Last month, I was invited to be a speaker at the Portuguese Women in Tech and Wealth Conference at Nova SBE. My first reaction was surprise, as I did not think I could possibly be an expert in financial literacy. Sure I had done a few stints writing about financial literacy for kids, but I was not even sure if it was working that well. I decided that was all impostor syndrome and so I would have to accept the challenge and do the talk. I did more prep than usual, I discussed different approaches with the moderator, I spoke to people who were more literate than me and I scripted myself thoroughly. This was an important topic, and I wanted to make sure I got it right.
Why Women and Wealth
One could argue there is a broad spectrum of people that are financially illiterate, and there is not much point in this conference being exclusively for women. But let’s see the stats:
- Difficult starting point: As of 2020, women were earning 14% less per hour than men. The gender pay gap makes it hard for there to be any excess income.
- Difficult road: As women make less income, this has a compounded effect throughout life. Women save less and accumulate less wealth. And don’t go thinking it is only because women like to go shopping. It really is related to how much they earn, and also their profile of saving and investing. Meet the gender savings gap.
- Difficult end-point: By the time EU women get to retirement, they make 30% less in pensions than men. This is not only because of a difference in earnings but also because of career interruptions or a choice for part time work to cope with family responsibilities, at an age where they would likely be accelerating or at the peak of their income.
The gap starts early, prolongs itself throughout life and the available pension will only exacerbate it. So what part can we actually affect here?
The Concept of Investing
Many of us have certainly grown up with the concept of savings or at least the concept of knowing that it is important to save for a rainy day. That is pretty much the extent of my own financial literacy until well into my career. I still remember reading “Rich Dad Poor Dad” not that many years ago and realising all the steps I was not taking and all the money mindset I had to work through.
First, let us talk through a form of investment that is often underestimated and not even recognised as such. The investment in yourself. Our greatest asset is not our house, but our mind. And as such, our investment in our mind – be it through learning or through mindset change – is going to make the biggest difference in our future lives. When job changes are needed, businesses are created, assets need to be invested, it is our knowledge that can give us the flexibility to adapt and grow. This investment can take various forms and be different for each person, but there is a reason you can deduct education spend in your taxes. Because it is an investment in human capital.
The most common investment people like to talk about is the stock market. But there is more to investing than stocks. What matters ultimately is to develop a portfolio that works for you, that you understand and, more importantly, one that makes money work for you, even when you sleep (or retire).
Going back to basics
If you are going to plan where you are heading, then you need to know where you are coming from. A status check is something you do in corporate strategy or in your personal life. And it applies to personal finances too. There are 2 tools I am particularly fond of – with one of them being famous and the other not so much.
Budget
This is not rocket science – it is a matter of knowing what are the inflows and outflows of cash that you have, and hopefully what is left to save or invest. There are enough writings out there about budgeting, but I would emphasize a few points that can ruin the process along the way.
- Do 6 months or a full year of expenses review – that makes sure you don’t leave out a lot of stuff you pay annually, be it the important insurances or the app store subscription you never thought about again;
- Do it on paper or screen – not just a rough calculation in your head. Putting pen to work will materialize it and ensure you go through all the steps;
- Divide costs into must haves, good to have and nice to have – or whatever terminology you choose to define what you need to survive, what helps you live and what helps you thrive.;
- Decide how much you will be spending on each category – ideally fitting it into your broader income;
These last 2 points are particularly important to do as a family (if you are managing a family budget). Differences in money habits can be a strong cause for disagreement in families, and debating whether some expenses are truly needed before it is too tight is always better than when crisis hits.
A budget will give you a full view on where you are spending your money (you are bound to have a few surprises there), where you have flexibility to make adjustments and how you can start incorporating savings.
Balance Sheet
This is the poor cousin of financial education. Balance sheet is something we hear on TV when there is a banking crisis and banks’ balance sheets need to be cleaned up. I must say doing a balance sheet about 5 years ago gave me a great understanding of where we were and even some comfort when compared to my budget, as at that time we were in one of those moments in life when there was not a lot of accumulation of wealth from salaries going on.
- Your assets are your possessions with a long term value – bank accounts, investments, pension, house, art, rare jewellery even. I don’t complicate and it is important to distinguish that what you buy to use every day is not necessarily an investment just because it is expensive.
- Your liabilities are what you need to pay – mortgages, credit cards, car renting or other personal loans. Quite straightforward, even if at times stressful.
When you deduct liabilities from assets, you have the famous net worth. Hopefully positive, but if not still informative about what you need to do from there.
Getting Ready for the Big Day
You know your numbers now, so you are ready to go. Not so fast tiger! Now, you need to understand how you will transform your savings (big or small) into investments. How you will look at your portfolio and make your first investment decisions.
The first thing you need to think about is, where do you want to go, what are your goals? Sometimes people ask me good financial literacy books, and my advice ends up leaning towards life books. Your finances need to enable the life you want, but for that you need to understand where you want to get to. Be it retire early with financial independence, put your kids through college or build a trust fund, the sky is the limit. But you need to know what you are working towards.
Once you know that, there are a few things that are the constraining factors of your goals and will probably determine how long you will take to get there:
- Risk Capacity – understand that investments can be risky and as such you need to know how much you can afford to lose if things go wrong, or to at least live without during a liquidity crunch period, if you are unable to convert your investments into cash
- Risk Tolerance – this is the famous one that people claim women are more risk averse than men. I am still unsure about the real data at this point, but this is something you need to assess. My level of risk is determined not necessarily by the level of risk in the assets but mostly by my understanding of the instrument. How each person assesses their risk tolerance is personal, but essential.
- Time Horizon – one thing we know is that risk tolerance evolves over time. If you are young and childless you can be in an accumulating period and playing it for the longer term in less liquid assets. If you have a family of young children and are not saving very much but still want to invest, you may want to choose to go for some more liquid assets and capital protection. And close to retirement, with kids outside the house, you may think differently again.
- Liquidity Needs – what part of your portfolio do you need to have “handy” in case there is an emergency, and what part you want to make sure it is “out of sight” so you leave it to grow? Many assets lose value when we over-trade and others can’t be easily converted to cash, so an understanding of your liquidity needs (going back to the budget above) will be key.
- Taxes – what is your tax situation, how are different instruments taxes in your country, are there some that can be tax efficient?
With this in hand, you are now well versed to start your financial discussions.
Can I start now?
If you have a good understanding of all the steps so far, and have been through the exercise, you are now more financially literate. This means you can ask the right questions when faced with an investment decision.
Let me make an aside – investing directly is not for everyone. In truth, some people are better off using a broker (who invests for a living) than investing their own money, especially if they are very busy and dedicated to an entirely different activity,. I know in today’s day and age we all think we can learn everything from YouTube and now ChatGPT. And we can indeed learn a great deal. But often we learn enough that we can make informed decisions and ask the right questions. Naturally, there are lots of opportunities to trade directly via digital brokers these days, so the world is your oyster!
Once you start building your portfolio, make sure you understand the following questions for each instrument you are considering
- What is this?
- How does it make money? e.g. dividends, interest, carry
- What are the risks involved? e.g. How can I lose money?
- What are the costs involved? e.g. What are the fees to buy or sell this?
- How can I evaluate if it is a good investment?
When I started investing, I started with start-ups. Not because I was in the mood for losing money in the majority of investments, but rather because business is what I understood. If there is an area of expertise you have, that may help you get started. Things to avoid? Investing in things that your friend (or your banker) says are good. If you don’t understand what is good about it, it is not good enough for you. Take time to learn and then make your own decision.
My last word of advice. A portfolio is fluid. You don’t need to look at your finances every day, but you do need to allocate part of your time to manage them. Understand if there are deviations to your budget, ensure you are accumulating assets, evaluate new investments that may come your way, work on optimizing taxes and make decisions on what to do with any new savings. Money habits are hard to come by, on top of everything else we need to deal with in life. But if money means freedom of choice in so many parts of the world, it is up to you to design your choices.
Photo Credit ChatGPT