5 THINGS EVERY WOMAN SHOULD KNOW ABOUT THEIR FINANCES
By 2025 more than 60% of the UK’s wealth is expected to be in the hands of women.
Women will have more financial power than ever before.
The reality is that wealth is often passed down to women by their husbands, so the likelihood is that we’ll be in control of both short and long term finances at some point – make sure you’re prepared when it happens to you. Research suggests that both a confidence and engagement gap exists. Women stereotypically control the everyday household finances, whilst long term finances such as pensions and investments are regarded as the man’s domain. 63% of millennial women admit that they defer to their male partner when to comes to long term financial planning. Please remember this article and our website don’t give personal advice. If you’re unsure what to do, ask us about advice.
Clare Stinton
Workplace Financial Wellbeing Specialist
During my 7 years at HL I’ve spoken to many female clients, both during my time on the Investment Helpdesk and in my current role as a Financial Wellbeing Specialist. In my personal experience, it’s become apparent that women often have a crash course in finance through necessity, rather than choice. It’s usually during an already emotional time, off the back of a life changing event such as divorce or loss of a partner. I’ve lost count of how many clients have said ‘why aren’t we taught this?’. They’re right, most school curriculums don’t include information on credit scores, how to get a mortgage or the power of compound growth. It’s said Einstein referred to the latter as the 8th wonder of the world! Regardless of age everyone (men too) should arm themselves with the tools to understand money – it really does make the world go round. Becoming financially literate will give you clarity and confidence for your present and your future. So here are five finance fundamentals and potential pitfalls to get to grips with, to ensure you’re in control of your own financial future.
1. You’ve heard of the Gender Pay Gap…but what about the Gender Pension Gap?
According to research conducted in 2019, women in their late 50s have around 50% less in pension savings than men. This disparity increases with age, by the time they reach their early 60s, women have a third of the pension wealth of their male counterparts on average. Socio-economic factors can undermine female financial resilience. Pension inequality predominantly exists because women typically earn less during their lifetimes, the result of both the pay gap and what’s termed the ‘motherhood penalty.’ Taking time out of work to look after children and potentially returning part time on a reduced wage means that women receive consistently lower pension contributions from their employer and generally have a lower capacity to save for later life. Missing or reduced contributions in your 20s and 30s can seriously harm your retirement income. Evidence suggests there are two main ways to boost your pension pot: a) how much you contribute and b) the level of investment return. The good news is, it’s these two areas that we as individuals have the greatest degree of control over. Get ahead of the gap, plan for that career break and assume you’ll take time out of the workforce to have children – if you save more earlier on, the money has longer to grow. The magic of compounding means your money works harder, this is where you can earn returns on your past returns. The longer the timescale, the more your money can grow, therefore it’s much easier than playing catch up in your 40s. Swap that monthly ASOS spend or takeaway splurge for a bit more into your pension (it’ll cost you less than you think with tax relief) - you’ll thank yourself later! Remember money in a pension can’t be accessed until you’re 55 – 57 from 2028. Tax rules can change and benefits depend on your circumstances. Watch the below video to find out more about your workplace pension, remember taking action now will likely mean more choice later in life.
2. Investing isn’t just for men
Investments can make your money work as hard as you do. Yes, investing comes with risk – BUT so does holding cash for the long term, due to the invisible threat of inflation. Inflation is the cost of everyday living rising at a faster rate than the value of money – for example goods and services that cost you £10 in 2000, would cost you £15.18 in 2015 and £17.21 in 2020. So taking no risk at all, is actually a risk! If your cash savings don’t keep pace with inflation - which the Bank of England targets at 2% annually - then your hard-earned money will erode in value – your purchasing power is reducing. Investing is nothing like the portrayal in that famous Leonardo DiCaprio movie. Investments are a practical, financial tool used to help deal with inflation by offering the prospect of a better return than cash interest rates. For example if you had invested in the top 100 UK companies from 1 January 1986 to 1 January 2021 you would have seen a total return averaging more than 8% a year (though this doesn’t take charges or inflation into account). This isn’t a guide to what you’ll receive in future though, investments can fall as well as rise in value, so you could get back less than you invest. When it comes to investing, time is your greatest ally. Five years is generally the minimum timescale suggested when considering investing. The longer your timescale, the longer your recovery period should your investments fall in value. The best thing is that you don’t have to be a stock market expert. It’s commonplace for individuals to invest in a fund, particularly within a pension. A fund is where likeminded people pool their money and an expert fund manager makes the day-to-day decisions for you. They will make a charge for doing this, but it can reduce your costs and administration in comparison with picking individual investments yourself. Ready to learn more about growing your money and unlocking new opportunities? Check out the video below where I chat to Susannah Streeter, Investment Analyst and all-round stock market expert, about all things investing.
3. Your credit score matters
If you ever want to buy a house or take out a loan – then you should take the time to check and manage your credit score. It impacts your future ability to access credit, this includes credit cards, mobile phone contracts and monthly insurance premiums. Your credit score is how lenders will assess the risk of lending to you, it’s an assessment of how good you are at managing debt. You can check it for free with one of 3 agencies, Equifax, Experian or Call Credit. Please note your score may vary between providers. If your score is lower than expected, check all of your personal information on file is correct including checking for fraudulent activity. And make sure you’re registered on the electoral roll as this can help with identity checks. Get your name on some bills, if you’re living at home with your parents then paying your phone bill monthly via direct debit can be proof you’re a good candidate for credit. Ensure your bills are paid on time, this is fundamentally what lenders are trying to assess – not doing so will lower your score. Be aware, the last 6 years’ worth of financial decisions will be held on your credit file - this can include financial associations such as your partner’s spending habits. Shared utility bills can also sometimes create a financial link - so it’s important to check you’re not associated with any ex-partners or old housemates. If you are then let credit reference agencies know to break the link.
4. Set (and review) your budget
Budgeting is the cornerstone of financial health and good financial planning. Unfortunately. I think the word ‘budget’ can have negative connotations, people may think budget means basic, or associate it with restrictions – when in actual fact, it sets you on the right track to achieving your goals. Living without a budget is likened to going travelling without a map, it can be accomplished but the result is often expensive and inefficient.
Setting a budget will mean you are less likely to overspend and fall into debt as it encourages good spending habits. It can also increase your capacity to save by identifying areas where spending could be reduced. Build saving into your budget and save on the day you get paid. It’s important to have some savings under your own name so the money is easily accessible in times of need. Set up a standing order to move the money to a separate account so you’re less likely to spend it. Even better, if your employer offers salary linked savings then the money can be deducted prior to hitting your bank account. For me, moving cash from my current account to a savings account means it’s out of sight, out of mind, when it comes to impulse purchases. Get started with our Household Budget Planner. Remember to regularly review your budget, it’s a living calculation and needs to reflect changes in your personal circumstances.
5. Have a plan B
The last 12 months has taught us that there are only two certainties…uncertainty and our finite existence. The answer to this is two-fold. In the short term, everyone needs an emergency fund. This is rainy day money for unforeseen circumstances. It’s generally suggested that individuals save between 3-6 months’ worth of expenses – the ‘needs’ not the ‘wants’. However, if you’re in or approaching retirement then this increases to 1-3 years’ worth of expenditure. This safety net can cover any unexpected costs e.g. the replacement of white goods appliances, car repairs, alternatively it can also provide a buffer and buy you more time should you lose your job or become ill and unable to work. In most instances this should be held as cash in an easy access savings account so it can be accessed quickly and without penalty. People are better off if they have an emergency fund as it will reduce the likelihood of them turning to expensive borrowing. Secondly, long-term there is something to be said for protecting before investing. The main trigger for looking at protecting yourself is down to the number of people that are dependent on you, such as a partner/spouse/children. Equally, you need to look at the support that will be available to you should you be unable to work. Dependent on the type of insurance it can safeguard the future of your loved ones or could provide income support should you fall ill and be unable to work. Your partner is not your insurance policy, overreliance on a partner can leave you at a disadvantage and mean that your individual needs aren’t always prioritised. Three quarters of women over 60 are either single, widowed or divorced when they die. Listen to what our expert panel have to say about building financial resilience. We discuss how the Covid-19 pandemic has affected women in society, as well as share our top tips for managing your money going forwards.
As I mentioned earlier, we can be sure of two things – one being that life doesn’t last forever. Thinking about our own mortality is scary, but isn’t it scarier thinking that all the wealth you’ve accumulated through life could be swallowed up by the government (worst case scenario)? More than half of all UK adults do not have a valid will. Women are likely to outlive their male partner so please ensure that you have instructed how you would like your assets to be divided. If you pass away without a valid will, you die intestate and your estate will be divided according to a fixed set of rules – these rules are often outdated for modern families. Having a healthy relationship with your finances starts with the right mindset. Money worries are the biggest cause of stress outside of the workplace – that means they trump our concerns around relationships and health! Becoming financially fluent won’t happen overnight, just like building an emergency fund - it takes time. Women need to make an active decision to find the time in their busy lives and dedicate it to educating themselves - so sign up to any financial wellbeing sessions if offered by your employer. Remember, unlike most things today, you won’t get immediate gratification, but you’ll reap the benefits long term. Knowledge is key to financial independence and resilience. Take the first step and check out the Learn section of our website. Finally, remember this article and our website don’t give personal advice. If you’re unsure what to do, ask us about advice.