How Women Can Achieve Financial Independence: Saving and Investing Basics

By Rachita Sharma

A lack of practical knowledge and understanding of how, when, and where to prudently manage money for the future is a foundational barrier to the empowerment of women.

Financial literacy is perhaps a first step towards achieving gender equality both inside and outside our homes. After all, a woman who is confident about decisions related to wealth will assume confidence and create opportunities for a better future.

Needless to say, one of the most important financial literacy skills any person, especially a woman, can acquire is something that is not taught in schools. Not surprisingly, many people talk about saving and investing as if they are one and the same. In fact, some experts have found that a majority of people believe the two terms to be completely synonymous.

Saving and investing, however, are actually quite different, though they do complement one another in serving your financial goals. For any woman, saving and investing are safeguards that promote financial independence and stability over time if done effectively.

This article outlines the differences between saving and investing, how saving and investing helps women achieve financial independence and stability, and when and how to use each option to reach your goals.

Saving versus investing for women seeking financial independence

Saving is a simple strategy that can help you meet short-term financial objectives, such as establishing an emergency fund, buying new furniture, or going on a vacation. Typically, the money you save (your savings) is deposited into a bank account that pays interest. Financially savvy savers shop around to find the bank with the highest interest rate or annual percentage yield (APY). That APY is likely to be approximately 1-2% per annum, meaning that every year, the bank adds 1-2% to your balance just for keeping an account with them.

While the idea of any kind of free money might seem exciting, 1-2% is a fairly low return. The main advantage of saving this way is that it comes with almost no risk. The bank is insured and you are guaranteed to receive the interest as long as your money remains in the account. It is certainly a better option than keeping your savings in a jar or under your mattress—at least the money is at no risk of being lost in a flood or fire, or to a burglar who breaks into your home.

Keeping your money in a savings account is safe, and you can withdraw funds from the bank whenever you need them, such as in the case of a health emergency or job loss.

Investing, on the other hand, is a better strategy with respect to your longer-term goals. Typically, investing includes buying stocks, bonds, mutual funds, and/or exchange-traded funds (ETFs), and using either a brokerage account or experienced broker to do so. Some trades can be accomplished for free, but others are fee bearing.

Investing money that you won’t need immediately—ideally for at least five years—is best. Why would you want to lock up your money for such a long time? Because you are likely to receive a much higher return than you would from a savings account. Unlike saving, though, the risk is higher that you could lose money with investing because the market is sometimes volatile. However, the potential return on investments is five to 10 times greater than what you could earn via a savings account if you remain invested for the long game.

Investing is therefore a better strategy for retirement planning; your investments have time to ride out the ups and downs of the market and ultimately grow more substantially.

Basics of saving for financial independence

One of your primary savings goals should be to create a personal emergency fund. Some large expenses can be hard to predict, and having money set aside for occasions that you hadn’t foreseen can keep you out of debt (and lower your stress). Strive to save three to nine months’ worth of salary in a bank account so you can easily access and withdraw it precisely when you need it without fees or penalties. That way, you can remain financially stable and independent no matter what life throws at you.

Once you have an emergency fund in place, you can start focusing on short-term savings objectives—things you might want to purchase within the next year or two. Even a small amount of money saved from each paycheck can add up fast.

Saving this way is beneficial because not only are you contributing to your overall financial well-being, while allowing yourself to buy a few little extras, but you are also earning additional money thanks to compounding interest.

Your first interest payment is based on your initial deposit or “principal,” but your next interest payment will then be based on the new, higher principal, and so on, so that your balance increases incrementally. As long as you do not have banking fees that exceed the interest you are earning, that free extra money is all yours to keep.

The drawback of saving this way is that if you leave your money in a savings account for too long, time can work against you. Every year, the things we buy become a little more expensive. This steady increase is called inflation, and it typically adds to the cost of living by approximately 2% each year.

So even though a savings account guarantees that your money will grow over time, that money might not have the same purchasing power on the day you withdraw if it did not grow in tandem with the 2%. This is why investing is a better option when your goal is to save up for something big that you will want or need in the future, such as retirement.

An introduction to investing

When you invest, you ask your money to work much harder for you than it would by merely sitting idle in a bank account. Every investment you make—perhaps with expert help—should have the potential to at least outpace the rate of inflation so your net worth can continue to rise.

Since 1926, the average rate of return on stocks has been 10-11%. But the stock market has both good years and bad years, so losing money is always a possibility. Although bonds carry much less risk than stocks, they also tend to generate lower returns.

Assessing how much risk you are willing to take with your investments is an important first step. As a rule of thumb, the younger you are, the more risk you can handle because your investment portfolio has more time to recover from any losses. Whatever your risk tolerance, be sure that you can live comfortably without the money you plan to invest for at least five years, so you can give it adequate time to grow. You also need to take deductions from any brokerage or trading fees into consideration.

In the internet age, finding the information you need to help you decide where to invest your money has become easier. As you make decisions, remember that the best way to reduce your overall risk is by diversifying your investments; that is, investing in multiple ways, rather than just one. That way, a single loss won’t significantly deplete your wealth. With sufficient diversification, you should be able to greatly increase your purchasing power over time.

Teach your children about investing and saving

When young people gain a better understanding of saving and investing, the impact on society can be powerful. And financial skills among the younger generation is growing. While currently only 21% of Americans are directly invested in individual stocks, awareness of the importance of financial literacy has been increasing. In one statistic, 73% teens reported wanting more financial education and only about 50% of teens said they learned about personal finances in school.

Young women, especially, should note that this is an area where they need to rise against the norm to gain an equal advantage. At present, about 50% of women ages 55-65 have nothing saved for their retirement, and traditionally, conversations about investing are limited among men. This is also believed to be because of the pay disparity women face, though their expenses remain the same.

Young women in America today have the potential to dramatically reverse those trends and make financial resilience a priority. This could start small, but proactive steps taken today will form the basis of an equal society tomorrow—one where women are liberated, both socially and economically.