Building Financial Independence For Women Through Financial Literacy

Women’s participation in the economy has risen steadily over the decades when it comes to education, workforce experience and increased earnings. However, significant challenges remain that include a wage gap between women and men, as well as other barriers women face in growing their wealth.

Financial literacy is an area where women possess less confidence than their male counterparts. In a March 2021 study by the Global Financial Literacy Excellence Center, women were found to answer a financial literacy question disproportionately with “do not know,” yet when that answer option was removed, they often chose the correct answer.

Those who have financial literacy are able to use their knowledge and skills to effectively manage their money when it comes to budgeting, investing, and saving for emergencies, retirement and other goals.

Due to lower confidence in financial literacy, as well as factors such as the gender wage gap and lower rates of retirement savings, women may face difficulty in covering unexpected expenses, reaching financial goals and retiring at their preferred age.

Nearly two-thirds (62 percent) of working women are behind on their retirement savings, compared to just 48 percent of men. This includes 41 percent of women who are significantly behind, compared to 30 percent of men. More than a quarter (28 percent) of working women weren’t contributing to their retirement savings during the last two years, compared to 21 percent of men.
Women make up 52 percent of the entry-level banking workforce but just over one-quarter (27 percent) at the SVP and C-suite levels.
Nearly half (48 percent) of women are confident about their finances, although only 28 percent feel empowered to take action.
Just over half of women (53 percent) are confident with managing investments, and less than half (44 percent) are comfortable creating a diversified portfolio.
Women are significantly outpaced by men in retirement savings, with an average balance of $98,000 for men compared to the $62,000 average balance for women.

Sources: Bankrate’s 2022 retirement savings survey, McKinsey & Company Women in the Workplace report, Bank of America’s Women, Money, Confidence study , Bank of America’s Financial Life Benefits Impact Report

Lack of financial literacy could put individuals at risk for getting into excessive debt, having an inadequate emergency fund or not saving enough for retirement. A 2022 TIAA Institute financial literacy survey found that women answered an average of only 45 percent of personal finance questions correctly, whereas men fared significantly better with 55 percent correct on average.

The number of correct answers among men and women for each type of personal finance question is broken down as follows:

Saving questions
Men: 64 percent correct
Women: 53 percent correct

Investing questions
Men: 54 percent correct
Woman: 40 percent correct

Questions on comprehending risk
Men: 40 percent correct
Women: 32 percent correct

Questions on borrowing
Men: 66 percent correct
Women: 55 percent correct

Questions on insuring
Men: 49 percent correct
Women: 41 percent correct

The TIAA Institute survey also found that women with low financial literacy are five times more likely to have difficulty making ends meet, three times more likely to be debt constrained, and three times more likely to be unable to handle a $2,000 financial shock.

Another financial area in which research has shown women to be behind men is that of retirement literacy. Research released in 2021 by the American College of Financial Services showed retirement literacy to be low among both genders; however, women were in worse shape, with nearly 9 out of 10 (89 percent) receiving a failing grade on a 38-question retirement literacy quiz, compared with 72 percent of men.

Due to having lower financial literacy rates than men, women may ultimately face obstacles when it comes to handling living expenses, building wealth, and managing loans and credit card debt.

I encourage women — whether young or old — to take control of their personal finance situations before the next pandemic, divorce or other potential crisis strikes.

— Melisse BursteinCPA and partner at Miami-based accounting firm Gerson Preston

Some things Burstein says women can do to brush up on their finances include:

Take inventory of monthly income versus expenses.
Set a budget and stick to it, since knowing how much money comes in and goes out every month helps you make informed financial decisions.
Allocate 20 percent of monthly income toward a rainy-day fund, which can help you stay out of debt when unexpected bills arise.
Use no more than 30 percent of monthly income on “lifestyle activities,” such as shopping, eating at restaurants and going to the movies.
Start saving for retirement in a 401(k) or IRA — even if retirement seems far off — and contribute as much as you can afford.

Building wealth

Retirement: Studies have found women are behind men when it comes to saving for retirement. For instance, a 2022 Retirement Savings and Spending Study by T. Rowe Price found women are contributing less to their 401(k) retirement accounts than men, and the median account balance for women was 65 percent lower than for men.

The median 401(k) balance for women is just $21,638, whereas it’s $62,040 for men, the T. Rowe Price study found. It also found women have a lower rate of saving, with an expected median contribution rate for women of 11 percent, compared with 13 percent for men.

Savings: When it comes to saving money, women put away less than half the amount men saved in 2022, with women saving an average of $3,146, compared to the $7,007 saved by men, according to New York Life’s 2023 Wealth Watch survey.

More than 2 in 5 (46 percent) women say money issues have negatively impacted their mental health, a 2022 national Bankrate poll found. Not having enough savings is the biggest money concern 60 percent of women say impacts their mental health, according to the survey.

Investing: There would be at least an extra $3.22 trillion assets under management today if women were to invest at the same rate as men, according to a 2021 study by BNY Mellon Investment Management. A perceived income hurdle may be one impediment to investing for women, as U.S. women on average believe they need more than $6,000 of disposable income each month before they can start investing, the study found.

A 2021 Fidelity study found that just 33 percent of women felt confident in their ability to make decisions regarding investing, and just 42 percent had confidence in their ability to build up long-term savings, such as for retirement.

Cost of living and purchases

Emergency savings: Rising interest rates are cited by more than half (54 percent) of women as a reason they’re saving less for unexpected expenses, compared with 43 percent of men, Bankrate found when conducting its 2023 emergency savings report. The survey also found that women were far less equipped than men to pay for a $1,000 expense from savings, with 37 percent of women reporting they would do so, compared with 50 percent of men.

Cost of living affordability: For every dollar a man earns, women earn just 83 cents, which can make it more difficult for women to afford basic cost of living expenses, such as housing. In fact, single women looking to buy a starter home would need to spend 49 percent of their monthly income to cover mortgage costs, while single men would have to spend just 32 percent, according to a 2022 PropertyShark study.

Lower income can result in more worries, and nearly three-quarters (72 percent) of women are worried they wouldn’t be able to cover a month’s worth of expenses if they were to lose a primary source of income, compared to just 64 percent of men, according to Bankrate’s 2023 emergency savings report. Those who reported being very worried about this were 51 percent of women, compared with 39 percent of men.

Loans and approvals for big purchases

Loans: A 2020 Experian report found men carry more debt than women in most categories, including having 20 percent more personal loan debt, 16 percent more auto loan debt and nearly 10 percent more mortgage debt. The one exception was student loan debt, of which women carry nearly 3 percent more than men.

When it comes to borrowing money for college, 58 percent of all student loan debt belongs to women, according to a 2021 study by the Education Data Initiative on student loan debt by gender. The study also found it takes women an average of around two years longer than men to pay off student loans, even though they make higher payments.

Credit availability: In addition to the gender pay gap, a gap exists between men and women regarding bank card credit limits, according to some data. A 2021 report from the Federal Reserve Bank of Philadelphia found that “the unexplained gender difference in bankcard limits is $1,323, with male borrowers having higher limits than female borrowers.”

On average, men have just $125 more credit card debt than women, per the 2020 Experian report. While the average debt is similar between genders, men’s and women’s views may differ in regard to reasons for taking on debt. Men were found to have a higher tolerance than women for using debt to obtain luxury items, according to research published in The Journal of Consumer Affairs in 2018. It found women were more accepting of using debt for purposes like bridging income gaps.

Gerson Preston’s Burstein offers the following advice for women when it comes to getting out of debt:

Make a plan: Create a plan to pay off debts, starting with the ones that have the highest interest rates.
Cut expenses: Look for ways to reduce expenses, such as cutting back on dining out or entertainment.
Increase income: Consider taking on a part-time job or freelance work to increase income and pay down debts faster.
Seek professional help: If debts are overwhelming, consider seeking help from a financial professional who can provide advice on debt consolidation or debt management plans.
Don’t borrow your way out of debt: Try not to reduce one debt by creating a new one. For example, it may seem beneficial to take out a 401(k) loan, but the fees and taxes upon the withdrawal can be exorbitant.

Bottom line

For women looking to build up an emergency fund or get out of debt, getting started is often the hardest part. One important way to take control of your finances is creating a budget so you can keep track of how much money comes in and goes out each month. You can use pen and paper, a spreadsheet on your computer or a budgeting app. Having a budget will help you make decisions about how to spend any money that’s left over after you factor in your living expenses.

Investing is a way to grow one’s wealth and outpace inflation, and investment accounts can be opened in the form of retirement accounts, investment funds, or options such as stocks, bonds and mutual funds.

“In general women should try and start learning about personal finances while they are still in school,” Burstein says. “Financial education can and will play a pivotal role in supporting women who may experience personal crises and can also give them the strength to leave unhealthy relationships, confident that they can economically support themselves.”

Organizations women can turn to for financial education and resources include the Financial Literacy Organization for Women and Girls (FLOW) and the Women’s Institute for Financial Education (WIFE).