There’s an accepted wisdom around women and money these days: we have a money problem. And that problem is that we earn only 77 cents of each dollar a man makes. Less if we work in certain industries (think manufacturing and financial services). Even less if we are women of color.
This is a problem, no doubt about it. It’s unjust, it’s antediluvian, it’s inexcusable. And we should fix it. As individuals, we should ask for the raises we deserve; as companies, we should quantify and then close our gender pay gaps.
But we shouldn’t fall into the conventional view that this is the money issue facing women. And that until we fix this, everything else is small potatoes. That’s because there’s another gender gap that can cost us women even more, over the course of our careers.
It’s the gender investing gap.
Starting with the pay gap, the numbers look like this: Assume you’re making a salary of $85,000 a year, and you have 40 years left to work ahead of you. Get the raise to the guy’s level, and you’ll earn an additional $1 million. Pretty good stuff.*
What if you take 20% of your (pre-raise) salary and invest it in a diversified investment portfolio — one made up of stocks and bonds — rather than leaving that money in cash? Over the next 40 years, we estimate you’ll earn an additional $500,000 to $2.1 million, depending on market performance.*
An extra $1 million in increased salary is good. An extra $500,000 to $2.1 million is also pretty good. But getting all of it is a game changer.
So, why do people believe that the raise will have a greater impact on their lives?
It’s because they overlook the power of what’s called “compounding.” Albert Einstein is reported to have called compound interest “the most powerful force in the universe.” Compounding essentially means that you earn returns on the money you invest…and over time, you also earn returns on the returns themselves.
Stay with me for a sec. Let’s say you invest $1,000 and the market goes up 10%. You’ve just earned $100. If the market goes up another 10%, you earn that 10% return on the original $1,000 and on the $100 you just earned. So that same 10% market increase means you earn $110. Do this again. And then again. And over a long enough period, it matters. As in, really really matters.
And so over time, the power of investing can outstrip the value of getting that raise.
Important point, ladies:
This is by no means meant to suggest that the stock market only goes up. Hardly. And, believe me, I have the scars from the market downturn of 2007 / 2008 to prove it. But historically — counting up years, down years, and bumps along the way — the stock market has returned 9.7% on average annually since 1928. This is quite a bit more than keeping the money in the bank these days, where it can earn close to 0%. Historically, the reward for weathering some market ups and downs has been well worth it.
This is why the worst financial advice I ever heard was in my 20s, when my (grrrr) ex-husband told my brother, “Don’t save for retirement now. Save later when you’re earning more money.”
You can imagine how happy my brother was to hear this…except that this advice was more than just wrong — it was just plain dumb. (Not the only dumb thing my ex-husband did, mind you. But that’s another story.)
The right time to take your money out of the bank and invest is almost always “now,” so that the power of compounding can begin to work its “magic.”
So what should women do?
Well, the answer of course is that we should ask for the raise at work and we should invest that raise.
And if we strike out on the raise? Hey, it happens. But it doesn’t mean we should throw our hands up on investing, hoping that a better boss will come along, or that we will somehow make more money later and invest then. Instead, let’s take financial control now.
Disclosure: We project a starting salary of $85,000 and a starting salary of $110,500 (reflecting a 30% raise) using a women-specific salary curve that includes inflation from Morningstar Investment Management LLC, a registered investment adviser and subsidiary of Morningstar, Inc. We add up her annual salary amounts under both scenarios over a 40-year period. $1.07M is the difference between the two sums.
Disclosure: The cash results assume a 1% long-term average annual return. The diversified investment portfolio results assume a low cost diversified portfolio comprised of 60% Large Cap US stocks and 40% US bonds, which is rebalanced to this allocation each year. These results are determined using a Monte Carlo simulation—a forward looking, computer-based calculation in which we run portfolios and savings rates through hundreds of different economic scenarios to determine a range of possible outcomes. The range of results reflect an 85% and 50% likelihood of achieving the amounts shown or better, and include the impact of inflation and taxes on interest but not capital gains or fees.
The results presented are hypothetical, and do not reflect actual investment results, the performance of any Ellevest product, or any account of any Ellevest client, which may vary materially from the results portrayed for various reasons. The results presented are not for any specific product and do not take into account specific product fees. Financial forecasts, rates of return, risk, inflation, and other assumptions have been used as the basis for the results presented.