until they are all eliminated. The only debt that makes sense for working women is a home mortgage.
If you are getting closer to retirement, you should set a goal to pay off your mortgage before you retire. It was once customary for Americans to enter retirement debt free. However, it is less common today and many people now enter retirement saddled with debt.
If you are retired, resist doing anything that may cause you to go into debt. Financial independence for women means not having debts.
Don’t leave your future to chance. Contact our team at Springwater Wealth today to learn how we can help you develop a financial plan for your peace of mind.
Save First, Then Spend
Let’s assume that you are debt-free. If you are working, you should save first and then spend whatever is left over. So, let’s say that you earn $100,000 a year and you have determined that you need to save $20,000 a year to achieve financial independence. You should save as much as you can in your employer-sponsored retirement account. You can save nearly that much ($19,500 in 2020) in a 401(k) or 403(b) plan. You could save additionally in a savings or investment account.
You would have approximately $80,000 left over. Let’s assume your adjusted (for taxes) gross income is $65,000 and you pay combined (federal and state) taxes of 30%. Your taxes would be $19,500. You would have $60,500 for your fixed and variable expenses. So, you need to make sure you spend no more than $5,000 a month.
Most Americans spend money on their living expenses, pay their taxes and save whatever is left over. This is not a good strategy, because too often there is little left over to save. Financial independence for women requires saving first and then living on the rest.
Financially independent women set goals and they develop a plan to achieve them. You should set goals for all of your large variable expenses. Here is an example.
Let’s imagine that you wish to buy a new car in 3 years. We’ll assume that you own your car outright now and in 3 years the trade in value of that car will be $20,000. The new electric car you plan to purchase will cost $40,000. That means that you will need to save $20,000 in the next three years. We will assume you save in a simple saving account and that the interest on your savings is 1.3%.
If you save $545 a month for the next thirty-six months, you will be able to pay cash for the new vehicle.
If we assume (from above) that you can spend $5,000 a month, you will have $4,455 after your auto savings for day-to-day living expenses.
If these actions seem a little overwhelming, because you do not know where to start, you find the math confusing or you just need a cheerleader, get help!
There are many resources on the internet and mobile applications where you can track your expenses (e.g. Mint, Wally, YNAB) and manage your investments (e.g. Vanguard, Betterment, Wealthfront). If you need personal guidance, consider hiring a Certified Financial Planner™. You can find qualified, fiduciary financial planners at the CFP Board, NAPFA and Garret Planning Network. We help women gain financial independence and you can reach us here.