Women and money – getting into good financial habits
Women generally face more financial hurdles in their retirement than men for a number of reasons.
Broken work patterns to raise children, lower average earnings, and longer life expectancy are the main causes. Therefore, women need to take action when they are young so that they are not significantly disadvantaged later on.
There is a significant financial gap that can open up over a lifetime due to many women spending less time in the paid workforce than men. Over the next 40 years, for example, a 25-year-old male is expected to earn (on average) $2.5 million. In the same period, females are expected to earn just $1.5 m illion.
With the compulsory employer super system entirely based on earnings, it’s not hard to see how the gaps identified above directly impact the amount of super women accumulate during their working lives.
Getting into good financial habits
The following ten good financial habits can help you make the most of your wealth accumulation strategy.
1. Start with the basics
The foundations to achieving your financial goals start with getting organised. This means you need to start with the basics – complete a budget and understand your expenditures. This will also allow you to manage your cash-flow to meet your ongoing expenses.
2. Improve your financial literacy
Financial literacy is the ability to make informed judgements and effective decisions about the use and management of money. It is an essential skill for functioning in modern society and is becoming increasingly important in achieving your financial goals.
3. Take control and build your super
Statistics show that women in Australia earn less than men on average, lower earnings means lower superannuation balances1. Therefore, it is important to improve your knowledge and take control of your super. Start by tracking down any lost super and providing your tax file number to avoid paying up to 47 per cent tax on your employer contributions. Consolidating your super into one account is also important.
There are a number of ways to build your super and even small contributions can make a big difference over time:
• Salary sacrifice
• Government super co-contribution: the Federal Government may match your personal after-tax contribution to super if you meet the eligibility criteria.
• Partner or spouse contributions: if you have a low income, or are not working, your partner or spouse may be able to contribute to your super.
4. Understand investment risk
An integral part of your wealth accumulation strategy will be investing into assets such as fixed interest, property and Australian or international shares. It is essential to understand potential investment risks and be comfortable with the impact of decisions you make (such as how much risk you’re taking on).
5. Understand your investment options
As a consumer, you probably wouldn’t purchase a product you didn’t know anything about – you would complete some research to get a greater understanding. The same principal applies to investments. You need to understand what you are investing in, what investment options exist and if these options are suitable for you.
6. Harness the power of regular investing
Making your money work harder for you is good practice. The easiest way to do this is to harness the power of regular investing. Investing regularly over a long period of time allows you to take advantage of compounding investment returns.
7. Protect your most valuable asset
Your ability to earn an income is your most valuable asset. All of your future plans depend on it. If you’re unable to work due to illness or injury, you lose this valuable asset – unless you have the right insurance arrangements in place. You should seriously consider taking out appropriate insurance cover, such as income protection and total & permanent disablement cover to ensure your financial stability is protected.
8. Make the right estate plans
It is estimated that nearly half of all Australians die without a Will. Creating one is a vital aspect of your estate planning which should also include enduring power of attorney, medical power of attorney, guardianship of your children and a binding death benefit nomination within your super account.
9. Appreciate that life changes
Particularly for women, circumstances will change throughout your life, therefore your goals will too. So that you can continue to make the most of what you have, your financial plan should reflect changes. For example, you may get married or you may have children. You may receive inheritance or a redundancy and need some advice about the most tax-effective way to use it.
It’s your life; make the most of every opportunity.
10. Develop a Strategy
Clear direction to help achieve your goals can be formulated in a strategy within a financial plan. Your financial plan can be likened to a road map which will move with you over time as your circumstances change.
Sources: IOOF, August 2014
1. ABS, Category 6302.0, Average Weekly Earnings – Trend, February 2011 (released 19.05.11)