Women and Money

Commencement — “the beginning” of our lives as independent adults — is an excellent time to begin learning about financial planning. Toward that end, the Boston University chapter of 85 Broads, a networking and mentoring organization for women with more than 17,000 members worldwide, representing more than 1,000 companies and 250 colleges and graduate schools, recently hosted the conference Investing in Women: A Woman’s Guide to Financial Savvy.

While financial planning is important for everyone — men and women — guest speaker Jeffrey Allen, a School of Management assistant professor, identifies some special challenges that women have to deal with. “On average,” says Allen, “women outlive men by about seven years and have been historically underpaid by about 20 to 25 percent, so they need to understand what’s going on with their money, and invest right away.”

Allen and Nancy Chisholm, regional consultant for Fidelity Investments, gave students the following advice, and more, about credit card debt, student loans, budgeting, and retirement plans.

Credit card debt
“A credit card is a wonderful vehicle to establish a great credit rating,” says Allen. “But it can also put you in a bad situation if not handled correctly.” Most borrowers don’t consider, for example, that if the minimum payment of 3 percent is paid on a debt of $5,000 at 18 percent interest, it will take 34 years to pay off, and the interest alone will be $4,850.

Allen advises that if it’s not possible to pay the credit card in full each month, borrowers should pay more than the minimum, and they should always make payments on time. Late payments are reported to credit bureaus and will hurt the payer’s credit score, which may be consulted by employers, landlords, and banks.

Student loans
If a student loan is borrowed at a low interest rate, Allen says, it may be wise to take the full time granted to pay it off and put cash into investments with a higher return.

As with late credit card payments, late loan payments can drag down a credit score. Allen recommends setting up an electronic payment schedule, where the money is automatically paid from a bank account to prevent late payments. Some lenders offer credits to borrowers who make a specific number of on-time payments — so being timely can lead to a lower loan balance.

Budgeting
“Everybody should know where all of their money goes,” says Allen, “down to the details — budgets are not made to constrain you, but simply to keep you in line in terms of overspending in particular categories.” Some financial experts recommend dividing gross income into different categories, with 25 percent allotted to taxes and 45 percent to foundation expenses, such as food, housing, health care, and transportation. The rest might go to fun expenses (15 percent) and future expenses (15 percent). Fun expenses include things you want as opposed to things you need, while future expenses are such things as an emergency fund, a retirement account, and big-ticket items like a first house.

Retirement plans
“When you go to work,” says investment advisor Chisholm, “your employer will most likely offer you one of two retirement plans, a 401(k) or a 403(b). The advantage of these plans is that the money contributed comes out of your paycheck before it is taxed. You can also invest into a Roth IRA, which is not tied to an employer, and that contribution is made after taxes are paid. Both of these accounts, however, grow tax-deferred, meaning that the money within them is not taxed while it is in the account — this tax deferral allows you to keep more money for yourself, letting it grow over time.”

Many employers will match a percentage of what employees contribute to retirement plans. This “free money” can make a big difference at the end of one’s career. If, for example, a 25-year-old woman contributes 10 percent of her gross salary, or $5,000 a year, each year until age 59½ and that money grows at 10 percent a year, she will have roughly $1,227,500 when she retires. But with a company match of 50 cents per dollar on the first 6 percent of her salary, she will have roughly $1,595,500 at retirement — a difference of $368,000.

This also highlights the power of compound interest. The woman in this example invested $175,000 on her own, but within 35 years, her investment grew to $1,227,500. The earlier in life you begin investing, says Lara Oakes (SMG’08), copresident of BU’s 85 Broads chapter, the more significant the impact on your net worth later in life. Starting 5 to 10 years earlier can mean a difference of a few hundred thousand dollars.

Allen is keenly aware that budgeting and investing can be scary topics for people who have never had to face them before. He recommends that everyone take a money management class, such as Metropolitan College’s Personal Financial Planning. He also advises consulting financial Web sites and journals, such as Money Magazine and Kiplinger’s. Finally, he says, students should talk to business professors; there are plenty of them on campus, and many are more than willing to help students get started.

Robin Berghaus can be reached at berghaus@bu.edu.