Last weekend, I had the pleasure to share some actionable steps with a group of motivated women professional in Suzhou to become more financially savvy.
Lots of questions filled the room. So I decided that a post would be a great way to answer some of them.
1 How to manage my income?
This is the foundation. If you don’t control your cash-flow, then the rest will be fruitless. You need to understand what comes in and out of your pocket.
There is a basic framework that gives a good and healthy ratio of how much of our income should go to different categories. It's the 50/20/30 rule.
This means that your income should be allocated towards these THREE main areas:
LIFESTYLE: 50% of your income should go to the indispensable expenses for you to live a happy life. Everyone has their own MUST expenses but it usually covers: rent, food, kids education, medicals. These are the things that even if you don't have a job, you still MUST pay each month.
FUN: we all need to have fun and enjoy life. 30% of your income can go there. This category is more flexible as we all have many ways to enjoy life. You can include here your holidays, shopping, movies, weekend activities or anything that does not fall into the previous category.
YOU: At least 20% should go towards you. What does that mean? It includes saving for your life goals, for the ‘Older You’, for a rainy day fund, etc.
Two IMPORTANT notes to follow this:
Separate the YOU part as soon as you receive your income into designated accounts: an account just for emergencies, an account just for retirement, an account just for your house, etc. You get extra points if these accounts are investment accounts and not just checking accounts (except maybe for the emergency one).
Keep all these categories always as % of your income so it always moves as your income increases or decreases (hopefully just increases).
2 How to invest my money?
Investing should be a goal-oriented action. This way, you know where you are going and how far you are from it. No one gets excited from opening a regular investment plan, a bank account or pretty much any account. Well, most people don't.
However, if you think that you are opening an account and name it: House for my parents, this is going to be more powerful and will give you the drive and motivation to fund those accounts in a more diligent way.
You need to work based on SMART goals which are Specific, Measurable, Attainable, Relevant to your objective and Time-oriented.
For example, going back to the objective of buying a house for my parents. This is not YET a SMART goal, just an idea. To make it a SMART goal, I may need to do the following:
SPECIFIC and MEASURABLE: have USD 60,000 for a downpayment on a USD 300,000 property.
ATTAINABLE: ok, 60 thousand sounds a lot easier than 300 thousand and if I give myself 10 years, then it seems doable.
RELEVANT and TIME-ORIENTED: by having the downpayment in 10 years, I'm going to be able to get them a house.
So now that I broke it down to a specific goal, then this can lead me to create a specific strategy for this goal. So based on the idea of giving myself a 10-year time frame to get there, my options are:
saving $500 a month under my mattress or
investing $330 with an 8% annual growth, I will get to my objective of $60,000 in 10 years.
The important part is that now I know my options on how I can get to my objective and it's up to me to choose the way to go. You can use the same structure for any goal you have and this will lead to actionable steps to get there.
Also, it’s important to start by the bottom of the financial pyramid. Forget the speculative investments if you don’t have an emergency fund yet.
3 How can I be more confident to manage my money?
Women tend to have more money in cash and less in retirement accounts than men. That is a fact based on several studies and surveys. One of my favorite ones is the 'Women and Financial Wellness: Beyond the Bottom Line' by Merrill.
This, in my opinion, is one of the biggest factors that have led to the Wealth Gap because we know that cash does not grow over time.
My suggestion is for you to start taking a more active approach to managing your wealth. If you have long term goals like retirement or anything beyond 15 years, then you should definitely should have exposure to stocks in your strategy.
In the other hand, one of the reasons to not take a more active role could be that we do not feel confident to manage our investments. One way to start feeling more confident is by learning about the subject and have open and honest conversations. Don't shy away from the money talk as this could potentially create a one million dollar problem in the future.
Evading the topic could create a one million dollar problem in your future.
It all starts and ends with you.
Just need to focus on three things: master your cash flow, work on SMART goals, and take a more active role. Then, I promise you will become #FinanciallyFit and you will be able to focus on what really matters: living your dreams!
Thanks for reading, share with all your female friends and let me know if you want to have an open conversation on how you can too become #FinanciallyFit
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