Many personal finance books are aimed at women. It’s a logical brand extension if you get a bestselling title. Not only are women more willing than men to buy books that offer advice for improving one’s life, there’s also a widespread belief that women need more help in the monetary arena than men do. As Suze Orman wrote in Women and Money, “Why is it that women, who are so competent in all other areas of their lives, cannot find the same competence when it comes to matters of money?”
There would seem to be some evidence pointing to women’s money troubles. Women are rapidly becoming more educated than men, and yet women build up far less wealth. Clearly that calls for some financial education, right?
Except the problem with much literature aimed at women in this regard is that it takes a scolding tone that women are blowing their cash on frivolous things or, to use the title of one book, Shoo, Jimmy Choo!. According to Helaine Olen’s new book, Pound Foolish: Exposing the Dark Side of the Personal Finance Industry, Gallup found that men spent $11 more per day than women in 2011. “They are also easier online marks, quicker to click the ‘buy it now’ button and less likely to comparison shop or return items. Men are more likely to buy Groupon and other online coupon deals for fun, while women use the services to purchase needed goods at a discount.” Men are more likely to spend big on cars — a category that can get you into trouble far faster than the sale rack at Macy’s — and yet, as Olen notes “there are, needless to say, no male equivalents of this stuff. No books with titles like Let Go of the Lamborghini! or Bench the Bulgari.”
Compounding this issue are some studies finding that women may, on the margins, be better at investing. They’re less likely to pursue hot stocks. Writes Olen, “A Vanguard study found men significantly more likely to panic and sell at the market lows, locking in their losses instead of their gains.” So if women don’t spend more frivolously than men, and they don’t invest any worse, what’s the problem?
In a nutshell, the reason women build less wealth is that they earn less money. While plenty of personal finance books promise riches from stashing away small bits of cash — thanks to the miracle of compound interest — the interest rates that make it look like $3000 a year will buy you a mint at retirement hover in the 10-12% range. Actual, inflation-adjusted rates of 6-7% are more likely over the long term. To build up lots of wealth, you need to be investing lots of money. It’s a lot easier to invest lots of money if you have lots of money coming in. One Federal Reserve study found that while fewer than 60% of families in the 40th-60th income percentile save, just about 85% of those in the top tenth do.
There are lots of reasons women earn less money. Discrimination is one. Women are less likely to negotiate starting salaries (though there’s some research claiming that they hurt their hiring chances when they do). They work fewer hours, even when they work full-time, and women are more likely than men to work part-time, with all the income trade-offs that entails. There’s sorting within fields, with men perhaps putting a higher value on income than other factors like flexibility. All this can be limiting to men too — society tends to judge men more based on income than it does women — but the financial results are obvious.
So what’s to be done? With any big issue like this, you can keep an eye on someday goals (ending pay discrimination) while also asking what individuals can do Monday morning. These are not either/or choices. It is not denying the reality of larger social forces to look at both. Of the list of causes above, the one most within individual control would be the number of hours worked. When we get busy, it’s easy not to put in the extra hours on the margin — the planning, networking, skill-building hours. Perhaps we might call these the “lean in” hours, to use the language Sheryl Sandberg is proposing. These are the hours when, as a freelancer, you’re seeking out new clients, or the hours in a conventional job when you’re angling for the next promotion or to move to a higher level in a different organization. But these are the ones that lead to more money down the road. There are, of course, other things to life than money. But in general, whether you’re male or female, having more enables more choices than having less.
(I’m writing, a few days this week, on topics proposed by Women’s Money Week. Today’s topic is income. You can read other bloggers’ posts on that topic by clicking on that link).
Photo courtesy flickr user SarahSphar
Yes, lower earnings is important, possibly the most important, but there’s also evidence that women are less financially literate, less likely to be involved in their long-term finances, and that they are less likely to be involved in the stock market. (Lusardi and Mitchell have some of this literature using the HRS.)
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O’Dean does find that women, conditional on being in the stock market, are more likely to buy and hold and they’re less likely to make over-confident mistakes, but there’s still room for some kind of financial education targeted at women. Women are doing well in the stock market not because they’re making active choices, but because they’re not making the active mistakes that men are.
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There’s a somewhat sizable literature on the topic. Personally I’m more in favor of making finances as hands-off as possible, setting defaults and opt-out policies, for example, which would mean people just have to do what everybody else is doing rather than solve their own scary optimization problem. (Madrian and Choi are the big names in this literature, though it, too, is voluminous.)
Yeps, the trope about women and frivolous spending can be irritating. And I’d read a book called Bench that Bulgari just for the title!
@Well Heeled Blog – maybe that should be the title of my big business book idea!
We all have little leaks, I’m sure. And some people are big spenders, unable to hold onto cash. But looking at the data, people who make more money save more money. The income side of the equation matters a lot more than much personal finance literature promotes.
I think women tend to choose jobs (teaching, virtually all medical jobs, administrative assistant) where there is less/little reward for investing in your career. Teachers move up by seniority, unless they want to be administrators. Nurses and physicians have compensation rates set by insurance companies, and most now are employees, not in practice for themselves.
A third factor in the gender difference is effects of overtime laws. A friend’s husband (electrician) recently got a good job after ~3-4 years of unemployment. (She’s a teacher.) He’s taking about all the overtime he can get to rebuild their savings. Her benefits and pension are fixed and she’s at the top of the payscale, so having her “lean in” is not going to help their family- teachers don’t get overtime.
@TG – there are often still ways to lean in, even on salary-scale jobs. Unless your friend’s contract forbids it, there are services like Teachers Pay Teachers where innovative teachers can sell their lesson plans for extra cash. You can teach in various programs during the summer. You can coach and earn extra money during after school hours. In other cases, say Fed govt employees who are forbidden from accepting anything in side income, may also not be planning in being in those jobs for life. How you network and what skills you learn affects what job you get after that career.
She has taught college level classes, but at adjunct pay, it makes more sense for her husband to work overtime. The amount of money people make on sites like you mention is trivial, kind of like at-home party sales.
For most families, including mine, career decisions are made on a “what’s best for the family” level, not on a “what advances my career” level.
@TG – The problem with that is that for a great many women, what advances their career will be what’s best for their family, as women’s income is increasingly not about extras but about their children’s standard of living. Life happens.
it’s not wrong to teach women to think the what’s in it for me; it’s valuable.. you are getting at some of the mixed messages.. which are … do more, be more but ask for less etc.
But what standard of living is OK for your children? Is the option of private school necessary for an “appropriate” standard of living? Do you have to be able to afford to live where public schools are “good”, whatever that means to you? Do you need to pay for health insurance for your children or does it make more sense to be heavily subsidized by the state, as many Oregonians are?
If you choose to move away from your family of origin, especially away from a rural area, for your career, you will likely have a higher income but no family support, so you will have to hire more support such as backup childcare.
I guess I read this post and think, “This applies to the 5-10% of women with the drive and intelligence to earn incomes in the top 5-10% of the population. It’s about staying upper middle class, not working class or even middle class. And if my Facebook sample of women who went to good colleges/grad schools is at all accurate, 1/3-1/2 won’t have any kids anyway.”
I completely disagree that physicians have little reward for investing in their careers and have compensation rates set entirely by insurers. It all depends on the subspecialty and location – MDs outside of major cities and with equity ownership can do very well indeed, regardless of the insurance climate. Being an MD can actually be one of the most meritocratic fields out there, and I know very few docs who have to take work home with them: when their shift is over and the charts are done, they’re done.
Women MDs do get the shaft, however, when they don’t “lean in” to highly-compensated specialties and instead choose peds or family medicine thinking they’re most “flexible,” while marrying surgeons and failing to negotiate with their husbands for an equal division of household labor.
women with partners who are men are surprisingly unaware of the family finances … this is my anecdotal sense among white married women in america… that said even if the woman holds the info on the finances or is single etc. — the issue here isn’t just how to work more hours but how to be worth more in the hours you do work… I don’t think flexibility and being a good family person are out of line with making more per hour … the idea is that time = $ and of course that women maybe accept or earn less per hour than they should. part of this is in the teaching women to ask without feeling bad about themselves and part of it is in getting away from the cultural idea that just b/c you are at your desk more hours you are more productive… this seems not true.. the best manager should work less b/c has built the best team.. just like a great salesperson should earn more in less time than a mediocre one.. work more hours definitely isn’t helping women get richer b/c it’s not practical… maybe how to make more in the hours you do work etc.
I think also you might be getting at the issue of meaningfulness versus financialness… and that hey are not mutually exclusive but on a continuum… that is to teach women to only care about romanticized jobs or marriages but not $ is disempowering.. just like it is wrong for men to only be in everything for $.. the most fulfulling jobs seem to be the ones that let you self actualize at something you are genuinely passionate about, cause no harm, etc and with some sense of financial reward… if it is only good for others but not financially beneficial it might not be the best “job”–
Maybe Laura could do a post on how mothers of Davidson Scholars balance full-time careers and supporting their children’s talents, especially for families with incomes that are not in the top 20% or schools that are not in the top 20%.
My friend the electrician found a job 90 miles away, so he’s gone 5 days/week. At some point, leaning in to your career doesn’t work when both parents do it, unless there are extenuating factors like money for tutors/private school or grandparent help.
@TG – so the median annual wage of women who work ft is $35,984. For men it’s $45,500. If you have these two married to each other, their combined income is $81,484. That puts you just slightly below the lower limit for the top 20% of households in America, which is $88,030.
I suspect that children need both parental (or other caring, involved adult) time and money to achieve at high levels. Where do you see performance as a function of parental time/income drop off? Are there Davidson scholars who are not in the top 20% of parental income? If not, why not? If so,why?
With my teacher/electrician couple, who would provide this parental time, given that good employment for both of them in the same place is unavailable. Given that she can’t move and finish her pension, which is dependent on 30 years of state employment to be optimal, how would they “step in”? Their best ROI is staying in this state for her pension.
I think an important reason that women earn less money is linked to your observation about women being less likely to negotiate starting salaries: they are more likely to undervalue themselves, their abilities, and how much they are valued by other people. This isn’t to say that all women are like this and all men are not; rather, society has provided this narrative for women as a group for a long time and many women continue to believe it. From my own experience, I have observed that men are more likely than women to back themselves in a situation when it is uncertain that they will be successful. Given that getting a higher paying job usually means stretching your abilities beyond your current experience, I believe that this narrative has contributed to women earning less than men and will continue to do so unless women start telling themselves a different narrative. This isn’t to mean we should tell ourselves the same things that men do. But women really need to think about their own self worth and work on this if this is holding them back from getting the job (and earning the money) that they want.
I just followed Laura’s link and realised that my observation had already been written about in one of the post’s linked to the Women’s Money Week website: http://womensmoneyweek.com/6-ways-to-increase-your-income-by-changing-your-mindset/