Saving Isn’t Enough, Women Need to Invest Their Money
By: Laura Izquierdo
Tags: Self Improvement, Financial Freedom, Money, Personal Finance, Financial Planning

Saving Isn’t Enough, Women Need to Invest Their Money

Photo by Brooke Cagle on Unsplash

I’m almost embarrassed to write about money. At the age of 28, a lot of what I’m about to cover are things I should probably have known a long time ago. In fact, most of it I did already know a long time ago. I have a master’s in Business Economics, I was an Analyst at the Bank of America Merrill Lynch, and I’ve still not started to manage my personal finances properly. So, this summer, I invited Emilie Bellett, founder of Vestpod and the author of “You’re Not Broke, You’re Pre-Rich,” to join me on my podcast to talk about why everyone should be investing for their future and why women, in particular, can’t afford (pun intended) to be late to the game.

Why you need to invest your money

In short, by keeping money in a savings account, you’re losing money. And just two basic financial principles are enough to explain why:

Inflation: Inflation is the decline of purchasing power of a currency over time. Policymakers in the U.S. and the European Central Bank aim to keep inflation steady at around 2% per year. This means that $1.00 this year has a value of $0.98 next year.

To make things worse, the national average interest rate on savings accounts in the U.S. stands at 0.04%, which means your savings aren’t keeping up with the 2% inflation rate. By keeping your money in a savings account, you’re literally losing money, and in the long term, the decrease in value can be substantial.

Compound interest: Compound interest is the interest paid on your investments, calculated both on the initial sum and the accumulated interest earned in previous periods.

Albert Einstein famously said:

“Compound interest is the eighth wonder of the world. He who understands it earns it…he who doesn’t…pays it.”

Say you invest $100 in the S&P 500. Assuming the return matches the average annual return of 8%, next year, you would have $108. The following year, the 8% interest would now apply to the $108. You’re not just making $8 every year from the initial $100 you invested; you’re earning an average of 8% return on the cumulative amount. So over 20 years, you wouldn’t just have $100 + ($8 x 20) = $260; you would have $492.68.

Women, that includes you

Women invest around 40% less than men. In fact, just the other week, I third-wheeled to dinner with my sister and her boyfriend, and some of his friends decided to join us. For at least an hour, the guys spoke about money. How much money they had invested, what they had invested in, what their financial goals were, what their plans were for the future. It was clear this wasn’t the first time they had had this conversation.

My sister and I sat and listened with interest, but neither of us had much to bring to the table. Neither of us had ever discussed our finances with friends. We were embarrassed to admit it, but we hadn’t started investing yet. Before that night, we were both proud to have been responsible with our savings, so it was petrifying to realize that it wasn’t enough. The following day was the day I reached out to Emilie.

We told her about that night and how we had both come to the realization that we should have been talking about money a long time ago! And she told us something really interesting. A recent study by Starling Bank has analyzed the difference between the language used by media outlets when ‘speaking’ to their readers about money and found some alarming differences.

Women are mostly described as being “excessive spenders” and advised to “limit, restrict, and take better control of their shopping splurges,” whereas the language used to target men implied that financial success made readers “more of a man.” When women shop, their expenses are seen as frivolous, but when men spend similar amounts on big purchases, they’re “investments.” In short, women are socialized to save money, in contrast to men, who are encouraged to invest for financial success. Type in “women money” in Getty Images and count how many piggy banks you see. What are we, six?

So, it’s not surprising that only 52% of women say they feel confident managing their investments, compared to 68% of men. But it’s important to highlight that, even though women invest less often, those who do tend to generate better results. In part, this is explained by the fact that women are generally more risk average than men. The trouble is, this can also lead to women holding overly conservative portfolios that bring them lower returns, and coupled with the fact they continue to earn less than men, on average, they retire with 25% lower pensions.

Prior to my chat with Emilie, I hadn’t given my pension much thought. It had always been something my employer had arranged for me. But especially now that I’m self-employed, how had this not even slipped my mind?!

I signed up for Emilie’s latest online event about pensions in search of answers. The workshop began with her asking us to download an app that turned a photo of ourselves and added a very cruel 30 years on. It’s petrifying, but I recommend it. She explained that a reason why so many of us postpone thinking about retirement is that there’s an emotional disconnect between our present and future selves. You don’t identify with 70+-year-old you, so you don’t make decisions on their behalf. And it’s time you started to.

On average, women live longer than men; American men live to 76 years on average, in contrast to women who will live to 81. Assuming you retire at 65 and considering you could live longer, you want to be aiming for a pension that will cover you for 20–30 years. According to financial coach Emma Maslin, one of the speakers at the event, you want to be investing around 15% of your salary into retirement.

Some of the material expenses you have when you’re younger won’t exist by then, so she said most people tend to overestimate how much they’ll need. Still, I personally would prefer to have too much than not enough. But if you want to calculate the minimum “pot” you want to end up with, Emma says to take 30–50% of your yearly salary and multiply it by 25. You can use this calculator to help.