What Does it Take to be a Financially Independent Woman?

What Does it Take to be a Financially Independent Woman?

With a strong and powerful collective voice, millions of women around the world just marched in support of their rights, and for policies that would benefit both men and women.

All this collective female power makes me wonder about economics and women. Are women feeling more financially independent?

The numbers show the financial well-being meter is moving up for women. It does seem we’ve learned from our past and have made headway against many of the challenges we face more than men, such as the well-publicized wage gap. One striking fact is that younger women now actually are more financially independent than their male counterparts. That’s according to a 2016 study by Bank of America and USA Today.

Who can call herself financially independent?

This study found last year that 61% of women between 18 and 26 years old have money in savings, but only 55% of men in the same age group do. Thirty-four percent of those women do their own taxes, compared to 28% of their male counterparts, and 33% of these young women have their own health insurance (instead of being on their parents' insurance), compared to only 25% of young men.

These numbers demonstrate that as women, we are starting to prove by the numbers that we can be financially independent. But those are just a few ways to measure what it means to be financially independent. Others may prefer to put some dollars on it. Wealth management firm UBS found in 2013 that 60% of people with over $5 million and 28% of those with $1 million to $5 million call themselves "wealthy," but just 10% of millionaires feel that being wealthy means they don't have to go to work. Apparently wealth and financial independence aren't about some magic number: Just 16% said you become wealthy only after reaching a certain threshold of assets.

Two-thirds of the millionaires who responded to the UBS survey, both male and female, said the whole reason to build wealth is achieve complete financial independence, where one setback won't banish them back to the ranks of the un-wealthy. If you can believe it, half of those whose personal worth was between $1 million and $5 million felt that one setback would severely impact their lifestyle.

What does it take?

So, as you can see, being financially independent and feeling financially independent are two different things. Even millionaires don't necessarily feel financially independent (and those with shaky resources and high expenses could be correct). The flip side is that you can get that feeling without having millions of dollars saved. The feeling is a moving target and a personal definition. It's about not only what you earn, but also what you spend and save in relation to your income.

Financial freedom shouldn’t be about attaining a specific amount of wealth, or even a certain portfolio size. Financial independence is a state of mind that’s realized once you know you can live without worrying about how you’ll pay your bills. Here's how to get there.

1. Income for life

Either your investments are enough to generate sufficient income to last for life, or you have a pension or inheritance that will be enough to cover your monthly living expenses forever. In other words, you have money for life. This happens as a result of many years of investing to maximize every dollar of savings.

2. Investments that will keep growing 

You end every year with more money than you had at the beginning of the year. Work with a financial advisor to make sure your investment portfolio is fully diversified with different assets. An exchange-traded fund, index fund or Vanguard fund are simple, low-cost ways you can make sure you're diversified without a lot of fuss. Consider if you had money in a fund that mirrors the Dow Jones Industrial Average; it topped 20,000 and soared to a record high this month. After your investment has logged some gains, take some profits by selling some of the winners and looking for some up-and-comers that will offer future gains. If you're not happy with passive trades, an investment advisor can help you enact these strategies (see Blurred Lines: Whom Can You Trust for Financial Advice? and What Is a Registered Investment Advisor?).

3. Resources, so you can give to others 

You have enough money to give some away, whether to your kids, charities or another worthy cause. This can only happen after you have carefully calculated how much you need to live. After you're sure you have enough to last the rest of your life, you start giving money away or making plans for what will be left after you're gone.

4. Living well below your means

You’re happy living off whatever you have and are not constantly wishing for a bigger lifestyle. Conventional wisdom says you should be able to save at least 20% of your after-tax income, although in today's world, that's not always possible. For starters, rent has gotten so high that in some markets, it rivals a typical mortgage payment for the area. And don't forget about education loans.

But it seems the younger generation has learned something about saving, which is living with your parents for as long as you can. Analysis of federal census data conducted by the Pew Research Center in 2012 found that 35% of Americans between the ages of 18 and 31 still lived with their parents. I don't have as negative a view as some people of living with your parents while you pay off debts and save enough so you can live independently. Of course, this isn't – and shouldn't be – a permanent solution. Coldwell Banker Real Estate conducted a poll and found that parents feel it's acceptable for their adult children to live with them for no longer than five years after finishing college.

5. Having a big, soft cushion of emergency money

An emergency fund means you aren't living from paycheck to paycheck, worrying that any setback means that you're instantly going to lose everything. Losing your job doesn't result in also losing your house because you have a cushion. A general rule is to have at least three months' worth of bills covered by emergency funds, but in reality, six months or more is better. These funds should be tapped only in an unexpected emergency – a sudden job loss, if your car breaks down, if you have to take time off work due to a medical problem, etc. (See Why You Should Have an Emergency Fund.)

6. Living debt-free

If you don't have cash to cover it, then you probably shouldn't buy it, with a home and car being two exceptions. But if you don't have enough of a cushion to support your home if you have to take time off work, you should be looking at a less expensive home. The less debt you have, the lower your monthly bills will be, and the larger your emergency fund will be in relation to your bills.

The Goal: Real Financial Freedom

When I was a kid, my dad strongly advised me to never put myself in a position to need a man to support me. That became my definition of financial independence. The be all, end all is financial freedom – real financial freedom.

Having financial freedom will bring you life freedom. If you've planned well and haven't been faced with an endless stream of financial difficulties throughout your life, you will be more and more in charge of your own schedule. You will have the freedom to retire when you think it’s time. Eventually, you'll work only for the love of it – or be able to stop your work life to do something you enjoy more. Then, you wake up and do whatever you want; your time is entirely your own.

Pam Krueger
Twitter Email

Pam created the award-winning MoneyTrack series seen nationally on over 250 PBS stations. She is the recipient of a 2010 and 2009 Gracie Award and brings her knowled ... Click for full bio

Alternative Beta Strategies: Alpha/Beta Separation Comes to Hedge Funds

Alternative Beta Strategies: Alpha/Beta Separation Comes to Hedge Funds

Written by: Yazann Romahi, Chief Investment Officer of Quantitative Beta Strategies, J.P. Morgan Asset Management

A quiet revolution is taking place in the alternatives world. The idea of alpha/beta separation has finally made its way from traditional to alternative investing. This development brings with it a more transparent, liquid and cost-effective approach to accessing the “alternative beta” component of hedge fund return and a new means for benchmarking hedge fund managers.

The good news for investors is that the separation of hedge fund return into its components—rules-based alternative beta and active manager alpha—has the potential to shift investing as we know it. These advancements could democratize hedge funds and, at long last, make what are essentially hedge fund strategies available to all investors—even those who aren’t willing to hand over the hefty fees often associated with hedge fund investing.

A benchmark for alternatives

With respect to traditional equity investing, we have long accepted the idea that there is a market return, or beta—but this hasn’t always been the case. Investors used to assume that to make money in the stock markets, one needed to buy the right stocks and avoid the wrong ones. The idea of a market return independent of skilled stock selection seemed ridiculous to most market participants. Yet today, we would never invest in an active manager’s strategy without benchmarking it against its respective beta.

Interestingly, hedge fund managers have been held to a different standard. Investors have been much more willing to accept the notion that hedge fund strategy returns are pure alpha, and that their investment returns are based entirely on the skill of the fund manager. That notion explains why investors have been willing to accept a “two and twenty” fee structure just to access what has been perceived as one of the most sophisticated and powerful investment vehicles available.

In thinking about the concept of beta, consider its precise definition—the return achievable by taking on a systematic exposure to an economically compensated risk. In traditional long only equity investing, the traditional market beta has been further refined as a number of other risks have been identified that are commonly referred to as “strategic beta.” These include factors such as value, momentum, quality and size. But no one ever said that these risk factors must be long-only.

Over the past decade, as more hedge fund data became available, academics began to disaggregate hedge fund return into two components: compensation for a systematic exposure to a long/short type of risk (alternative beta), and an unexplained “manager alpha.” What they found is that a significant portion of hedge fund return can be attributed to alternative beta. That fact has turned the tables on how we look at hedge fund return. With the introduction of the alternative beta concept, hedge fund managers will have to state their results, not just in terms of total return, but also as excess return over an alternative beta benchmark.

Merger arbitrage—an alternative beta example

The merger arbitrage hedge fund style can be used to illustrate the alternative beta concept. In the case of merger arbitrage, the beta strategy would be the systematic process of going long every target company, while shorting its acquirer. There is an inherent return to this strategy because the target stock price typically does not immediately rise to the offer price upon the deal’s announcement. This creates an opportunity to purchase the stock at a discount prior to the deal’s completion. The premium that remains is compensation to the investor for bearing the risk that the deal may fail.

Active merger arbitrage managers can add value by choosing to invest in some deals while avoiding others. Therefore, their benchmark should be the “enter every deal” strategy, not cash. In fact, the beta strategy explains the majority of the return to the average merger arbitrage hedge fund. And it doesn’t stop there. Other hedge fund styles that can be explained using alternative beta include equity long/short, global macro, and event driven. Note that the beta strategy invests in the same securities, using the same long/short techniques as the hedge fund strategy. The difference is that the beta strategy is a rules-based version that can become the benchmark for the hedge fund strategy. After all, if a hedge fund strategy cannot beat its respective rules-based benchmark (net of fees), an investor may be wiser to stick to the beta strategy.

Implications for investors

What does all this mean for the end investor? Hedge funds have traditionally been the domain of sophisticated investors willing to pay high fees and sacrifice liquidity. Alpha/beta separation in the hedge fund world means that investors can finally choose whether to buy the active version of the hedge fund strategy or opt for the passive (beta) version. Hedge fund strategies can be effective portfolio diversifiers. Now, through alternative beta, virtually all investors can access what are essentially hedge fund strategies in a low cost, liquid, and fully transparent form. For investors who haven’t had prior access to hedge funds, this could be welcome news. Not only can investors look at an active hedge fund manager’s strategy and determine how it has done compared to the systematic beta equivalent, they can also invest in ETFs that encapsulate these systematic strategies.

When looking at one’s traditional balanced portfolio today, there are plenty of questions around whether the fixed income portion will achieve the same level of diversification it has provided in the past. After all, with yields still low, there is little income return. Additionally, the capital gains that came from interest rate declines are likely to reverse. With fixed income unlikely to adequately fulfill its traditional role in portfolios, there is a need to find an alternative source of diversification. This is where alternative strategies may help. For investors seeking to access diversifying strategies in liquid and low-cost vehicles, alternative beta strategies in ETF form are one option.

Looking for an alternative to enhance diversification in your portfolio?

For investors looking to further diversify their overall portfolio, JPMorgan Diversified Alternatives ETF (JPHF) seeks to increase diversification and reduce overall portfolio volatility through direct, diversified exposure to hedge fund strategies using a bottom-up, rules-based approach.

Learn more about JPHF and J.P. Morgan’s suite of ETFs here


Call 1-844-4JPM-ETF or visit www.jpmorganetfs.com to obtain a prospectus. Carefully consider the investment objectives and risks as well as charges and expenses of the ETF before investing. The summary and full prospectuses contain this and other information about the ETF. Read them carefully before investing.
J.P. Morgan Asset Management
Empowering Better Decisions
Twitter Email

See how ETFs differ from other investment vehicles, learn how to evaluate them, and discover how ETFs can be used effectively to achieve a diversity of investment strategies. ... Click for full bio