Broad Street: Financial Literacy 101
Hi Broads! My name is Gina Vinnitsky and I’m going to be joining you every month to discuss women and wealth. I’d like to kick off the year with a little “Financial Literacy 101,” because I think we could all use a bit of an icebreaker when it comes to talking money. In the coming months, once we’ve gotten organized and made sense of our 401(k)s, we can get into nitty gritty topics like stock market investing, and of course, the buzzword of the year: cryptocurrencies! And if you are thinking, “oh no, I am not sure this stuff is for me,” let me tell you I didn’t even think I had the “finance” gene until a few years ago when I started doing my own research and investing. Everything I’m writing about here, I learned by doing. And as the saying goes, if I can do it, so can you.
Gina Vinnitsky | Financial Contributor
Welcome to a new year, new you. After all, once the holidays are over and we’ve said goodbye to our in-laws, the last remnants of our bikini bods, and most of our discretionary income, isn’t the next step usually setting New Year’s Resolutions and doing our best to adhere to them? In theory, sure. That sounds wonderful! But in reality, eating massive amounts of kale after four weeks of candy canes and sugar cookies just doesn’t seem possible. What does seem a little more within our reach, however, is to finally get serious about our finances. It might feel a little scary initially, but it sure beats spinach smoothies and crack-of-dawn workouts.
First things first, let’s start by breaking down the barriers surrounding finances in the first place. Many of us find that talking about money is imprudent. Like politics and religion, “society” tells us there’s a time and place to discuss finances but never in public and never with friends or potential suitors. And if the subject ever does arise, maybe you don’t feel confident enough to speak up, be heard, and ask questions. The good news is, you’re not alone. According to Fidelity Investments, 80% of women decline to discuss finances with a close family member and only 47% of women said they are confident speaking to a financial professional. And the stock market? Forget it. According to Financial Finesse, less than half of women feel confident in their investments. Millennial women especially are avoiding the stock market: 75% of women aged 18-34 said they find investing confusing
But it’s 2018, broads, and women are towing the line just about everywhere you look! Women CEOs, women presidential candidates, women pilots. Coupled with the fact women live longer, generally get paid less, and on average require more money in retirement, isn’t it time we step up and gain control of our finances?
So let’s start washing away the stigma about females and finances by first and foremost, making sure we have everything in order. The first step to finding your financial confidence is knowing what you have in the bank and making the most of it. I’ve offered a few guidelines below to help get you started.
1. Evaluate Your Current State of Affairs
Deep breath, broads. This part can be a little scary and overwhelming, especially if it’s been a while since your last check in. But just like we dread going to the dentist, don’t we love that clean feeling once we leave, lollipop in hand? No? Just me? Well, either way, there’s no way around this step and if it helps, you can think of the peace of mind that comes with knowing your financial status as the metaphorical lollipop.
First, figure out what you’re bringing in (income) and what you’re spending (expenses). I recommend using a piece of paper or a spreadsheet to write this all down, because while there are apps out there that can do this for you, paying $2.99 for something you can do for free somewhat defeats the purpose of what we’re trying to accomplish here.
Next, add everything up. Ideally, you want your income to be greater than your expenses. This means you’re living within your means and the next few steps (saving for retirement and emergencies, getting a high credit score) will be a little easier for you. But if your expenses are higher than your income, your lifestyle will sooner or later become unsustainable.
Of course, there are ways to swing you back over to sustainability. You’ve heard it before and I’ll say it again here: cut back on non-essentials. This might mean temporarily giving up weekly manicures at the salon or making coffee at home versus buying from the coffee shop. The lifestyle might not be as fun or glamorous, but neither is losing sleep over a dwindling bank account.
But let’s not forget about the other side of the coin: upping your income. It’s never an easy conversation, but you should be asking for that raise every single year. Arm yourself with data you’ve quietly gathered from co-workers around the water cooler, as well as data from salary survey sites like PayScale. Make sure, first and foremost, that you’re getting paid fairly and adequately and know the ins and outs of negotiating (see Negotiate Your Salary Like a Badass Broad for a refresher). Next, think about a side hustle. Being an Uber or Lyft driver might’ve once had an unfair stigma attached to it, but it’s now become commonplace to have a second job. In fact, 44 million Americans have a regular side hustle, and 36% of those people make $500 a month or more. So if you’re not willing to give up a few expenses, think about how you can make a little extra cash to support the lifestyle you’re already living.
Finally, if you have any debt that’s been racking up, it’s time to face the music and figure out a payback plan. Credit cards with a high interest rate should move to the top of your list, because you’re essentially lighting cash on fire every month you hold a balance. Figure out how much you can afford to pay down monthly, which should be a little easier now that you’ve cut some non-essentials out of your spending, and stick to it. The faster you free yourself from debt, the faster you can start saving.
2. Save for Retirement
The funny thing about retirement is that even though we all think of it as inevitable, it really isn’t. How much money you save now is directly correlated to how soon you can retire and what kind of lifestyle you can have once it happens. So if you’re not saving much, or anything at all, you can say goodbye to sipping those umbrella-topped drinks on a remote island while you’re still young enough to enjoy them.
The harsh reality is women will need about $158,300 more in retirement than their male counterparts, while making on average about 21% less than men. So despite your age, career, or financial status, there really isn’t any time to lose.
Luckily for all of us, there’s a simple solution to all the chaos and it’s called the 401(k) plan. Yep, you’ve heard of it and your employer most likely offers one. And if you haven’t started already, you should immediately sign up and take full advantage. It’s a convenient way for you to automatically save money from each paycheck before paying taxes. It never reaches your bank account, so for me, I don’t feel like I’m giving anything up. Most employers will also offer 401(k) matching, meaning they will contribute additional money to your account. In other words, they’re giving you free money. I repeat, free money.
There are lots of different 401(k) matching formulas, but here are two of the most common. A 50% match up to 6% salary means your employer will pay half of your total investment, up to 6% of your gross salary. For example, if you make $80,000 a year and contribute 6%, your employer will throw in an additional $2,400 per year. The other common 401(k) formula is a 100% match up to 4% salary. This means your employer will match your contribution dollar-for-dollar until they reach 5% of your gross salary. So if you make $80,000 a year and contribute 5% of your pay, your employer will contribute an additional $4,000. Some employers might offer a mix of the two, where they will 100% match up to 3% and 50% match another 3%. 401(k) plans can differ, and you should find out the details before you enroll, but it’s generally a good idea to contribute. Otherwise, you’re leaving free money on the table that will most certainly be a big help in your retirement.
If you’re self-employed or you don’t have access to a 401(k) through your current employer, don’t worry. You can still set up an IRA (Individual Retirement Account) through a bank and get many of the same benefits, meaning you can invest your contributions and grow your funds steadily. Many banks offer free accounts and some will even offer free investment guidance.
3. Create a Nest-Egg
Once you start saving for retirement, you might feel like you have a little bit of a safety net. And you’re not wrong. But keep in mind saving for unexpected costs or emergencies is equally as important. Nearly 60% of Americans don’t have enough savings to cover a $500 or $1000 unexpected cost. This could mean an unforeseen car repair, a late night trip to the vet, or worst-case scenario, losing your job and having to make rent or a mortgage payment.
In general, you should strive to save up at least six month’s worth of expenses. Meaning if you lost your job or couldn’t work, you would have ample time to figure out your next move without any serious stress. The easiest way to start working towards this is by making it as automatic as possible. Most checking accounts allow you to set up a recurring transfer of a specified amount; for example, 10% of your paycheck can automatically be transferred to your savings account. Imagine waking up on payday and already having done the hard part while sleeping!
You can also sign up for an app like Qapital, which allows you to round up your purchases to the nearest dollar and deposit the difference into your savings account. So if you do happen to indulge in that 3 o’clock latte (and who can blame you), you can at least feel good that you’ll be saving a little money in the process.
4. Check Your Credit Score
Credit scores can feel as elusive as retirement. There isn’t a lot of urgency around fighting for a better score until you need it. But as soon as you’re ready to finance a house, a car, or even the shiny new iPhone X, you’ll be keeping your fingers crossed that you don’t seem like a flight risk to creditors. Furthermore, you might think you have all your bases covered by signing up for a free monitoring service, but take it from me, those services can miss some pretty big red flags.
In order to stay on top of your credit score, first check your credit report with all three major reporting agencies: Equifax, Transunion, and Experian. Different companies use different agencies, or a combination of them, in order to determine if they want to do business with you. You can get a yearly free report from all three agencies through AnnualCreditReport.com, which is the only FTC-approved site for doing so.
Once you get a copy, make sure everything looks accurate: personal information, open accounts, closed accounts, credit inquiries. Everything that’s ever been associated with your name and social security number should show up there. And if you see something out of place, like a credit card you never opened, be sure to report it to the agency immediately. It can be a lengthy process, but the last thing you want is a stolen identity or fraudulent accounts besmirching your good name and all the hard work you’ve done to straighten out your finances.
Next, you’ll want to look up your credit score. Unfortunately, this is where it gets confusing because the credit reports you receive from the three major reporting agencies don’t actually have a “credit score” attached to them. Many credit card companies now allow their members to see their credit score, and you can find a list here. You can also estimate your score through MyFico’s free estimator or CreditKarma.
Finally, in order to keep a good credit score, make sure to pay your bills on time and pay them in full, when possible. If you must keep a balance on your credit card, make sure it’s no more than 30% of the total limit. In other words, if your credit card has a limit of $10,000, be sure to only keep a balance of $3,000 or less (with a zero balance being the optimal situation). Also, instead of opening multiple accounts with multiple credit card companies, you can always request a higher limit from your current issuer. The less moving pieces means you have less to worry about, allowing you to keep a closer eye on your credit.
New Year’s Resolutions are never easy, are they? And in all honesty, neither are finances. Especially with the difficulty so many of us have around discussing money openly, which only leads to more confusion and less investing. But now we’ve started the conversation and begun to organize our finances for the coming year (and really, many years to come), we’ve opened ourselves up to new possibilities for growth, both financially and metaphorically. The sky’s the limit from here, broads! Until next time. . . .