Financial literacy is a critical skill, especially in an economy full of uncertainty, but it is especially important for women entrepreneurs and executives. Mastering the basics of financial management enables women to take control of their businesses, plan for the future, and build security and wealth that can be passed down through generations. However, women often face unique challenges when it comes to financial literacy, which can hold them back from achieving these goals. Below, we share some of the challenges women face, how they can take control, and the steps to building generational wealth. You’ll also find a glossary of terms at the end of this article.
The Challenges Women Face in Financial Literacy
Despite significant progress in gender equality, women still face barriers in gaining the financial knowledge and confidence they need to succeed. Numerous studies show that women, on average, tend to be less confident about their financial literacy compared to men, even when their actual knowledge levels are similar. This confidence gap can contribute to fewer women taking proactive steps to manage their finances or make strategic financial decisions for their businesses.
According to a report from the Pew Research Center, women are less likely than men to score high on basic financial literacy questions. In fact, only 12% of women answered all questions correctly in a study measuring financial knowledge*. This disparity can have real consequences for women entrepreneurs, as financial literacy directly impacts decision-making around credit, loans, and investment—essential elements in running a successful business.
The Kauffman Foundation has also reported that women entrepreneurs face greater hurdles when seeking financing**. On average, women-owned businesses start with less capital and are less likely to receive business loans compared to male-owned businesses. This puts women at a disadvantage from the start, often leading to slower growth for their businesses. A lack of access to financial resources and literacy leaves women vulnerable to making uninformed decisions that can hurt their financial standing in the long run.
Women entrepreneurs need to be equipped with strong financial skills to overcome these barriers. Building financial literacy is not just about understanding the numbers; it’s about taking control of your financial future.
Taking Control of Your Finances with Financial Basics
To empower themselves, women entrepreneurs must start with the basics of financial literacy. These fundamental steps can help them take control of their personal and business finances.
- Pay Down Debt
For many women, debt can be a significant hurdle to financial independence. The first step in taking control of your finances is addressing any high-interest debt you may have, such as credit card debt. By focusing on paying down debt strategically—often starting with the highest interest rate debt first—you can reduce your financial burdens and free up cash flow for saving and investing.
- Build an Emergency Fund
An essential element of financial security is having savings set aside for a rainy day. Women entrepreneurs, especially, need to prepare for potential business setbacks or economic downturns. Experts recommend setting aside three to six months’ worth of living expenses in an easily accessible account. This emergency fund acts as a safety net and can help you avoid taking on debt in times of financial strain.
- Invest for the Future
Once you have a handle on debt and savings, the next step is to invest in your future. A wealth advisor can be a valuable partner in helping you make strategic investments. Begin by setting up retirement accounts such as a 401(k) or an IRA. Not only does this provide long-term security, but you’ll also benefit from tax advantages. A wealth advisor can also help you diversify your investments, whether it’s through stocks, bonds, real estate, or business ventures, setting the foundation for growth. A wealth advisor can also help you develop a plan that may allow you to save for the future while also paying down debt, especially if your investments could grow faster than the interest you’re paying.
- Set Up Retirement Savings
Retirement planning is crucial for women entrepreneurs, who may not have the same access to employer-sponsored retirement plans as those in traditional jobs. It’s important to regularly contribute to your retirement accounts, even as your business grows, to ensure you’re building a nest egg for the future. Whether you’re starting with an IRA, SEP IRA, or a Solo 401(k), automated contributions will help ensure you’re consistently saving for retirement.
By mastering these financial basics, women can take control of their financial situation and set themselves up for long-term success. But what if you’re looking to go beyond financial stability and start working toward creating generational wealth?
Working Toward Generational Wealth
Once you’ve established financial stability, it’s time to start thinking bigger. The goal for many women entrepreneurs is to not only provide for themselves but to create wealth that can be passed down through generations. This requires strategic planning and the use of advanced financial techniques, such as the Buy, Borrow, Die method, to maximize wealth while minimizing taxes.
Here’s how you can work toward building generational wealth over time:
- The Buy Stage: Accumulating Assets
At this stage, the goal is to accumulate appreciating assets like real estate, stocks, or even your own business. These assets will grow in value over time, but you won’t pay taxes on that growth until you sell them (known as capital gains). Focus on building a portfolio of investments that will appreciate and hold these investments for the long term to benefit from favorable tax rates on capital gains.
- The Borrow Stage: Leveraging Assets Without Selling
Once your assets have appreciated, you don’t need to sell them to access the wealth they represent. Instead, you can borrow against these assets. By taking loans secured by your real estate, stock portfolio, or business, you can access liquidity without triggering capital gains taxes. For ultra-high-net-worth individuals, this is a key strategy to fund their lifestyles while their assets continue to grow in value. Plus, the interest on the loans can sometimes be tax-deductible, further reducing your tax burden.
- The Die Stage: Passing Wealth to Heirs Tax-Efficiently
When it comes time to pass your wealth on to your heirs, there are strategies in place to minimize the taxes they will have to pay. For example, the step-up in basis rule allows your heirs to inherit assets at their current market value, not the value at which you originally purchased them. This means they can sell those assets without paying capital gains taxes on all the appreciation that occurred during your lifetime. Establishing trusts, such as dynasty trusts, can also help protect wealth for future generations and avoid estate taxes.
Mastering financial literacy is one of the most powerful tools women entrepreneurs can have at their disposal. By gaining control of your personal and business finances and then strategically planning for the future, you can not only secure your own financial independence but also build wealth that can benefit generations to come.
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Glossary of Terms:
- Capital Gains: The profit made from selling an asset for more than its purchase price.
- Ordinary Income: Income earned from wages, salaries, tips, and other non-investment sources.
- Long-Term Capital Gains: Capital gains on assets held for more than one year, which are taxed at a lower rate than short-term gains.Tax Loss Harvesting: A strategy where investors sell assets at a loss to offset gains and reduce their tax liability.
- Donor-Advised Fund (DAF): A charitable giving account that allows donors to receive an immediate tax deduction while retaining control over how and when the funds are distributed to charities.
- IRA (Individual Retirement Account): A retirement savings account with tax advantages.
- SEP IRA: A retirement plan designed for self-employed individuals and small business owners, offering tax-deferred savings.
- Solo 401(k): A retirement savings plan for self-employed individuals, with higher contribution limits than an IRA.
- Step-Up in Basis: A tax rule that allows heirs to inherit assets at their current market value, avoiding taxes on the appreciation that occurred during the original owner’s lifetime.
- Dynasty Trust: A trust designed to pass wealth down through generations without incurring estate or gift taxes.
** https://www.kauffman.org/reports/access-to-capital-for-entrepreneurs-removing-barriers/