• Mindful Money Management Can Lead to Financial Success

    By Betty Hintch
     

    Financial strategies vary based on age, work, and marital status, and whether an individual has children. One concept that can help women at any age or point in their professional or personal life is to regularly review spending habits and adopt the “joy-based spending” rule, says Manisha Thakor, director of wealth strategies for women, The BAM Alliance.

    Manisha Thakor“The joy‑based spending rule is a way of tracking discretionary spending. Determining how much joy and fulfillment a particular expenditure brings is a measure that people can use to decide what items in a budget stay or go. Many people find that they are spending money on things they feel they should have because of status or somebody else's definition of what life is. But when they're honest with themselves about what really brings them joy, and they pare down to spending on only those items, they're able to find extra money for savings without feeling like they're being deprived,” Thakor says.

    Some non-joy-based spending behaviors are easier to stop, such as spending money on unhealthy foods or participating in activities with people who you don’t enjoy being with. Eliminating other non-joy-based spending from budgets requires additional work, such as renegotiating cell phone or cable bill contracts for lower monthly fees, Thakor says. Finally, cutting other non-joy-based spending requires life changes, such as moving to a more affordable home. “Some people realize ‘I'm spending so much money on this apartment, or this condo, or this home, and I really only use a fraction of it,’” Thakor says.

    Keeping a lid on spending is key during all stages in life, but for women in their 40s and 50s, applying joy-based spending can minimize lifestyle creep and losing control of spending.

    Lifestyle Creep

    Lifestyle creep typically happens when people in their 40s start making more money and have more discretionary funds. Those around them are making and spending more money, so they automatically assume they need a bigger house and car and luxurious vacations, Thakor says.

    “You've got your career going, and you're seeing what your peers are doing. Your kids are in school, and you’re hearing what other parents are doing. Pretty soon, it can become very easy to start living a much bigger life than you can actually afford to live, without even realizing that you're doing it,” she adds.

    The 50‑30‑20 rule can be a useful tool to limit lifestyle creep. Outlined in the book All Your Worth by Sen. Elizabeth Warren and her daughter, Amelia Warren Tyagi, the rule recommends that 50 percent of your salary go toward needs, 30 percent toward wants, and 20 percent toward savings.

    “That 20 percent is a huge number. Most people in America are saving in the single digits, but that's the gold standard,” Thakor says. Saving at that 20 percent level can help people accomplish their future goals.

    For example, some women who only made modest salaries are retiring early by not living like everyone else, she explains. They are frugal, not at the expense of joy and life, but they follow mindful, conscious spending concepts as highlighted in the book Your Money or Your Life by Joe Dominguez and Vicki Robin.

    “Their lives may not look like everyone else's. They don’t have the fancy cars. Their homes are a little smaller than everyone else's. They have had good things but not tons of things, and they made sure to save every single year and to educate themselves about investing. While they still have a lot of vitality, they travel, using the same frugal skills they learned during their working years,” Thakor explains.

    Maintain Control

    For women in their 50s, there are uncontrollable, common pitfalls that can derail financial health, such as companies downsizing, pay cuts, increasing healthcare expenses, and potential elder care expenses for parents. “One way to counteract those uncontrollable events is to maintain control of those things that you can,” says Thakor.

    “There are just so many things that start creeping up once you're in your 50s. I'm seeing a lot of women in their 50s struggling and having to choose between helping their kids and funding their retirements. I want to give them permission to fund their retirements. It helps everyone because if you don't, ultimately you're going to end up back as the responsibility of your kids anyway,” Thakor adds.

    Early Savings

    Avoiding lifestyle creep and maintaining control of finances allows women to protect the savings they have amassed in their 20s and 30s.

    “The money you save in your 20s and your 30s is the single most valuable money that you can ever save in your life. Quite literally, it's worth five times the money that you save, say, in your 50s and 60s, because it has so many more years to grow and compound,” Thakor says. “Even if it's $50 a month, any amount is enormously helpful to start saving early on because of compounding interest.”

    For example, if a woman in her 30s wants to become a millionaire, she would start saving $5,000 a year for 40 years. By the time she is 70 years old—if she earns average historical market rates of return—she has her million. If that person waited until she was in her 50s to start saving toward that goal, she would have to save $25,000 a year to get to the same place by age 70, Thakor says.

    Children and Work

    One major decision that confronts many women in their 20s and 30s is whether to continue to work while having children or to take time off. The decision to stay out of the workforce costs the average woman, in terms of lost savings and wages and time investing, approximately $500,000, Thakor calculates. 

    Rachel RabinovichWomen who make that decision should take the following steps to account for the average of 11 years out of the workforce to care for children. Those years tend to occur during ideal savings periods when women are not only missing salaries but also valuable years of compounding.

    The following are some ways to approach your financial decision-making process when it comes to starting a family:

    Assess current expenses. Take two or three months to carefully track and calculate expenses to gain a clear understanding of where money is spent, says Rachel Rabinovich, certified financial planner professional at Society of Grownups. Include all needs (e.g., core living expenses), savings (e.g., retirement, college education, vacations), and debt-reduction goals (e.g., credit card debt, student loans).

    Look for unique ways to cut costs. If staying home with children is a priority, it is important to cut back on spending, especially on unnecessary items, Rabinovich says. As you are preparing to leave your job, cut expenses incrementally so you can get used to living on less. 

    Some common areas where people trim spending are on eating out, entertainment, and cable television. Other strategies to save money include couponing and planning grocery shopping trips around sales or experimenting with DIY projects to replace things you might previously have spent money on (e.g., holiday and birthday gifts). “It might be helpful to start practicing living on less a few months before you leave work if possible so you can tweak where you need to. Think of it as a dry run for your new lifestyle,” Rabinovich says .

    Open an IRA. Stay-at-home mothers should make sure that money is still being set aside for their retirements, Thakor advises. For women who are planning to become a one-income family, a good retirement savings vehicle is the spousal IRA, which allows an employed spouse to make an IRA contribution on behalf of a non-working spouse. Currently, the limit on these contributions is $5,500 annually.

    Stay in touch with your career. Women who plan to eventually return to the workforce should remember that getting back into positions similar to the ones they had before may present challenges, Thakor says. To maintain ties to a career, stay-at-home mothers should keep track of the skills that they are developing while they are out of the workforce. For example, leadership and project management skills they bring to organizing events for their children or serving on PTA boards or other organizations demonstrate that managerial and project management skills are still fresh. In addition, Thakor says that stay-at-home mothers should continue networking with former colleagues so that when they are ready to go back to work, they are not starting from a dead stop.

    Not all women who plan to return to the workforce use the same plan. For example, returning to the workforce can happen at different ages, Thakor says. One stay-at-home mother she knows went back to work later in life, after her husband retired from his job. She was able to provide health insurance for her husband so he could retire a few years before he was eligible for Medicare. “This couple had the tough conversations about who was funding what at what stage. While he was working, she did the grocery shopping and the cooking, and then when he retired and she went into the workforce, he did the cooking and the grocery shopping. There was honest dialogue and nontraditional division of duties,” Thakor says .

    Be realistic about marriage. Half of marriages still end in divorce, so speak honestly with your partner about other financial vehicles to protect yourself if you're going to be making the financial sacrifice to stay at home with children, Thakor emphasizes. A financial adviser and/or an estate lawyer can share strategies to provide coverage if a divorce occurs or a spouse passes away.

    Financial Success Requires Planning

    Maintaining healthy finances while enjoying your money and still saving for the future translate into financial success for many people. The icing on the cake is having enough money to retire and enjoy life, rather than worrying about finances. What’s the secret sauce to achieving that goal?

    “The overarching theme that I see in people who retire successfully is that they plan for it, they talk about it, they don't live like everyone else, and, maybe most important of all, they actually sat down, either on their own or with a financial adviser, and calculated the numbers. They're not guessing what they need to get there; they know what they need. They're clear about how far they are away from their goal, on the way to reaching their goal,” Thakor concludes.


     

    Betty Hintch is senior editor for HFMA.



    Financial Planning Resources

    Take advantage of the following tools when forecasting your retirement.   

    All Your Worth: This book by Sen. Elizabeth Warren and Amelia Warren Tyagi offers a six-step plan for organizing finances, as well as information on relationships and money, buying a home, and planning for emergencies.

    Your Money or Your Life: Authors Joe Dominguez and Vicki Robin share a new way of thinking about money based on looking at your salary or hourly wage minus the time and money you spend to hold down a job (e.g., commuting time and cost, buying clothing, equipment, and food). The authors then recommend looking at your buying decisions based on the number of hours you must work to purchase those items.

    Ballpark Retirement Estimator: Offered by Choose to Save, a program of the Employee Benefit Research Institute, this calculator helps its users determine how much they need to save for retirement.

    FIRECalc.com. This retirement calculator uses your current portfolio and how much you want to be paid in retirement and for how many years, and then provides an estimate of the risks in your retirement plan.




    How Single Women Can Develop a Safety Net

     

    The likelihood of being divorced, separated, or widowed is much higher for women, at 29 percent, versus men at 17 percent, according to a Pew Research Center study. Financial implications for these women include not having two incomes and not having the opportunity to receive benefits from a spouse's Social Security payments. “There's a layer of a safety net that marriage can provide that is not there when you're single,” says Manisha Thakor, director of wealth strategies for women.

    However, single women can develop their own safety nets by taking the following steps.

    Emergency funds. Ideally, single women should have three to six months of essential living expenses on hand, Thakor says, and single women should be at the higher end of that range. “That doesn't mean three to six months of living your life exactly the way you would want to: It is three to six months of what you have to spend in order to not lose your home, not lose your car, or keep your insurance going.”

    Retirement savings. Single women don’t have the option of receiving a spouse’s Social Security payments, so it’s imperative that they contribute as close to the maximum each year as possible to either an employer‑based retirement plan or an individual retirement account that they open on their own, Thakor advises.

    Income protection. When only one salary is available, protecting income with disability insurance is important. One way for single women to get the advantages of this safety net while keeping premiums as affordable as possible is to agree to as long of a period as possible before the policy kicks in. “For example, instead of the policy kicking in within one month of a disabling injury, it will cost a lot less if you can afford to go six months because you have that emergency fund before it kicks in. It's sort of like a deductible; the longer you can go before having the policy kick in, the lower your premiums will be,” she says.

    In addition, the disability policy should apply to the woman’s specific occupation. “The slight difference between ‘own occupation’ and ‘any occupation’ in those policies is massive. ‘Any’ means if you can be a cashier at a gas station, even though you're a lawyer, the disability payments won’t kick in. Whereas your ‘own occupation’ would mean if you're a surgeon and you had a hand injury and you can no longer hold a scalpel, then the disability payments would kick in,” Thakor says .

    Women with dependents should definitely have disability insurance, but they should consider life insurance as well. Term life insurance is preferable to whole-life insurance, because it is easier to recognize the risk-management component of term life without having to worry about the savings component of whole life, which is a very expensive way to save, Thakor says. The last piece of income protection to consider is long‑term care, if it is offered through a woman’s workplace at an attractive price.

    Estate plan. For mothers who have children, it’s important to have a plan for who will take care of your dependents and who will be in charge of any inheritance if the mother should pass away. An estate attorney can assist with a will and power of attorney and can recommend whether a trust is necessary, says Rachel Rabinowitz, certified financial planner, Society of Grownups.

    Taxes. Take advantage of head-of-household status on tax returns. Women who can file as head of household may be eligible for various deductions and credits.



    8 Keys to Managing Finances When Going Through a Divorce

    Whether it's anticipated or a surprise, divorce creates tremendous emotional upheaval for women and their families. To get a grasp on financial management—which can sometimes be the last thing on people’s minds as they manage their distress—soon-to-be or newly divorced women should consider the following strategies from Mary Gibbons Gardiner, CDFA, CRPC, financial adviser, vice president, Morgan Stanley Wealth Management.

    Assembling a team. Women should choose financial management and legal teams that are aligned with their best interests. A woman may have been working with the family CPA or family attorney for many years, but now it's time to put her own team in place. Women should look to these team members to make them aware of the “language of divorce”—the tax, legal, and financial issues that are involved. In addition to an attorney, financial adviser, and accountant, women may want to consider seeking a therapist for themselves and their children. 

    Determining expenses, assets, and liabilities. Ideally, a woman would have a handle on her expenses prior to a divorce, but once a divorce is pending, it’s important to review spending and determine expense needs and ancillary expenses.

    Determining assets requires thinking about the availability of those assets in the near and long term. For example, although a young divorcée might be entitled to retirement assets, she won’t have access to that money for quite a while. Or a woman may receive the family home, but before she can consider it an asset, she must determine whether she can afford to maintain it or whether she has the option to sell the home.

    Reviewing insurance coverage. Spouses who pay child support and alimony should have adequate disability and life insurance to ensure those payments continue in the event that they cannot work or pass away. A key pitfall in this strategy is not purchasing disability or life insurance soon enough before these spouses develop health issues that prevent them from obtaining insurance. In such scenarios, those liabilities should be factored into the divorce settlement to provide for the ex-spouse and children.

    Health insurance should also be considered. Women covered by their spouse’s plans can continue their coverage for up to 36 months after the divorce. Women should check with the insurance provider to determine the premium.

    Covering college costs. Paying college costs is one of the key financial issues related to having children. When parents are divorced, but both spouses will be contributing to a child’s college expenses, it’s important to define what those expenses entail. For example, summer programs or international study opportunities should be considered when determining each parent’s contributions.

    Understanding Social Security. An ex-spouse’s Social Security is available to the other spouse if the couple was married for more than 10 years and the ex-spouse is currently not remarried. This applies to either spouse, so women in high-paying jobs should remember that their ex-husbands may be able to claim some of their Social Security benefits, depending on the scenarios.

    Reviewing retirement accounts. When a divorce occurs, beneficiaries on retirement accounts (401(k), IRA, etc.) should be checked and changed as needed. 

    Evaluating child support versus alimony. Higher earners may be paying alimony to their ex‑spouses. Alimony is tax-deductible, but child support is not. So how you define the money you are paying to your ex-spouse can have positive or negative tax implications.

    Selling the family home. Higher earners should also be aware of the tax implications of selling the family home and downsizing. Timing can make a big difference in the tax liability.



    Super-Size Savings to Finance Time Off for Children

    The decision to take time off to care for children or stay in the workforce can be a difficult one, with many pros and cons. If women decide to take time off, some choose to lighten the burden of living on one salary after having children by saving as much money as possible in the working years prior to giving birth. The following strategies may be helpful in investing these large sums of money.

    Use a high-interest savings account. An online, high-yield savings account is one place to consider because it is liquid and accessible. Also, keep six months of living expenses liquid in a high-yield savings account for emergencies, such as a spouse’s job loss.

    Beyond that, women should consider how long they plan to be stay-at-home parents. For any period of time up to five years, they should have in cash at least the projected income needed while they will be out of the workforce. This is money that most women can’t afford to lose in a market downturn or have tied up in an investment vehicle like an annuity. CD laddering—investing in CDs of varying time periods so you can earn the higher yields offered on those longer-term CDs while still having cash in hand as the older "rungs" of the ladder mature—is another option to earn a slightly higher yield and have cash available at staggered dates.

    Consider investing in the stock market. If the plan is to be at home for the long term, consider investing in the stock market according to a projected timeline and tolerance for risk. A diversified portfolio is a good bet for potential growth while mitigating risk. This strategy is advisable only if you have a backup plan to cover your costs in case of the potential loss of value in your investments due to changes in the stock market. 

    Contribute to your retirement plan. Before taking time off from work to care for children, consider saving aggressively to an employer’s retirement plan. One of the lost opportunities for stay-at-home parents is that they can no longer contribute to employers’ sponsored retirement plans. Once the time off begins and the funds are available, stay-at-home parents can continue saving for retirement through a spousal IRA, which currently has a maximum contribution limit of $5,500 (in 2016) if you are under the age of 50.



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