small change toward a rich life

Women and money: four destructive myths

Among financial bloggers, this has been designated Women’s Money Week. I don’t usually think about finances and economics in a gender-specific ways, but coincidentally, last week I happened to be reading a book called Pound Foolish: Exposing the Dark Side of the Personal Finance Industry.

The author, Helaine Olen, devotes a chapter to the way the financial industry treats women, and reading it left me in a roil of righteous indignation.

In a nutshell, companies have found it profitable to make women feel insecure about their financial acumen so that they can then sell those women financial services and advice. (The book as a whole documents the way most of the financial advice being offered is aimed squarely at making money for the advisor, often to the detriment of the advisee.)

It’s the same strategy that glam mags use: put a Photoshopped celebrity model on the cover, some list of 25 or 50 or 99 ways you can be sexier for your man, plus some diet, skin, and hair tips. They’re not really trying to help you with all that advice; they’re trying to make you worry that you’re not pretty or thin or clear-skinned enough, so that you’ll buy the latest overpriced fashions and ‘beauty products’, advertised in their pages by the thousands.

Likewise, financial companies from banking to insurance have pounced on anything and everything which supports the stereotype of women confused and made helpless by their retirement and investing options. Some even go so far as to imply that women are just inherently less capable of handling finances than men are. You may be a whiz at stretching that grocery budget, ladies, but when it comes to retirement planning you’re in over your head. You need extra help, and hey, we just happen to have a stable of advisors waiting to tell you what to do!

So here, to combat the misinformation, are four destructive myths about women and money.

Myth 1: Women have less money because they overspend

It’s true that women have less money than men. But shopping has absolutely nothing to do with it.

women's shoes on displayAlthough women spend more on clothing and personal care, men spend more on nearly everything else. By every measure, in every study I could find, men’s total spending is higher.

When men and women are asked about impulse shopping, women confess to higher levels. But that’s a measure of self-perception, influenced by societal stereotypes, not an actual count of dollars. In fact, women are slightly better savers than men — on average, they save 1–2% more of their income.

The real problem is that women’s incomes are so much smaller to begin with. Women are still paid significantly less than a man with the exact same qualifications for the exact same job. This is true at every level of income, whether you’re waiting tables or running a multinational company.

How much less? One study, which controlled for variables including “college major, occupation, industry, sector, hours worked, workplace flexibility, experience, educational attainment, enrollment status, GPA, institution selectivity, age, race/ethnicity, region, marital status, and number of children,” reported a pay discrepancy of 5% right out of college, growing to 12% a decade later. That’s the income gap that can’t be explained by ‘life choices’ or anything other than simple gender discrimination.

Compound that over forty-plus years of working life and each woman winds up hundreds of thousands of dollars behind her male counterparts. On top of that, women are more likely to take time off to care for children and elderly relatives, reducing their lifetime income still further. On average, working women earn just 77% of what men do.

woman with three children on park benchBiology and social tradition combine to ensure that nearly all single parents are women. Single mothers comprise about four-fifths of our country’s poor. In fact, whether they have children or not, women almost always suffer economically from divorce, while men’s financial situations usually improve after a split.

Finally, women live longer, meaning higher total costs for living expenses and health care. The death of a husband often means a dive into poverty for the surviving widow … because her earning power is less, not because she bought too many shoes.

Myth 2: Women are worse at money management

If you want to find a study to support gender superiority in personal finance, you can take your pick of dozens. But they don’t all point the same direction.

man showing off his new FerrariWomen have more credit cards; men have more car loans. Women are more likely to carry a balance, but men carry higher dollar amounts and take out more cash advances.

Women make more budgets. Men are more likely to default on their loans and overdraw their bank accounts. The highest amount of credit card debt actually belongs to single men, who are trying to impress women they’re dating. (Apparently they haven’t gotten the memo that most women don’t find debt attractive.)

But all of this is smoke and mirrors. In every case, the difference between the genders is small — three percent here, four percent there. Nowhere is there a compelling case to be made for the superiority of one gender over another when it comes to daily finances. Credit scores don’t show a gender-related difference.

American women do file for bankruptcy significantly more often than men. But that doesn’t reflect a lack of competence, it reflects increased responsibility: the overwhelming majority of bankruptcy filers are single mothers. Seventy percent of single parents are going it entirely alone, without the benefit of child support, and only about ten percent are receiving welfare (TANF) assistance.

So before you go pointing at bankruptcy levels as evidence of women’s poor money skills, consider that the main reason for those bankruptcies is that three in five fathers default in part or in full on their legal child-support payments. Maybe it’s men, not women, who could use a little help on the money management front.

Myth 3: Women don’t plan as well for retirement

In survey after survey, men report higher confidence about their own retirement preparedness than women do — sometimes much higher. When those studies are covered in the media and touted by the financial companies that sponsored them in the first place, it’s typically with the assumption that men are indeed better prepared.

confident man at Dale Carnegie conventionThe key mistake here is equating confidence with competence. As Shakespeare put it, “The fool doth think he is wise, but the wise man knows himself to be a fool.” In modern times, this phenomenon is known as the Dunning-Kruger effect: ignorant people overestimate their own competence, whereas informed persons underestimate theirs.

Are men really doing better? In some cases, yes — though not because they’ve done a better job of planning, but simply because they have so much more money to begin with, and shorter lifespans mean less risk of outliving their assets.

But it’s also true that many men only think they’re prepared for retirement. Men tend to overestimate their prospects, while women are simply more realistic … or even underestimate their own capabilities. As one study notes, men already in retirement are enjoying it less than their female counterparts, possibly “because men tend to overestimate their financial preparedness and therefore face a more difficult financial adjustment when they retire.”

Similarly, men are much more likely to believe they know exactly how much income they’ll need in retirement. Again, this is often interpreted as evidence that women are not as adept at financial planning. I submit that maybe it’s because fewer women are so foolish as to think we can predict the future.

Do you think you know where Social Security is going to stand in 25 or 30 years? How about Medicare? Will health care be more affordable in when you’re eighty than it is right now, or less, and by how much? Will you or your partner get cancer? What about Alzheimer’s? Where will you be living in 2035? Will you own a home, or rent? Will inflation be low or high?

Are you exactly where you thought you’d be, doing what you thought twenty years ago you’d do? How many people do you know today working in jobs that no one had conceived of in 1990? Could you have predicted the state of the economy in 2010 … back in 1985?

Unless you’re less than five years from retirement, even the most educated guess could be off by a wide margin. Assuming you know the answers to any of those questions is as misguided as imagining you know what kind of return the stock market is going to provide over the next quarter century.

elderly man in hospital bedMore evidence that women are more realistic than men: women more often factor health care expenses into their retirement plans. This is a non-trivial consideration: simulations suggest that out-of-pocket medical expenses — after Medicare pays its share — will total between one and three hundred thousand dollars per person after age 65 … assuming Congress doesn’t gut Medicare benefits or push back the eligibility age, in which case the costs will rise.

The typical retirement savings of American households aged 55-64, by contrast, is a mere $120K … not even enough to cover the lowest estimate of health care expenses for two people, much less twenty-plus years of living expenses.

With those numbers, the idea that 45% of men believe they are set for retirement (as one recent survey claims) begins to seem ludicrous. Other studies, where men and women alike are more cautious and the gender difference is only a few percent, are probably more realistic. But in that case, focusing on the gender gap obscures the larger picture: that roughly four in five Americans are not at all confident that they’ll have enough money to retire comfortably … with good reason. And those that are confident mostly shouldn’t be.

Myth 4: Women are less skilled at investing

We’ve already covered that women save more than men do. Turns out they also do more research, hold more diversified investments, and are less likely to trade on impulse — like dumping stocks during a market crash.

In fact, although a majority of women consider themselves ‘beginner’ investors — men tend to think they’re ‘intermediate’ — men’s and women’s portfolios perform equally well. Women aren’t bad investors, they’re just more humble.

But here’s the real kicker: women have higher net investment returns than men. Not because they’re better stock pickers (because that’s a loser’s game), but because they trade a lot less often. Men are more volatile — buying here, selling there — and in the process they rack up a pile of trading fees. Here, again, the culprit is overconfidence; as one scientific study notes, “Psychologists find that in areas such as ÂŽfinance men are more overconfident than women … We find that the average turnover rate of common stocks for men is nearly one and a half times that for women. While both men and women reduce their net returns through trading, men do so by 0.94 percentage points more a year.”

roulette wheelWomen are more risk-avoidant than men, on average … probably because they have less money to start with and therefore less of a margin for error. But despite what many advisors would like you to believe, conservative investing is not inherently a losing strategy.

The common wisdom has long been that stocks (which are volatile and risky) return more profits than bonds (which are steadier and safer) over periods measured in decades. Even now, many people will tell you that the only reason to be in bonds is if you intend to cash out within the next five years.

The reason for this advice is historical: the United States financial market had a good long run — over a century — where stocks always outperformed bonds over any thirty-year period you cared to pick. But that was not, as many assumed, an immutable law. It was a function of a unique, unrepeatable macroeconomic circumstance, with hefty contributions from the Industrial Revolution and two world wars.

Boston sculpture: the tortoise and the hareThat particular gravy train came to an end in the early eighties … even though no one would recognize it for decades. Starting in 1981, if you put your money into bonds and waited 30 years, you would be better off than someone who invested in stocks.

Now, that doesn’t mean that bonds will always be the better pick, any more than stocks were always the better pick before. It does put the lie, however, to the idea that women are weaker investors because they take fewer risks. Risk doesn’t guarantee reward, and statistically, women investors are more than holding their own.

… and one sad truth

I would have liked to title this article ‘Five Destructive Myths’. However, it turns out there is one financial area in which men lead women by a wide margin. I’ll explain what that is — and why, and how we can start closing the gap — in my next article.


12 responses

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  1. Done by Forty says

    But how do I know to trust the information in this blog post, since it wasn’t written by a man?

    Just kidding. Some eye opening stuff there. The statistics on child support are particularly sobering.

  2. Pauline says

    For a year I traveled to developing countries to help women start small businesses and endeavors. They are the ones that would help the family get better conditions of living, they can save, work hard, and have the family’s best interest at heart. Many micro loans NGOs only lend to women.

  3. Jeremy Shapiro says

    What a well-researched, insightful article on money-related issues and women. People who are interested in the psychological level of the spending/saving issue might want to check out my column on The Psychology of Money and Happiness. The column is about this: No matter how shrewd we are about money management, serious efforts to restore financial health usually require us to reduce our consuming, and rather than being miserable about that, we can use psychological strategies to get more happiness from less stuff. Check it out!


    Dr. GoodCents

  4. A. Jessen says

    This goes to show that generalizations/stereotypes are often of limited use at best. There are always the extremes among both genders. I know a woman who is very smart about money, and one (living on a modest life insurance benefit) who never budgets for anything and gambles away at least a hundred a week, while expressing concern about her medical insurance costs. I also have a male family member who is a financial wizard (you’d never know by what he drives etc.), and one who has always been an overconfident over-spender, and is now paying for it after being downsized and hit with some unplanned expenses. I think temperament/personality and financial education are the big influences on money sense.

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  7. Richard says

    Do you think you know where Social Security is going to stand in 25 or 30 years? How about Medicare? Will health care be more affordable in when you’re eighty than it is right now, or less, and by how much? Will you or your partner get cancer? What about Alzheimer’s? Where will you be living in 2035? Will you own a home, or rent? Will inflation be low or high?

  8. Frederick says

    Yes, I agreed with you that men and women have a wide difference but as we know as technology is coming wide in our hands but nowadays women have a great plate forms and encouraged in last few years. and women will equal to men…

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