4 Common Ways Women Are Investing To Build Wealth: Which Is the Best One?
Despite many financial challenges women are still facing — such as pay disparity — they have made many strides when it comes to financial wellness. Yet, a new GOBankingRates survey found that 57% of women are not actively investing — something some experts deem an alarmingly high rate.
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“The riskiest investment is not investing at all. You are pretty much guaranteed to lose money after you factor in inflation,” said Bobbi Rebell, certified financial planner (CFP), founder of Financial Wellness Strategies and author of “Launching Financial Grownups: Live Your Richest Life by Helping Your (Almost) Adult Kids Be Everyday Money Smart.”
“The best way to invest is the one that makes the most sense for your needs — and those needs vary based on your goals, values, resources and your life stage among other things,” she said.
For those who are investing, they are using these primary vehicles, according to the survey: brokerage accounts with 10.89%, investing app with 6.59%; IRA with 8.79%; and work-sponsored retirement plan (401(k) or 403(b)) with 16.98%.
Here is what experts think about each of these.
Also see the number one money tip women should follow.
Brokerage Accounts
As Stephen Kates, CFP and principal financial analyst at Annuity.org, said, a brokerage account is a natural extension of a fully-funded emergency fund which will facilitate long-term investing for goals other than retirement.
“Money contributed to a brokerage account can be invested into stocks or bonds either directly or through ETFs [exchange-traded funds] and mutual funds,” he said.
Kates said, however, unlike a bank account or money market fund, these investments will have a risk of loss, but will offer a higher expected long term return.
“High interest rates in savings accounts will not last forever and other investments will be needed to grow savings,” he said.
Another advantage is that owning and managing your own brokerage account affords complete control over investment decisions, which can translate to cost savings and the avoidance of management fees, said Peter Earle, senior economist at the American Institute for Economic Research.
“But it consumes time and effort and there’s an above average chance of making poor decisions without professional guidance,” he said. “The essential trade-off is between autonomy and learning opportunities versus the support and expertise provided by established financial advisors.”
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Investing App
Financial and investing apps have been proliferating in the last few years and some are specifically targeted and designed for women investors. Of course, investing via an app can be very convenient — yet many experts also warn about their potential downsides.
“It’s no different than gambling at a slot machine if you aren’t educated on your investments,” said Jillian Krenk, CEO and founder of MoneyWellth. “This is best suited for passive investors who are investing in lower-risk investments like ETFs or researched investors who want full control of their finance.”
Other experts echoed this sentiment, noting that investors need to understand what is going on in the app before starting to use them.
“Don’t get wrapped up in the ‘gamification’ of investing,'” said Jay Zigmont, Ph.D., CFP and founder of Childfree Wealth, adding that many of the apps encourage you to frequently trade or may invest you in a robo advisor that is doing frequent trading.
IRA
The tax advantages and flexibility of an IRA make it an excellent investment option, said Krenk. On the other hand, one of the disadvantages is you are not able to access this money until retirement age without a penalty.
Yet, as she said, most people are underprepared financially for retirement, “so utilizing an IRA is one of the best financial decisions you can make.”
In addition, as Zigmont said, if you don’t have access to a 401k, an IRA is your next best bet.
“You can contribute either pre-tax (traditional) or post-tax (Roth), but both have income limits and contribution limits you need to be aware of,” he said, adding that the good thing about an IRA is that you may have more investing options than you have in your 401k.
Work-Sponsored Retirement Plans
Employer-sponsored retirement plans such as a 401(k) or 403(b) are a core pillar of retirement for most Americans, Kates said.
In addition, while the employee has less control over the account and investment options, the matching contributions can boost the growth rate of the account if the employee meets the vesting requirements to claim the employer contributions, he said.
In turn, for working women who have access to a work-sponsored retirement savings plan, taking advantage of it should be a key component, said consumer finance expert Tanya Peterson, vice president of brand at Achieve.
“It’s vitally important for everyone to save for retirement, but women have some special considerations,” she said, adding that for instance, women typically have longer lifespans than men and therefore must draw on retirement savings more.
“Almost 70% of private-industry workers have access to employer-provided retirement plans, making these plans available to a wide swath of working consumers,” Peterson said. “Investing as much as possible in one of these plans can make a huge difference in the ability to retire and the quality of one’s retirement. And if the company offers any type of matching program, not taking advantage is like giving free money away.”
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This article originally appeared on GOBankingRates.com: 4 Common Ways Women Are Investing To Build Wealth: Which Is the Best One?
