Young, single women are making their mark on the world. For the first time, educational attainment among women outpaces that of men at every level.1 Women make up 47% of the workforce, working primarily in management, professional and related occupations—and are projected to account for 51% of the increase in total labor force growth through 2018.2 And single women bought their first homes at nearly twice the rate of men.3
In short, young women are forging ahead on their own in their educational, career and financial decisions. However, many may put off planning for the long term—particularly for retirement—until they are planning with a partner. It’s a mistake that women cannot afford. Even though it seems like you have forever to build your financial strength, starting earlier makes the job much easier. Employing some simple, savvy moves today can help you reap substantial rewards in the long term.
Think about how you view money. Understanding what money means to you will help you make a plan and stick to it. Discuss with your friends or your significant other how you view spending, lifestyle, career, and salary expectations. If you are in a relationship, have a frank discussion with your significant other about money to discover common ground or potential future landmines. The good or bad habits that you learned growing up are likely to play out in your adult relationships.
Spend wisely. Incidental purchases could be draining your ability to save. Buying that $150 pair of shoes on a credit card with a 14% interest rate will cost you nearly $20 more in interest if you make the minimum payments. Ordering a $10 lunch at the deli just once a week translates into a whopping $520 per year. Map out a budget and stick to it, allowing room for food, fun and new clothes without derailing your savings efforts. Every time you opt out of purchasing that expensive coffee or another black sweater, deposit the amount you would have spent into your savings account and watch it grow.
Save for emergencies. Renowned financial expert Dave Ramsey has created “The Seven Baby Steps” approach to managing money and achieving financial peace. The first step he advises is to focus on saving $1,000 as an emergency fund to prevent unforeseen expenses from turning into credit card balances or consumer loans.4 Once that’s done, work on paying down high-interest consumer debt.
Pay down your debt. Gather all your latest credit card statements, loan papers and your checkbook register. Write down all your debts, the amount you owe on each account, the interest rate being charged and the minimum payment currently due each period. Add up the combined total you owe to creditors to gain a full understanding of how much debt you have. Once you’ve done that, focus on paying off the smallest debt and pay the minimum on all the rest. Once you have paid off the first loan, focus on paying off the next smallest loan. This will give you immediate gratification as you see your progress. Put as much toward your debt as you can: If you only make the minimum monthly payment, it could take a very long time to get out of high-cost debt, and you are likely to pay a lot of interest in the process. Finally, consider asking any company that issued you a credit card or loan to reduce your interest rate. Particularly if you're a good customer with a strong credit history, many companies will honor your request rather than risk losing you to the competition. If you're carrying a high balance on a card, an interest rate reduction could save you hundreds or even thousands of dollars in interest charges over time.
Build a financial buffer. Big expenses often crop up when you least expect them—and at the times you can least afford them. Once you’ve saved your initial $1,000 and done away with your debt, building an emergency fund is a good idea to give you financial security and peace of mind. While saving three to six months’ of living expenses might seem daunting, start with just a little each month and you’ll be surprised how quickly it adds up.
Get the app. Make your smartphone earn its keep by downloading some of the many useful financial apps available. TIAA-CREF’s free Savings Simplifier app for the iPhone helps you determine if your retirement savings contributions match your goals. If you’re constantly asking, “Where did my money go?”, check out Mint.com Personal Finance5, a free app for iPhone, iPad and Android that helps you track your spending and budget. BillMinder6, for iPhone and iPad, lets you monitor when credit card, student loan, and other payments are due, putting an end to late fees and keeping your credit report squeaky clean.
Start now. While retirement may seem a lifetime away, using that time to your advantage gives you power. For every 10 years you delay saving, you’ll need to save three times as much to catch up. If you contribute $1,000 per year into an IRA every year from age 20 to age 30, and contribute no more, at a 7% average annual return, your account will be worth $168,514 at age 65. Starting at age 30, you would need to contribute $1,000 per year for 35 years at the same average return to reach an account value of $147,913 at age 65.7 If money is tight, setting aside even small amounts now will likely reap large rewards over time.
Maximize your match. If your employer offers a matching funds program for retirement account contributions, be sure to participate. That match is additional compensation given to you just for socking away money for your retirement. In addition to boosting your investing power, when you start maximizing that match in your 20s, the returns on that additional contribution will keep compounding for decades.
Open a ROTH IRA. Funded with after-tax contributions, ROTH IRA returns grow tax-free over time. If you’ve had the account for more than five years, you can make tax-free withdrawals if you’ve reached age 59½, among other qualifications. Beyond that, you can also withdraw up to $10,000 for a first-time home purchase without incurring the 10% Internal Revenue Service (IRS) early-withdrawal penalty.8 Bear in mind that there are restrictions on who can contribute to a ROTH IRA, based on income.9
Check for credit. If you meet certain criteria, you might be eligible for the Retirement Savings Contribution Tax Credit. The credit, which totals up to $1,000 for single qualifying taxpayers, is available to those who earn less than $27,750, can’t be claimed as dependents, are not full-time students, and contribute to their employer-sponsored retirement plans or individual IRAs.10
Get help. It’s never too early to contact a financial advisor for assistance. Understanding the myriad money questions that arise regarding debt, investing, planning for large purchases, and protecting assets is a lifelong learning process. A good financial advisor can help shorten your learning curve and give you the benefit of training and experience when it comes to money management and investing.
You’re just getting started on life’s winding road. Developing good financial habits now will help you more effectively manage your money for decades to come. Time is on your side. Use it well.
Where does the money go?
It can be useful to see how other people spend their money and check out how your spending stacks up. This chart shows typical spending for U.S. consumers in 2011.11
1 The Condition of Education 2012, U.S. Department of Education, National Center for Education Statistics, 2012 http://nces.ed.gov/fastfacts/display.asp?id=27
2 Employment and Earnings, U.S. Department of Labor, Bureau of Labor Statistics, , January 2011, http://www.bls.gov/opub/ee/empearn201101.pdf and http://www.dol.gov/wb/factsheets/Qf-laborforce-10.htm#.UKL5F46LHao
3 Field Guide to Women Homebuyers, National Association of Realtors, December 2011 http://www.realtor.org/field-guides/field-guide-to-women-homebuyers
4 DaveRamsey.com. No date. http://www.daveramsey.com/new/baby-step-1/
7 Savings Fitness: A Guide to Your Money and Your Financial Future, United States Department of Labor, October 2010, http://www.dol.gov/ebsa/publications/savingsfitness.html#.UMvUkY6LHao
8 Topic 557 - Tax on Early Distributions from Traditional and ROTH IRAs, IRS.gov, Last updated October 31, 2012. http://www.irs.gov/taxtopics/tc557.html
9 Withdrawal of earnings from a Roth IRA prior to age 59½ may be subject to an additional 10% penalty.
10 IRS Tax Tip 2011-36, Get Credit for Your Retirement Savings, IRS.gov, February 21, 2011 http://www.irs.gov/uac/Get-Credit-for-Your-Retirement-Savings-Contributions
11 Consumer Spending 2011 News Release, Bureau of Labor Statistics, September 2012 http://www.bls.gov/news.release/pdf/cesan.pdf
While it is not our purpose or intent to provide specific investment advice or financial planning services, the above information may be helpful in understanding financial issues related to saving early. We urge you to seek advice based on your own particular circumstances from a financial advisor.
The tax information contained herein is not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Taxpayers should seek advice based on their own particular circumstances from an independent tax advisor.
The material is for informational purposes only and should not be regarded as a recommendation or an offer to buy or sell any product or service to which this information may relate. Certain products and services may not be available to all entities or persons.
TIAA-CREF Individual & Institutional Services, LLC and Teachers Personal Investors Services, Inc., distribute securities products.
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