Financial Independence For Women

Clearly, all women should be aware of their need for financial independence. But first, just as their male counterparts should, women need to take some time to increase their knowledge on investments before they begin investing any money. This 5-step blueprint can help you get started on the road towards your own financial freedom and independence.

Step One: Set Goals

Glasses on booklet discussing how to control your financial future

Your financial goals may be as short term as saving to buy a car or as long term as saving for retirement. The key is to be realistic and specific--and to start as soon as possible.

Investors should keep three rules in mind when setting goals:

Be specific. For example, "I want to retire in 20 years with a monthly income of $3,000."

Be realistic. It takes time and patience to achieve financial goals.

Be disciplined. Contributing to a regular savings program is the only way to achieve a secure financial future.

Step Two: Organize Your Finances

You're a woman with goals. Now determine where your finances stand.

  1. Write down your cash balance at the beginning of the year. 

  2. Add your expected income for the year. Check your most recent income tax return so you are sure to include all sources of income. 

  3. Subtract your estimated savings and investments. 

  4. Subtract your annual expenses. Consult your checkbook to make sure you include all expenses. The amount remaining is your cash balance at the end of the year. If it is negative, you'll have to go back and see if you can eliminate some unnecessary expenses. 

  5. List all of your assets. These are the things you own, including your investments, home, life insurance, etc. 

  6. Subtract your liabilities; that is, everything you owe. Liabilities include your mortgage, charge account balances, loans, and taxes due. The difference between your assets and liabilities is your net worth. If you calculate your net worth annually, you can monitor the growth in your personal wealth.

Step Three: Allocate Your Resources

Once you know how much money you are able to invest, determine the structure of your portfolio—that is, how much should be invested in stocks, how much in bonds, and how much should remain in cash. This apportionment of investments is known as asset allocation.

Asset allocation for any investor depends on objectives, risk tolerance and cash needs. Many financial advisors use a rule of thumb that links the percent of assets you put in bonds and cash to your age. Under this rule, a woman in her forties would put 40% of her money into bonds and cash. The remainder would go into stocks.

Your asset allocation mix will change over time, depending on your individual circumstances and financial objectives.

Step Four: Select Your Investments

Keep in mind that a portfolio structured with some combination of stocks, bonds and cash is most likely to be well positioned to achieve the maximum return with the least amount of risk.

  • Stocks. Although sometimes volatile over the short term, stocks are considered to be the best investment for long-term growth. In fact, no other investment has provided a higher return over the long term than stocks, according to Ibbotson Associates of Chicago. Depending on how much money you have to invest, you can choose individual stocks or buy mutual funds or unit trusts that invest in stocks. (Before considering a mutual fund or unit trust, read the product prospectus. The prospectus, which details investment objectives, risks, charges and expenses, should be read carefully before investing or sending money.)

  • Bonds or “fixed income” investments. Because the rate of return is fixed, you know precisely what your return will be when you buy a bond and hold it to maturity. You can choose different bonds with varying interest payment dates to be your primary source of investment income, since most bonds pay interest periodically throughout the year (e.g., January and July, February and August, etc.).

Step Five: Monitor Your Results

Financial planning is an ongoing process. Your needs and objectives will change throughout your life, and you should adjust your investment portfolio to reflect these changes. At least twice a year, monitor two aspects of your portfolio:

  1. Asset mix. Be sure you are comfortable with your combination of stocks, bonds and cash. Perhaps stocks have performed so well that they now represent more of your portfolio than you originally intended. You may want to shift your holdings accordingly.

  2. Performance. Monitor the performance of investments that fluctuate in value, such as stocks and mutual funds. This involves calculating the gain or loss in each investment. Keep in mind your time horizon; if you're investing for the long term, give the stocks or funds time to grow. Also, check the performance against a comparable yardstick. For example, if you own mostly conservative stocks, compare their performance with a conservative index, such as the Dow Jones Utilities Index.

Understanding investments and establishing a regular investment program are essential to successful financial planning for all investors. The best way to achieve your goals is to have a well-thought-out plan that is reviewed on a regular basis by both you and your financial advisor. 

Article written by financial advisor Tom Kukulski - This article may not be copied, reprinted, or republished on the internet without the express written consent of the author.

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