A TED Talk by LearnVest: 5 Financial Rules to Live By


Last week, LearnVest CEO and Founder Alexa von Tobel visited the New York Stock Exchange to deliver a TEDx speech about personal finance.

She told the story of one (hypothetical) girl — and the five financial principles that will shape her life.

Like most of us, “Jessica” never took a single personal finance class in college, or ever, for that matter. In fact, that’s part of what led Alexa to start LearnVest … 

Below Alexa shares five simple financial rules that can help us all get on track with our money, no matter where you’re starting out right now, or how much you learned (or didn’t) about money growing up.

Picture this: It’s spring and Jessica, a smart 22-year-old, is graduating from college with an English degree.

She has $25,000 in student loan debt and $4,000 in credit card debt that she amassed over the past few years. While these numbers may seem high, they’re actually pretty average for an American college graduate today.

Jessica is ecstatic to have landed a great entry-level position at a publishing house. She’s lucky to have a job, with a starting salary of $35,000. Once taxes hit, that comes out to approximately $2,300 per month. It’s a little less than she expected, but it’s her first real source of income!

Right off the bat, there are five basic financial principles that will ensure Jessica is making responsible choices with her money. And what Jessica does with her take-home pay today, and whether she follows these rules, will create a ripple effect through the rest of her financial life.

The same is true for the rest of us.

Read on for the five principles to live by.

5 Key Financial Principles

1. Live With a Budget

“Living within your means” just means spending no more than you earn — which is harder than it might sound. And plenty of you ask us all the time: How do I create a budget? To really get ahead, LearnVest recommends dividing your income according to the 50/20/30 rule:

  • 50% of take-home pay goes toward your essentials (housing, utilities, transportation and groceries)
  • 20% to debt repayment and future savings
  • 30% to everything else

If you follow this rule of thumb, you’ll be setting yourself up for responsible spending for a long time. If you don’t, your spending has the potential to turn into a downward spiral that’s hard to climb back up from.

2. Prioritize Debt Repayment

And that means building it into your budget: It should be part of your 20% above. If you use a credit card, pay it off in full every month, so you can keep your credit score in the 760 range. If you only make the minimum payments, you’ll actually only be paying off the interest, not even touching the bulk of the money you owe. The same goes for your student loans.

Debt is designed to grow quickly, and without automatic payments or bill reminders, you can incur late fees and even miss payments altogether, which will tank your credit score and your credibility with lenders.

Unfortunately, one bad move — like refusing to deal with your debt — can reverberate through the rest of your financial future by hurting your ability to take on new loans, buy a house or pay back the increasing amount of debt that’s piling up. So, nip it in the bud early and make this a priority! (See how one LearnVest editor paid off over $20,000 in student loans in three and half years.)

3. Build and Maintain an Emergency Savings Fund

An emergency fund should hold at least six months’ take-home pay. This is your safety net — if anything goes wrong, you’ll have money at your fingertips and won’t have to take on any debt. In Jessica’s example, she’s at a crossroads: If she doesn’t build up her emergency fund, she’s at risk if she loses her job, has a medical emergency, needs to finance a move or even finds out she owes extra money in taxes.

RELATED: How Much of My Paycheck Should I Save Each Month?

Not having a security blanket could cause her to take on yet more debt and hurt her financial future by gouging her credit score. But, if she makes it a priority to save a little bit each month toward that six-month cushion, Jessica will not only be building financial security but buying peace of mind.

4. Negotiate Your Salary

Your starting salary is the basis for all future raises, so make sure you have some say in where you start. As grateful as you might be for a starting salary (and we know that Gen Y especially might be thanking the job search gods), it’s the basis for every raise you will ever get. So the higher, the better, for many years out. And don’t expect your boss to offer you more money out of the blue — you have to ask for it. If Jessica negotiates her raise right now out of the gate, that higher starting salary will lead into her next higher salary, and so on. Even starting a few thousand dollars higher could lead to exponential benefits for her.

5. Start Saving for Retirement Now

Yes, right now. It may seem like it’s light-years away, but the earlier you start saving, the longer time horizon you’re giving your investments to grow. Take the graph at left for example — it illustrates the difference in savings between an individual who starts contributing to retirement savings in her 20s versus one who starts saving in her 40s. Clearly, starting early really makes a big difference. (Still have questions? Check this out.)

What This Means for Jessica

If Jessica maintains these healthy financial habits, she’ll have no debt, so she can open the restaurant she’s always dreamed of. She’ll have a great credit score, so she and her partner can afford the mortgage on their dream home. She’ll have ample retirement savings, so she can retire on that beach in Florida. Better yet, she’ll have a 529 account for her children, so she can send them off to school without any student loans.

Spending less doesn’t represent a major lifestyle change — it’s all about the little things: choosing to have a roommate, taking public transportation, eating at home more frequently, keeping an eye out for sales. The benefits of following through with these minor things are major. Most importantly, they mean that Jessica is OK and well protected. She, her family and future generations will be all the better for it.

At the end of the day, money isn’t about being rich; it’s about enriching your life. And that’s what LearnVest is all about.