When it comes to achieving financial independence, women face different challenges than men. More women choose to take a career break for family. Women live longer on average than men, so they have to save more for retirement. Women who lived through a period of extreme pay inequality may find themselves single with no financial education or security. And while the gender pay gap is gradually narrowing, it still exists.

By educating yourself and preparing for the future, you can take steps to reach financial independence and close the pay gap.

Steps to Financial Independence

What is the definition of financial independence? Some people define it as having enough wealth to live on without income from employment. To us, financial independence also includes being free of debt, being in control of your own finances, and having enough in savings to support yourself should you lose your current source of income.

With that being said, here are our 8 steps to financial freedom and protection for women.

1. Come to terms with your cash flow

Cash flow is, very simply, your income minus your expenses. Too many people don’t take the time to learn where exactly their money is coming from and where it’s going. Just getting a grip on your expenses can help you realize the areas in which you need to cut back.

Here are some of the oft-neglected items to be accounted for in your cash flow:

Inflow

  • Salary and bonuses (before tax)
  • Interest on savings
  • Any other sources of income, such as extra jobs
  • Gifts, grants, or scholarships

Outflow

  • Federal, state, and local taxes
  • Food (groceries and eating out)
  • Online subscriptions
  • Home maintenance
  • Rent or mortgage
  • Child or pet care
  • Memberships
  • Bills: gas, electricity, internet
  • Travel
  • Shopping
  • Miscellaneous expenses

Keeping your cash flow recorded constantly and consistently may seem straightforward, but there are lots of little expenses that can fall through the cracks. Some banks have apps that allow you to record what expenses fall under what categories so you can track your cash flow nearly automatically, but it may help to create your own spreadsheets and formulate a budget on your own.

Getting a grip on your cash flow is the simplest, most basic step towards financial freedom. Think of it as a blueprint for your future savings plans.

2. Save for retirement earlier than you think

According to the Transamerica Center for Retirement Studies, only 12 percent of women are “very confident” in their ability to fully retire with a comfortable lifestyle, compared with 23 percent of men. Cynthia Hutchins, director of financial gerontology at Bank of America, states that women are three times more likely than men to retire earlier than expected to take on a caregiving role. Also, as we stated above, women live longer on average than men. These are all sure signs that women should save as much and as early as possible.

One way you can save for retirement is by establishing a 401(k) and/or an IRA. If you have an employer willing to match your contributions if you enroll in their corporate 401(k) plan, take advantage of that opportunity as soon as possible. An IRA (individual retirement account) is one of the best ways to put your money to work for you, and you can hold this in addition to your employer’s 401(k) plan.

Self-employed women should look into 401(k) plans such as SIMPLE or SEP. You can also save for retirement by investing in a life insurance plan, but this option may have a lower interest rate than other options. Contact a wealth management advisor for professional advice on what retirement options are best for you.

3. Push back on salary offers and renegotiate pay

 According to Lorna Sabbia, head of Retirement & Personal Wealth Solutions at Bank of America, women push back on salary offers less often than men. But this could be a misconception: other studies have found that the reason women negotiate salaries less than men has more to do with the way they are treated than a reticence towards negotiation.

Whatever the case, the reason the pay gap persists has much to do with the simple issue of not negotiating (or re-negotiating!) pay as effectively as men. Luckily, even if your employer has a conscious or unconscious bias towards women, there are some negotiation techniques to use to combat this issue.

  • Present a mutually beneficial case. One strategy suggests using a “relational account” strategy, which involves asking for your desired raise while also signaling that you’re taking their perspective into account.
  • Renegotiate salary annually—or more often. While it may be detrimental to push for a raise more frequently than once a year, look for windows of opportunity after a significant achievement by you or the company.
  • Ask your peers about their salary. The days of hiding salary are over! Yes, while this might not be “old-school,” one of the best ways to combat discrimination is to find out how much your peers are paid. Concealing your salary does you and your co-workers no benefits—but it can allow your employer to pay certain demographics more than others. If there’s a stigma against talking about pay in your workforce, that’s a red flag. For example, a recent scandal at Conde Nast found that male and white employees for a YouTube channel were compensated while women and people of color were not. They only found this out by discussing their salaries.

4. Build a solid emergency fund

Being prepared in case of an emergency is a key tenet of financial independence. If something like a pandemic were to strike and you lost your job and fell ill without insurance, you and your family would be in much better shape if you had finances set aside for this purpose.

How much to keep in your emergency fund varies widely. A typical fund has at least two months of salary, but some experts say it should have at least six months’ worth.

Build an emergency fund the same way you would a savings account: bit by bit, month by month. When budgeting, set aside a specific percentage of your income each month for the fund. Your future self will be glad you did.

5. Understand good debt and bad debt

Debt is a word with negative connotations, but savvy investors know that certain debts are beneficial in the long run.

Good debt increases your net wealth over time. You might be paying now, but the benefits you receive from the investment will pay off exponentially in the long term.

Examples of Good Debt

Bad debt involves loans on depreciating assets (more on that later). It can get out of control quickly. Avoid this kind of debt completely if you can—it does you little benefit in the short term and enormous detriment in the long term.

Examples of Bad Debt

  • Installment loans
  • Financings
  • Credit card debt (except for reward programs that offset interest costs)
  • Cars

Essentially, the difference between good debt and bad debt is what you’re in debt for. If it’s an asset that increases your net worth, you could almost think of the expense as an “investment” rather than “debt”.

6. Make your money work for you

If you’re in debt (the bad kind) it may be a while before you can consider how to most effectively manage your savings. But as soon as you’ve built up a nest egg, the last thing you should do with it is let it sit and do nothing.

Take advantage of compound interest. Whether it’s through a high-interest savings account or investment, capitalizing upon compound interest is the most important thing you can do to make your money grow. With compound interest, the money you earn from interest starts generating its own interest, feeding itself in a cycle that allows your money to multiply rapidly.

The time your money spends in the market is everything. Compounding is exponential—make your savings work for you as soon as possible, even if you don’t have a fortune to invest.

7. Diversify your portfolio

You may have heard this before—diversification is the key to safe and effective investing. If you invest equally across the economy, you minimize your risks in the long run. Invest in many kinds of securities, such as stocks, bonds, ETFs, and mutual funds. If you’re new to investing, a mutual fund is one of the simplest and most risk-free forms of investment.

Natalie Plain, CEO and Owner of Billion Dollar Brows, suggests looking at companies you use and/or visit when you decide what to invest in. She says investing in what you personally like makes choosing a portfolio easier and gives more purpose to the investments.

8. Invest in assets that don’t depreciate

Spend money, but spend it wisely.

Buying an expensive product that immediately loses its value, like a car, is a loss overall. But purchasing certain items will actually be financially beneficial in the long run and increase your net worth in the long run.

Examples of assets that appreciate include:

Homes can either depreciate or not depending on many predictable and unpredictable factors. To preserve the market value of your home, you can treat it as an asset and invest in home improvements that increase its value. For example, you can add a deck or a patio that could increase the resale value by more than the deck cost to build. Treat home maintenance and upkeep as an investment, as well: in so doing, you’re preserving the value of your asset.

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