by Lynne Thomas
If, as some financial experts maintain, money is the primary tool of power in our society, why do women hesitate to contribute to their retirement plans? Perhaps we fear the consequences of investing for the long term without having a “safety net” in place for the short term. Let’s examine this safety net, or money cushion, and explore one way to establish it with money you already have.
In December 1986, burdened by $8,000 worth of credit-card debt, this spinster-in-the making found herself in a law office pouring out her troubles to a bankruptcy attorney. Four months later my debts were discharged in bankruptcy court, yet I remained a spending “junkie,” nearly blind to my lack of money management skills. Grasp the fundamentals of retirement planning? Devise a practical, workable budget? Hmm. Retirement was charging at me with the words “bag lady” written all over it, but only marriage seemed to offer financial security.
The turning point occurred when I read How to Turn Your Money Life Around: The Money Book for Women, by Ruth Hayden. This 150-page guide not only addresses women’s training, beliefs and behaviors with respect to money, it demonstrates ways to change them. Just as important, it presents a simple, practical plan for managing expenses. Using the book’s work sheets, I calculated my living costs--from rent and groceries to magazines and movies--by analyzing data from my check register, bank statements and credit card statements. After subtracting my expenses from my income I adjusted my spending to align with my life’s goals. Today I recognize each spending opportunity as an occasion to ask 1) Does this fit my agenda? and 2) Can I afford it? Even a bargain is not a bargain if the answer to either question is no.
Finally, the expenses and income are balanced–aha! a budget!--I made the plan work by taking the checkbook, credit cards, debit card and most of the cash out of my purse and leaving them at home. This, for me, was (and is) the centerpiece of Hayden’s method: By spending cash from a weekly, fixed-amount allowance to pay for such things as groceries, lattes, gifts and movies–the “flexible” expenses–I was able to reserve the checkbook for “fixed” expenses such as rent, utilities and insurance. Not only were other spending tools unnecessary, but assigning a specific cash amount to each flexible budget item, allowed me to create a set of fixed expenses out of an array of variable expenses. Who knew groceries, clothing and entertainment could be transformed into fixed expenses? Above all, it was easy to see over time that reducing the number of spending opportunities my bottom line increased. At last, I was living well within my means and becoming comfortable with my spinsterhood. The next financial challenge: growing my savings and investments.
Every woman, according to Hayden, needs an escrow account and an income-replacement fund in addition to a retirement plan. All three are equally important, she emphasized, and should be built simultaneously. Without a foundation of escrow and income-replacement funds–the safety net–a retirement plan could topple like a house of cards.
The escrow fund (usually a savings account) is where money is saved to be spent. Because this money has a spending agenda, it must be liquid--that is, immediately accessible without penalty. What types of expenses are met with escrow savings? Home and car repairs, insurance premiums, uninsured medical expenses, vacations, and veterinary care are examples of such expenditures. And so, I funded my escrow account with money “discovered” during the budgeting process as well as with gifts, inheritances, tax refunds and other windfalls.
“The more variables you have in your life,” Hayden tells her Women & Money classes, “the more money you need in this account.” Among those variables are children, pets, a house, vehicles and vacation property.
The second savings component–the income-replacement fund–is financed by a cash instrument such as a money market mutual fund. Funded in the same manner as the escrow account, this is “insurance” against job loss. Its objective is to cover a person’s living expenses for a minimum of three months in the event of disability or downsizing, for example. The size of this fund is contingent upon such things as disability insurance and accumulated sick time. Once I had fully funded this money cushion, I deposited later contributions to my retirement plan instead.
Having put the budget and safety net in place, this now-full-fledged spinster delved into investment books (David Bach’s recent Smart Women Finish Rich is a good one) and began implementing the information they offered concerning IRAs, Roth IRAs, 401(k) plans and other long-term investment vehicles. Money magazine, Kiplinger’s Personal Finance Magazine, numerous Web sites and several public radio and TV programs offered additional information on retirement planning and general money management.
Finally, here are some parting words from Hayden:
“If you have saved for retirement and don’t live to spend your money, someone else gets the money,” she tells the women in her classes, smiling at the irony.
“If you live and you haven’t put any money away,” she adds, “being 80 years old is going to be nasty. So, let’s bank on you living well a long time.”
Lynne Thomas 44, is a career receptionist. For nearly seven years she has successfully followed the money management plan described here. Recently, when she revealed her net worth to her family, her mom, especially, was impressed. Her mom is now convinced that a husband isn’t necessary for financial security.