Building wealth (Pt 1): Assumptions women hold that undermine their efforts

What gets us into trouble is not what we don’t know.  It’s what we know for sure that just ain’t so.

(Mark Twain)

Based on my experience being a woman, socializing with women and working with women on their finances, I’ve often noticed that many seem to hold a handful of (false) assumptions around money that undermine their efforts in building wealth.  I want to bring these assumptions to light and address them further.

 

Money is hard.

Our educational system offers students an extensive curriculum with the goal of setting them up for adulthood and success: math, literature, history, computer programming, art, chemistry, etc.  Unfortunately, personal finance isn’t part of the mix.  As with math, it seems that many girls become women who (subconsciously) assume that money is hard due to a lack of exposure; negative personal or family experience; stereotypical social and professional reinforcements – money is a man’s world; so on.

Like it or not, all women will face money realities sooner or later which need to be addressed and for which many feel ill-equipped: student loans, car payment, salary and benefits negotiations, retirement plan, inheritance.  Overwhelmed, the majority often default to tactics that impede progress: defer, delay, delegate, abdicate.

Still, to move forward, women need to give themselves the critical money education that they were usually never given at home, at school, at work. Here are a few ways to wade into the seemingly murky waters of personal finance:

·   Book: The Simple Path to Wealth (JL Collins):  JL distills decades of financial learnings and experience into a book that he’d written for his 20-something daughter, who has no interest in finance.  He covers everyday financial topics and writes in a style that makes the book easy to read, understand and implement.

·   Blogs: Learn how everyday people through self-acquired financial knowledge and discipline achieve financial independence decades before the typical retirement age (62).  Here’s a list of top FIRE (Financial Independence Retire Early) bloggers I like to read:

o   Afford Anything

o   Frugalwoods

o  Our Next Life

o  Mr. Money Mustache

I realize that for many people, money is a pretty dry, if not intimidating, topic.  Still, some have shown that it’s not only possible to learn, but also to master.   And, now there are increasingly more ways to learn about money.  Still, I suspect that for many women their biggest hurdle is not that money is hard, but rather their assumption that money is hard.

A home is a great investment.    

Women often assume that a home is a great investment for a number of reasons:

·        It’s one of the largest assets they own.

·       It’s more concrete than stocks and bonds. 

·       It has high utility.  You can live in it.  You can rent it out.  You can sell it.     

Unfortunately, closer examination reveals that a home is really a big expense, which can turn into a good investment if one manages the expense wisely and with a long holding period (more than 10 years).  Here’s a list of the pros and cons of owning a home:

Pros	Cons
·       Satisfies need for housing.  ·       Can rent it out.  ·       If paid off, much low(er) housing costs moving forward.	·       High “hurdle” costs: 4.4% o   Interest rate (3.3% on 30-yr fixed) o   Property tax (1% of property value) o   Annual maintenance costs ($3,000)  ·       High transaction costs (6% sales commission) ·       Illiquid ·       Limit mobility

Home ownership typically involves high initial and ongoing costs, which greatly erode overall returns despite appreciation in property values.  For some perspective, below is a comparison of different assets’ returns over the past 20 years.  Even a conservative investment portfolio (60% stocks and 40% bonds) outperforms a home (5.6% vs 3.4%).  For home owners on both coasts, higher home value appreciation rate is often offset by higher home prices.

 

Personally, I see a home as an emotional investment – a place to live, raise a family, cultivate a garden.  Financially, it’s an expense that can become a good investment if you’re able to do the following:

·        Buy a home wherein monthly mortgage is less than one-third of net income.

·       Be able to stay in your home for more than 10 years; the longer, the better.   

·      Have enough cash to support ongoing costs (e.g., property tax, maintenance, insurance). 

Age	Investment Portfolio ($)
35	$200K*
45	$400K
55	$800K
65	$1.6M

1) The worker invests in a portfolio composed of 70% stocks and 30% bonds, which has a annualized return of 7%.