Observations

Given the fact that I’m a single woman and a financial planner, I’ve socialized and worked with a number of women across a fairly wide economic spectrum from lower middle-class to outright wealthy (multi-millionaires). Over the years, in an effort to learn from women who are financially successful, I’ve mentally developed a profile of self-made women millionaires who’ve crossed that financial milestone (usually in their 40s) long before their peers. What I’ve discovered about their habits and mindset is that by doing with slightly less, they are able to accumulate so much more. So, for those aspiring to be financially successful, I share with you some key qualities that I’ve noticed in women millionaires.

They get the big stuff right  

House: For many women millionaires, wealth isn’t built by skipping morning lattes at Starbucks. Rather, they focus on getting the big purchases right. With respect to housing, they typically buy less home than they can afford. This habit bears out in academic research. According to Sarah Stanley Fallaw, Ph.D., the director of research for the Affluent Market Institute, most millionaires buy far less home than they can afford.[1] Typically, most millionaires buy homes that cost no more than 3 times their annual income. So, those who make $100,000 per year rarely spend more than $300,000 on buying a home. Not only do women millionaires buy less home, but they also try to lower ownership costs as much as possible by: 1) putting at least a 20 percent down payment to avoid Private Mortgage Insurance (PMI) 2) putting extra money towards the principal with every monthly mortgage payment 3) making biweekly versus monthly payments 4) refinancing if they can save about 1 percent off of their current interest rate. While women millionaire like the tangibility of real estate, they take steps to limit the high costs and, thus, risks associated with making such a big purchase.

 

Cars: Women millionaires usually buy versus lease their cars. A few optimize this purchase further by buying used cars as most new cars depreciate about 20 percent within the first year.[2] Additionally, when selecting a car, these women put a premium on fuel mileage and reliability. As with their homes, when making a decision on this sizeable purchase, they do so with an eye towards holding down purchase and maintenance costs. To save even more money, women millionaires have a tendency to hold onto their cars longer than the average 7 years.[3]

For most people, housing and transportation are the two biggest expenses. Women millionaires find ways to limit their costs by buying less home and car; paying off big purchases more quickly; holding onto assets longer than their peers.

They give their money jobs

Employer-sponsored retirement accounts (e.g., 401k, 403b): By keeping their biggest non-discretionary costs low(er) than what they can afford, women millionaires are able to funnel their savings into assets (usually stocks) that yield comparatively higher returns. They see their employers’ retirement plan (usually a 401k) as one of the most powerful vehicles for building wealth. However, rather than investing enough to get the employer’s match, women millionaires max out their 401k contribution. While they may not know the ins-and-outs of investing, they have a strong grasp of the key concepts, such as tax savings, higher returns (long-term), and compounding. By contributing to their 401k plan, women millionaires realize that they get an instant return on their contribution via tax savings. Contributions to tax-deferred retirement plans are tax-deductible in the year they are made. Moreover, women millionaires understand that while stocks are more volatile than other assets, on average, they net a higher return (7 percent vs 3 percent for real estate). Finally, women millionaires understand the value of time as it fuels compounding. For example, if investments have an average annualized return of 7 percent over a 10 year period, its value will double.   

Other investment accounts: Brokerage, Roth IRA. Once they’ve maxed out their retirement accounts, women millionaires will leverage other investment vehicles to try and earn higher returns. If their adjusted gross income (AGI) is below $124,000 (in 2020), they will max out their Roth IRA contribution ($6,000 per year if under age 50). Unlike tax-deferred accounts (e.g., 401k, 403b, Traditional IRA, Simple IRA), a Roth IRA is a tax-free account. While contributions are after-tax dollars (or non tax-deductible), they grow tax-free. Also, withdrawals of earnings, if done so after age 59, is also tax-free. Moreover, unlike tax-deferred accounts, a Roth IRA doesn’t have Required Minimum Distribution (RMD) at age 72. As is, investments can compound for decades longer than typical (tax-deferred) retirement accounts.    

Emergency fund: Women millionaires like the security of having a stash of cash at their disposal to address emergencies: home repairs, car repairs, medical expenses. Additionally, rather than holding 6 months’ worth of living expenses in cash, they often opt for a larger amount – 9 to 12 months’ worth of living expenses. They mentally compartmentalize their money into two key buckets: “today money” and “tomorrow money.” Emergency fund is today money while investments are tomorrow money. By setting aside a large enough sum of today money to meet short-term or incidental expenses, they prevent themselves from dipping into their “tomorrow money” (e.g., retirement accounts, home equity) or worse, credit cards.  

They think: I am my financial plan

Rather than depend on others for their financial well-being, women millionaires see themselves as responsible. As is, they put a lot of time and effort into building up their knowledge, career, and network. They understand that these elements will collectively help them build a richer life. Of course, there’s a high(er) upfront costs to the path they’ve chosen. But, by making their own way, women millionaires not only gain a stronger sense of self confidence, but also greater peace of mind from knowing that they are the agents of their own lives.    

Small things lead to big things