Three Financial Truths Every Woman Should Know

In an age of ever-increasing responsibilities, opportunities, and information, it’s critical every woman know and remember 3 important truths about money.

If there was ever a time in history when women needed to have information and insights about money, it’s today.

More women are in the workplace, in management and ownership positions, and making more money than they have at any point in time in the past.

Many times, they are the sole breadwinner for their children and the primary caregiver for their aging parents. They make a majority of the purchasing decisions for their families and are becoming more actively involved in savings and investment decisions.

More often than not, women outlive their husbands. This often leaves them alone, living with a lifetime of financial choices made as a married couple, for better or worse.

If a marriage ends in divorce, a woman will most often be the parent caring for the children. Perhaps she will have financial support from her husband, perhaps not, but she will, again, be the sole breadwinner and the caregiver to her family.

Income inequality between men and women remains a fact, even with current legislation in place. Even with more responsibilities—work, kids, family—she often finds herself coming up short on payday, as her male counterparts earn more than she does most of the time for doing the same job. Unfair? Sure. Unusual? Hardly. Women know all these things.

What does a woman need to know to effectively address them?

In this digital age, information floods through our phone and computer screens. Women have more sources than ever before to learn about how to accumulate, manage, and invest money. But not all information is valid. Not all of it is relevant.

Furthermore, the information is not insight, i.e., the ability to understand the nature and context of a set of facts and how to apply them to a particular situation. And information is certainly not wisdom, which is predicated on truth.

So let’s get down to the truth, or some truths, concerning personal finance that every woman needs to acknowledge, understand and embrace.

Truth number 1: Financial independence is an equation, not a situation.

Financial independence is a term that’s read about and discussed often. Women want to achieve it for all the reasons we’ve itemized above.

To meet this ever-increasing demand, experts with books, seminars, formulas, stock tips, real estate schemes, videos, followers, and fans saturate the digital space, bookstore shelf space, and convention halls, with strategies, philosophies, motivational speeches, tactics, and tricks, all of it about how to achieve and maintain financial independence.

Yes, let’s take a deep breath. It’s as overwhelming as a run-on sentence.

The merits of these life-changing concepts vary greatly, but it’s good that people are interested in the subject of financial independence and are learning about it. Most of these books and speakers will tell you that financial independence means different things to different people.

It’s being able to work from home, doing something you really love. It’s being free to travel all the time. It’s having the boat you always wanted.

The truth, however, is that it’s not any of those things. Financial independence is not a particular situation or a starry-eyed vision. It’s an equation, a function of math, with fundamental factors and set formula.

The factors in this equation are your living expenses, and your income and assets. The formula is simple: take your monthly living expenses and divide that total into the monthly income and total assets you have on hand.

The answer, or solution, to this equation will tell you how long can you live without earning an income.

Financial independence is the amount of time, measured in days, weeks, months, or years, that you can be free from being required to produce an income.

The three levels of financial independence.

Now let’s identify levels of financial independence in order to help you to determine where you are, and where you want to go.

1. Minimal Financial Independence.

This is the place in which most people find themselves. They are, to a limited extent, financially independent. The problem is that the duration of their independence—the amount of time they can comfortably go without working—is only from Friday at 6 PM until Monday at 9 AM. They have weekends and holidays to be free.

People at this level must work each week in order to pay their bills. If they don’t work, either because they’re sick or injured, or because they’ve been laid off, problems start to mount very quickly. They may have some savings, but it won’t pay the rent or feed the kids for long.

A regular source of earned income, usually in the form of a job, is essential. An emergency that requires money can be stressful, and sometimes disastrous.

In this example, the math plays out something like this: a person’s monthly expenses are $3000.00, and their monthly income or cash on hand is $3000.00. At the end of the month, they’ve run out of money. If they run short, the overage goes on a credit card, which may or may not be paid off at some point in the future.

2. Moderate Financial Independence.

It is an equation that resembles this: A person may also have monthly expenses of $3000.00 per month and $3000.00 in monthly income, but they also have $100,000.00 in savings. Therefore, if they lose their source of income completely, they can still theoretically survive for almost 3 years without working or earning money.

This level of financial independence is good. Most emergencies can be handled by using the cash reserve. Losing a job or changing careers may be less traumatic. Starting a new business or side gig is possible, using the savings.

Work is still necessary in order to preserve the cash on hand, but it’s much easier to sleep at night knowing you’ve got living expenses for one year or more in the bank.

3. Maximum Financial Independence.

It is what most people refer to as ‘financial independence’. This equation means that you don’t have to work for money for the rest of your life.

This is accomplished by having enough cash or income from investments (dividends, interest, royalty payments, etc.) or both so that your monthly expenses are covered, regardless of what happens with you work-wise.

Emergencies can be handled without impacting your lifestyle. All you have to do is wake up in the morning, and cash is either sitting in your bank account or coming into it on a regular basis. You don’t have to earn it.

The math for this Maximum Financial Independence, again, is the same: the amount of money you have divided by the amount of time ahead of you.

If you have $3000.00 a month in expenses and $3 million in the bank, who gives a damn if you have $3000.00 a month in income? You can probably live the rest of your life in comfort and security, even luxury. Even if you didn’t invest the $3 million and just stuck it under your mattress, after 50 years of expenses at $36,000 a year, you’d have spent only $1.8 million. You’d still have $1.2 million left. So, you know, plan a vacation in there somewhere.

Obviously, these are simplified examples that are not adjusted for inflation, taxes or any other variables. Let economists quibble about those. For you, the important thing to remember is that financial independence is an equation.

To change your level of financial independence, change your monthly living expenses, change your income, or change the amount of cash or assets you have on hand.

To reduce your monthly living expenses, spend it less often, or spend it more wisely.

To increase your monthly income, increase the value of your marketable skills through education, credentials, or new opportunities that you find or create.

To increase the amount of cash on hand, save the difference that you realize when you do the previous two things.

Those are the factors in the equation.

Truth number 2: The risk or reward ratio is a law.

Once you have increased your income, reduced your expenses, and are left with savings at the end of each month, you will soon be in a position to consider investing.

A rule that you may want to follow is this: have at least 6 months to one year of living expenses in cash prior to setting aside funds for investments. This will give you a Moderate Level of Financial Independence, as discussed.

This amount will remain untouched as you begin to think about and research investment strategies and consider investment advisors. You will keep this ‘cash on hand’ pad and invest with money you’ve accumulated through additional savings.

As you consider investing and increasing your net worth, you will want to have a heart-to-heart talk with yourself, and your partner, if you are married or living together and pool your funds. This initial discussion will be about one simple thing: what level of risk are you comfortable with?

This will precede conversations about individual stocks, index funds, mutual funds, real estate, or precious metals. The factors that influence your risk comfort level will include, but not be limited to, your personality, your ability to earn an income, your goals for the future, and your family obligations.

The reasonable risk comfort level for a single attorney making $150,000 a year with no children from an affluent family may be very different than the risk comfort level of a single working parent with two children to raise and put through college.

One investor has more discretionary income and fewer obligations. The lawyer in this scenario can afford to take more risks and possibly lose more money without an impact on their overall financial health.

A single working parent can’t roll the dice as easily (or as responsibly) knowing that a large loss might jeopardize the plans they have for their children. The parent may have less income and certainly more obligations.

One question that looms large for both investors in this example is, “If I choose to ‘go big or go home’ with a risky investment, and I lose all of it, how quickly can I make that money back?” That’s a question for you, too.

Related: 19 Best Investing Books for Beginners

Again, before you begin to consider investment strategies, particular investment classes and opportunities, and investment advisors, you determine your overall risk comfort level. You may find it helpful to say, ‘On a risk scale of 1 to 5, I’m a 2’. This means that you’re more comfortable with generally conservative investments. This will help you make appropriate choices and focus as you develop your investment skills and consider your options.

This doesn’t mean that you can’t set aside a percentage or dollar amount for riskier investments at some point. You may want to have 90 percent of your investments in fairly conservative investment vehicles, and then allocate 10 percent for opportunities that are admittedly higher risk, but offer the potential for higher returns.

Ignorance of the law is no excuse.

It is here that you must acknowledge a financial truth. It is a law, like the law of gravity is a law. It is not a thing that applies some of the time, most of the time, or even 99.9% of the time. It applies all of the time, everywhere, to everyone, to everything, and especially to investing.

It is not like man-made laws that only have consequences if you get caught. This is a natural law without exception, one that shows no mercy, offers no plea bargains, has no boundaries on its jurisdiction, and no flexibility in its enforcement.

That law is this: the greater the risk, the greater the potential reward. The smaller the risk, the smaller the potential reward. It’s that simple. 

If it’s that simple, why is it so important? Because investors are human and they are always looking to make money without risking money. It’s not possible. Any investment you look at contains risk. If someone is telling you there’s no risk in an investment, they’re lying. The risk may be low, but it is present.

So how do you work with this law and make it work for you? The answer is to simply honor the law in your decision-making process. If you’re averse to risk, accept the fact that your rewards—or your return on investment—will be lower.

If you are comfortable with risk, accept the fact that you may lose some or all of your money on investment if you chose to go down that road, but you may also win big. On the long road of investing, know that both of these will probably happen at different points if you go high-risk.

Know before you go.

If you are presented with a risky investment, but the potential reward or return on investment is not sufficient to justify the risk, why would you invest?

As an independent woman, you will be required to know all the risks involved in an investment. Read the fine print. Do your homework. Ask questions.

This means that if you consider investing in a company that makes widgets, you should know about the history of widgets, the current industry outlook for widgets, the governmental regulations on widgets, and profit margins on widgets, and who the main players are in the widget industry, otherwise known as competitors. And, oh yeah, are people still interested in buying widgets?

Doing all the research you can will help you make good investment decisions. It will also prepare you for the range of outcomes that result from all kinds of investments. You’ll be content to get steady, moderate returns on your conservative investments and not bemoan what could have been if you’d been more adventurous with your capital.

You’ll be ready to accept the worst that can happen, i.e., if you lose some or all of your money on a risky investment that had the chance to go global and make you a lot of money very quickly.

Also, be ready to handle the best that can happen if you hit it big.

That means not bragging or going on a spending spree when an investment pays off really well. It means knowing what the tax implications of a windfall from an investment will be for you and your family. Yes, enjoy your success, but remember, Scarlett, tomorrow is another day.

You’ll still be investing, still be in the game, and still be dealing with risk. And smart investors usually peel off some of the profits, enjoy a little, and then reinvest to make their portfolio grow.

Finally, know that there is a risk in doing nothing.

If you choose to do nothing with your money but keep it in the bank for the next ten years, know that every dollar will be worth much less ten years from now than it is today. It will buy much less. It will be much less, and it may be more tempting to dip into here and there along the way, eroding your savings.

So know and remember the truth that is the Risk/Reward Ratio.

Truth number 3: Money is power.

It’s easy to misconstrue the statement that Money is Power. The words conjure up an evil billionaire sitting in the drawing room of a manor house on the hill, hatching evil schemes to destroy his (or her) enemies. That’s not what we’re talking about.

What we’re talking about, in one sense, is the power of your ability to purchase.

Think of yourself like a queen. You sit on a throne. Within reach on the palace floor sits a bag of gold coins, your treasure. Various merchants, artisans, and tradesmen approach you each day with products and services on offer.

As a sovereign, you choose which vendors to bless and which to shun. You bless some and reach into your bag of gold coins, buying what they have to offer. You shun those that you do not purchase from, and they leave penniless.

If a product does not meet with your approval because it’s of poor quality, too expensive, or dangerous to your health, it doesn’t even enter your castle. And you don’t just decide for you. You decide these things for you and your family.

Now, imagine that there is not only one queen, but 100 million queens in the United States, making these same decisions every day. If only 1% of you decide that a product or company is not worthy of your trust or your money, you can decide to shun them. That product or company would lose 1 million customers. Woopsy daisy to those quarterly profits if 1 million American women come together and act together.

What could you, as an alliance of queens, do to shape corporate behavior? The possibilities are endless if you seize your power.

The same power can be used to benefit charities, support political candidates, save the environment, and bring important social issues to the forefront. The possibilities are, again, endless, if you seize your power.

The same power can be used to purchase your freedom if you are willing to pay yourself on a regular basis if you are willing to be generous to yourself if you are willing to shun other merchants and bless your future with savings.

Your money is your leverage. It is your voice. It is your vote. Your money is your ticket. You bless or you shun. So consider your purchasing power wisely, my queen.

Poverty is not an option.

If you asked 100 women what the biggest luxury is that rich people enjoy, many would run wild with a list of Italian shoes, French champagnes, and houses in Beverly Hills.

If you ask an affluent woman, who’s educated and has been wealthy for a long period of time, what the biggest luxury she enjoys is, and she will probably reply, “Choices.”

Think about it. Being seriously financially independent, or just plain stinking rich means that you can live where you want, do what you want, eat what you want, wake up when you want, dress any way you want, and say pretty much what you want.

Most wealthy people have the good sense not to take full advantage of the above list, but they certainly learn which privileges are important to them, and they enjoy those fully, often in private.

This is the reality of living in a capitalist society: the more money you have, the more options you have.

If we lived in a communist regime or a dictatorship, your options would increase the closer you are to power because the government could—and would—take your money anytime they thought you had too much, or anytime they needed more. Under these circumstances, it might be good to be the dictator’s cousin, or date a high-ranking member of the ruling party.

Remember that there are certain material possessions that money can buy. More importantly, there are options and opportunities that money in the bank can make possible. Decide which service you want money to perform for you, and act accordingly.

Related: 17 Best Things Money CAN Buy

Walk this way.

The options money offers are not just in spending it or saving it.

Money offers you the option to walk away from a job or relationship that’s not good for you. It will always take courage to do this, but having the financial resources to do it matter as well.

Not only can you walk away from a toxic situation, but you can also step into a better one. You can take a lower paying job with more opportunity. You can take night classes to bump up your skill set.

And if you need time, money means you can wait. If you’re sitting in a cubicle, doing a job you don’t love, and experiencing Minimal Financial Independence right now, seeing yourself in a position of power with options and opportunities might not be easy, but that’s exactly the first step you need to take: see yourself there.

Then work backward if you need to and determine how you can get there from where you are. It’s not necessary you have all the answers. You know all the truths.

You now know these eternal truths about money. Accept them. Embrace them. Prosper.

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Website: The Old Money Book

Grandson of a newspaper publisher and son of an oil industry executive, Byron Tully is author of 'The Old Money Book', 'The Old Money Guide To Marriage', and 'Old Money, New Woman: How To Manage Your Money and Your Life'. He lives in Paris and travels frequently.