Financial Illiteracy in Women
Fostering Women's Financial Independence: The Power of Financial Literacy
The economic landscape for women has seen positive growth in areas like education, work experience, and income generation over the decades. Despite these strides, significant challenges persist, including a persistent gender wage gap and various obstacles hindering women’s wealth accumulation.
One area where women may lack confidence compared to their male counterparts is financial literacy. A study conducted in March 2021 by the Global Financial Literacy Excellence Center revealed that women often responded to financial literacy questions with “do not know,” although, upon removing this answer option, they frequently selected the correct answer.
Financial literacy empowers individuals to effectively manage their finances, encompassing budgeting, investing, and saving for various financial goals, such as emergencies and retirement.
Lower confidence in financial literacy, coupled with factors like the gender pay gap and reduced retirement savings, can pose challenges for women in handling unforeseen expenses, achieving financial objectives, and retiring at their desired age.
Ways to empower women on their journey to attain financial independence
Education
Promote financial literacy education in schools and communities, starting from an early age. Encourage women to attend workshops, seminars, and online courses to enhance their financial knowledge
Promoting Early Learning
Educating young girls about financial management at an early age can instill lifelong financial responsibility and empowerment.
Encouraging Open Conversations
Encouraging open conversations about money and finances is crucial for empowering women to seek advice and knowledge without fear of judgment.
Government Initiatives
Advocate for government initiatives and policies that promote financial literacy, such as requiring financial education in schools or tax incentives for saving.
Role Models and Mentorship
Highlight successful women in finance as role models to inspire others to pursue financial literacy and careers in finance.
Digital Tools
Fintech solutions and budgeting apps can simplify financial management, making it more accessible and less intimidating for everyone, including women.
Financial Inclusion
Promote financial inclusion by encouraging women to open bank accounts, invest, and participate in the formal financial system.
Financial Coaching
Provide one-on-one financial coaching or counseling sessions to help women understand and manage their finances effectively.
Measurement and Evaluation
Continuously measure and evaluate the impact of financial literacy programs to ensure they are effective in improving women's financial knowledge and decision-making.
Exploring the Gender Gap in Financial Literacy: Research Findings
Gender Financial Literacy Gap: 2022 TIAA Institute Survey
In 2022, the TIAA Institute conducted a comprehensive financial literacy survey, highlighting a gender gap in financial knowledge. The survey revealed that women answered an average of only 45 percent of personal finance questions correctly, while men performed better, with 55 percent correct on average.
Here’s a breakdown of correct answers by gender for various personal finance question categories:
Saving Questions
- Men: 64 percent correct
- Women: 53 percent correct
Investing Questions
- Men: 54 percent correct
- Women: 40 percent correct
Comprehending Risk Questions
- Men: 40 percent correct
- Women: 32 percent correct
Borrowing Questions
- Men: 66 percent correct
- Women: 55 percent correct
Insuring Questions
- Men: 49 percent correct
- Women: 41 percent correct
The survey also uncovered the financial challenges faced by women with low financial literacy. Women in this category are five times more likely to struggle to make ends meet, three times more likely to be debt-constrained, and three times more likely to be unable to handle a $2,000 financial emergency.
Additionally, retirement literacy remains a concern for women. A 2021 study by the American College of Financial Services found that 89 percent of women received a failing grade on a 38-question retirement literacy quiz, in contrast to 72 percent of men.
Closing the gender financial literacy gap is essential to empower women and improve their financial well-being.
The Consequences of Gender Disparities in Financial Literacy for Women
As a result of their comparatively lower financial literacy rates compared to men, women might encounter challenges in managing daily expenses, accumulating wealth, and effectively handling loans and credit card debt.
Wealth Accumulation
Retirement Savings Gap: Research indicates a gender disparity in retirement savings. According to the 2022 Retirement Savings and Spending Study by T. Rowe Price, women contribute less to their 401(k) accounts compared to men. The median 401(k) balance for women stands at just $21,638, while men have a median balance of $62,040.
Savings Discrepancy: Women are saving significantly less than men. In 2022, women saved an average of $3,146, which is less than half of the $7,007 saved by men, according to New York Life’s 2023 Wealth Watch survey. Money-related concerns negatively impact the mental health of 46 percent of women, with insufficient savings being a major worry for 60 percent of them, as revealed by a 2022 national Bankrate poll.
Investment Disparities: A study by BNY Mellon Investment Management in 2021 suggests that there could be an additional $3.22 trillion in assets under management today if women invested at the same rate as men. Perceived income requirements may deter women from investing, with many believing they need over $6,000 of disposable income each month before they can start investing, according to the study. Additionally, a 2021 Fidelity study found that only 33 percent of women felt confident in their ability to make investment decisions, and 42 percent lacked confidence in building long-term savings, such as retirement funds.
These gender disparities in financial metrics highlight the importance of addressing financial education and empowerment for women.
Impact of Living Costs and Purchases on Women's Finances
Financial Strain due to Rising Interest Rates: A Bankrate report for 2023 reveals that over half (54 percent) of women cite rising interest rates as a key factor contributing to their reduced savings for unexpected expenses, compared to 43 percent of men. When faced with a $1,000 unexpected expense, women are less prepared than men, with only 37 percent of women confident in their ability to cover it, as opposed to 50 percent of men.
Affordability of Basic Living Costs: Women, on average, earn just 83 cents for every dollar earned by men, which can make it challenging for them to afford essential living expenses, including housing. A 2022 study by PropertyShark reveals that single women seeking to purchase a starter home would need to allocate 49 percent of their monthly income toward mortgage costs. In contrast, single men would only need to allocate 32 percent of their income for the same purpose.
Income-Related Worries: The gender income gap leads to increased financial concerns among women. According to Bankrate’s 2023 emergency savings report, 72 percent of women worry about their ability to cover a month’s worth of expenses if they were to lose their primary source of income. This level of concern is higher than that of men, among whom 64 percent share the same worry. Among those very worried about this situation, 51 percent are women, while 39 percent are men.
These findings underscore the financial challenges that women face in meeting the costs of living and emphasize the need for strategies to address these disparities.
Loans, Approvals, and Debt Management for Women
Borrowing Insights:
- According to a 2020 Experian report, men tend to carry more debt than women across various categories. This includes 20 percent more personal loan debt, 16 percent more auto loan debt, and nearly 10 percent more mortgage debt. Notably, women have around 3 percent more student loan debt than men.
- In terms of student loans, a 2021 study by the Education Data Initiative found that women hold the majority (58 percent) of all student loan debt. However, women typically take an average of approximately two years longer than men to pay off their student loans, despite making higher payments.
Credit Availability and Gender Disparities:
- Apart from the gender pay gap, disparities in bank card credit limits between men and women have been reported. A 2021 report from the Federal Reserve Bank of Philadelphia highlighted that male borrowers tend to have higher bank card credit limits compared to female borrowers.
- While men and women carry similar average credit card debt, their reasons for accruing debt may differ. Research published in The Journal of Consumer Affairs in 2018 found that men have a greater tolerance for using debt to acquire luxury items, while women are more inclined to use debt for bridging income gaps.
Debt Management Advice for Women:
- Develop a Clear Debt Repayment Plan: Create a structured plan to tackle debts, beginning with those carrying the highest interest rates.
- Expense Reduction Strategies: Identify opportunities to reduce expenses, such as cutting back on dining out or entertainment expenses.
- Boost Your Income: Consider exploring part-time employment or freelance work to increase your income, enabling faster debt repayment.
- Seek Professional Guidance: If debt becomes overwhelming, consult with a financial professional who can provide expert advice on debt consolidation or debt management plans.
- Avoid Debt-Centric Solutions: Be cautious about using one form of debt to pay off another. For example, taking out a 401(k) loan may seem tempting, but the associated fees and taxes upon withdrawal can be substantial.
These strategies can empower women to manage and reduce their debt effectively while making informed financial decisions.
The Bottom Line
For women embarking on the journey to build an emergency fund or eliminate debt, initiating the process can often be the most challenging step. One effective method for taking charge of your financial situation is to establish a budget, enabling you to monitor your monthly income and expenditures. Whether you prefer traditional pen-and-paper methods, electronic spreadsheets, or user-friendly budgeting apps, a budget serves as a valuable tool. It empowers you to make informed decisions regarding discretionary spending after accounting for essential living expenses.
Investing represents a means to expand your wealth, surpassing inflation, and offers various avenues, including retirement accounts, investment funds, stocks, bonds, and mutual funds. Experts recommend that women begin their financial education during their school years, emphasizing the pivotal role it plays. Not only can financial literacy assist women during personal crises, but it also bolsters their confidence to exit unhealthy relationships, knowing they possess the economic capability to support themselves.
Ready to take the next step?
Get tailored retirement advice from a vetted financial advisor