As many as 90% of women will be solely responsible for their finances at some point in their life. (1) 51%, or $14 trillion, of American personal wealth is now controlled by women, and expected to grow to about $22 trillion but the end of 2020. (2)
Women, Wealth and Purpose is the title of a 4-hour financial literacy course I created and teach across the Denver Metro area. (With a slight change of the content and student make-up the course becomes Wisdom, Wealth and Purpose.)
Over the decades I have been in the financial services industry I have heard from too many people, especially women, they want to have a greater understanding and sense of control over managing their money including investment management, tax planning, retirement, and estate planning but don’t know where to turn to learn. Many had relied on someone else in the family to make important financial decisions and now are forced to be in the decision-maker role on their own. Like Rosie the Riveter, they know “They Can Do It” but just need the education. They seek the security found in the knowledge of the basics of comprehensive financial planning.
Knowledge leads to a sense of control and optimism that can reduce stress. Ongoing stress about money is linked to migraines, heart disease, diabetes, sleep problems, and more. (3)
So, rather than fall prey to ill health over money fears, make the investment in your money management knowledge by taking classes, reading books, listening to podcasts and reading blogs. Of course, I realize I am preaching to the choir!
To some, learning about the key components of comprehensive financial planning sounds daunting…..and dare I say, boring. Believe it or not, neither is correct. Mostly, it is money that provides the foundation to our quality of life. We all know quality of life isn’t measured by money, however, we know having a secure financial path ahead of us can provide us with choices and opportunities we wouldn’t have access to without it.
Certified Financial Planners Are Here To Help
So, how do Certified Financial Planners™ (CFP®) assist folks just like you develop a roadmap to success? The College for Financial Planning awards the designation of CFP® to those willing to work through the rigors of the curriculum all designed to help the individuals we work with attain their important and varied goals with the most efficiency and highest probability of success as possible. In that course of study we learn there are 6 key money topics that could in fact be isolated and analyzed individually but actually fit together like pieces of a puzzle to complete our life’s financial picture. For example, decisions around retirement planning have a direct link to taxes. Planning for education for a child may have a relationship with planning for retirement and again, taxes. With so many moving parts, having a basic understanding of each money concept independently and how they integrate with each other allows an effective and actionable comprehensive personal financial plan to be designed. Fewer mistakes are made and more money-making and saving opportunities are identified and taken advantage of.
Women, Wealth and Purpose visits all 6 areas. However, importantly, it starts with envisioning the future you wish to live. What is important to you? What do you value and hold dear as your purpose in life? Do you wish to make your mark on the world with your efforts with a particular charity? Would that require your time alone or is money part of your planned support? Many tell me they never want to be a burden to anyone for as long as they live. Is that you, too? Is it important for you to give to our future generation by volunteering as a Reading Tutor at the local elementary school? Are you planning on helping your children or grandchildren with education expenses? Do you wish to leave a legacy to your family at your death? What about that extended vacation with your family when your granddaughter graduates? Does your car need replacing soon?
For those important issues in your life both the grand and mundane, that require money, if you can imagine a clear picture of what you want that to look like, what each vision or need would cost and have a prioritization of them in mind, a concrete financial path or plan can be created. What you will find is a great sense of accomplishment and dare I say, joy, when you know you are working toward fulfilling your life dreams many that touch not only you but your loved ones.
Let’s get started. Here’s where your knowledge about the 6 key concepts of financial planning comes into play:
Key Concept 1: Present Position
Quoting Steven Covey, “Begin with the end in mind”. Now that you have your various goals clearly in mind, prioritized and quantified, you have your “end” in view. But, where does this journey begin?
Start with taking an inventory of all of your resources including your checking, savings, investments, retirement plans, home market value, rental property, cars, furnishings, collectibles, etc. Add up their values then subtract all of your liabilities including mortgages, car loans, student debt, and credit card balances to come up with your Net Worth. Are their assets there you are already assuming are “seed money” set aside to reach your goals?
Identify Income Sources
Next, identify all of your current and future income sources. Consider your wages, expected Social Security benefits, pensions, investment income, alimony, child support and more. Compare this to what your life costs right now. Examine your spending over a few months to determine the average cost of your current lifestyle. Don’t forget the various annual or semi-annual payments you need to include such as HOA fees, car insurance payments, Homeowner’s insurance if it isn’t part of your escrow, and various membership fees. Can you identify what is a necessary expense? These would be those that you just literally can’t live without such as food, housing, insurance, car payment and more. What are your discretionary expenses that if in a pinch you really could live without?
When you compare your income to your expenses, if you have a shortage, meaning you are spending more than you are earning, it won’t be a surprise. You would have been noticing your credit card balances increasing.
Breaking the use-of-debt habit and working your way out isn’t easy but ultimately worth the effort. If you need help there are various credit counseling agencies available to help you develop a debt reduction plan. As a result, your stress level (and interest charges!) will be reduced and you’ll enjoy the satisfaction of saving and investing toward what is important to you.
A rule-of-thumb is to have 3–6 months of living expenses set aside in a liquid (albeit low yielding) savings or money market account. When life throws you a curveball, you have a resource to access instead of turning to a credit card. (By the way, how are those tires doing? Is the roof in good shape?)
Setting aside money for our future is difficult. Daniel Goldstein, a renowned behavioral economist points out, your “present self” lives very much in the moment and has a greater impact on immediate decision-making, while your “future self” is more of a far-away thought whose needs don’t seem nearly as imminent. (4)
For many, savings options like 401ks or payroll deduct savings plans are very helpful as the “out of sight, out of mind” rule applies. Beyond that, setting up an automatic investment plan directly out of your bank account can be helpful too.
Now that you
have your starting point your next consideration is how to protect yourself and
your family from financial devastation when negative life “events” occur? We all know, LIFE HAPPENS.
Key Concept 2: Risk Management
Planning for Life’s Financial Emergencies
In your journey, you will face roadblocks. What if you or your spouse lost your income because of a layoff? (Is your emergency fund in place?) What if you couldn’t work temporarily or permanently because of an accident or serious illness? What resources do you have in place now? Again, your emergency fund would be handy to pay bills. But that will only go so far. What would an employer’s group plan provide? Most only provide up to 60% of your pre-disability income through a short term and/or long-term disability benefit. (Insurers don’t believe it would motivate you to return to work if it were higher.) How would you fill the void? Could you reduce your lifestyle costs by that difference? If not, what would your Plan B become? Can you think of a reasonable Plan B? Perhaps a child will move back in to help? Do you really think they would or could?
If you are self-employed, should you be unable to work you could not only lose your current income but potentially your business if you aren’t there to generate revenue. There are disability income insurance contracts that may be appropriate to help you. The cost for this protection may be warranted if you don’t have a Plan B to fall back on. Imagine and plan for this trying scenario before it happens. Don’t think you will be able to wing it when you are stressed and desperate.
What would happen to your family or business if you or your spouse suddenly died? While this heartbreaking subject is one we don’t want to think about, not doing so and planning for this possibility puts your survivors in jeopardy. But it must be planned for thoughtfully. What would your survivors do if you weren’t there? Move to a different home? Require different child care arrangements? How much would the surviving spouse, if you have one, be able to make? Would they still be able to afford to put money away for their own retirement? Would even the must-have expenses be met? If not, you need to calculate the actual shortage.
Do your best to estimate the amount of money needed for your survivors to live a lifestyle you would like for them. Examine all of your resources including life insurance benefits provided by your employer’s group plan. (Caution, many employer plans are not transferable or convertible to an individual policy if leave your job. )And some that become very expensive.)
What other sources of income could your family come up with? How about your savings and investments including retirement accounts? That is fair to assume they can be tapped into but what does that do for the surviving spouse that would like to retire someday? How about the savings you had set aside for kids’ college? Would that be used to make mortgage payments instead? Now that you have thought this through, do the math. If you have a shortage of resources that amount is what you would want to replace somehow. For most, purchasing life insurance is the most prudent, cost-effective option. It is still an expense but if the proper amount is insured once again that stress, the gnawing feeling that you know life could be bad for surviving loved ones without it, is removed.
Now to consider what kind of individual insurance to buy? One type is term insurance, which is perfect if you see that you need to have coverage for a certain period. As an example, you want to make sure your children’s education is paid for should you pass. You would no longer need to have this coverage once they finish school. You match the timeline of the contract, say a 10-year term, with the timeline of your goal. It is not necessarily designed to provide you coverage well into your senior years.
The other main category is Permanent Insurance. We also know these as whole life and universal life insurance. This type protects your life no matter how long you live. Whether you are looking to leave a legacy to loved ones or a charity or know your business would need a cash infusion for its survival or to implement a succession plan, having a permanent policy in place is appropriate.
Important to note, life insurance death benefits are TAX FREE to beneficiaries.
In addition, we can use permanent insurance policies to help achieve various accumulation goals, even retirement cash flow, as these include a cash value component providing tax-deferred growth. With very careful structuring, even a tax-free income stream can be created. Some of these insurance policies can tackle two or more financial goals through one contract. That’s how comprehensive financial planning can create efficiency in your portfolio!