One Life-Changing Class You Never Took by Alexa von Tobel (Full Transcript)

Money is such an important thing it effects us all and most people simply learn about it through trial and error.

So from there, it’s easy to understand that money right now is the number one thing that young people really stress about. Worse, 76% of the country feels completely out of control when it comes to money.

Pause for a second, four of your closest friends, three of them right now feel out of control when it comes to their personal finances. 75% of this room feels out of control when it comes to their personal finances.

Unfortunately we’re not doing anything to change this. Right now 84% of college graduates said that they need more help when it comes to personal finance but they’re not getting it, and as a result of all of this, 61% of the country is living paycheck to paycheck.

More than 50% of our country is not quite sure how they’re going to pay their bills next month. That is staggering. Think about the stress that that provides to an individual’s life, really staggering.

So I often ask myself: How on earth did we get here? How do we end up in a position where this thing that is so critical to every single person in this room and in this nation’s life? It’s something that we’ve never learned.

What I want to walk you through is, I want to take the 1.8 million college graduating seniors from this year and I want to walk you through exactly what ultimately happens. I want to introduce you to someone who will represent the absolute norm and we’re going to find out how they end up on such a ride.

So meet Jessica. She’s 22 years old, she studied English. She’s going to graduate from college this year with $25,000 in student debt, and $4,000 in credit card debt, and she’s going to end up, if she is lucky and I repeat lucky, with a job right out of college, where she’ll make $35,000. That means that she will take home every month approximately $2,300 in take-home pay.

So I’m going to walk you through 5 decisions that Jessica’s going to make, some that she’s aware were bad decisions, some that she’s not, and it helps you better understand how she ended up in a situation that most of America is in.

So first, she’s not going to have a budget. Jessica thinks about her life right now and says: “I barely get any money that I’m making. Why on earth am I going to sit down and have a detailed budget? I’ll be lucky if I can just pay my bills.”

She doesn’t even know that good financial planning recommends that 50% of her money that she takes home goes towards essentials, 30% towards life style, and 20% towards the future. That’s really key — 20% towards her future savings.

Jessica’s going to move after college to a big city. She’s going to first do what every other college graduate does, get an apartment, which she’s going to spend $1,200 on rent. Right out of the gate, a simple decision such as getting her apartment is going to throw even the chance of her having a balanced budget completely out of whack, but also put her in jeopardy for years to come as she won’t have that 20% going towards her future.

Next, Jessica already has lots of debt. She thinks to herself: “Everyone in America is in debt. Why do I have to worry so much?” And instead of aggressively paying it down she’s only going to pay her minimum payments. Worse, she’s going to miss a few of those payments because she doesn’t even understand what a credit score is. Nor does she understand why it’s so critical to her financial future.

After that she’s not going to think about emergency savings, and the reason she doesn’t is she can barely think about how she pays her bills. So she’s like, “What do I need emergency savings for?” What she doesn’t know is if she loses her job tomorrow or has any type of an emergency, she’s completely vulnerable and she’s going to have to rely on credit card debt in order to keep her head above water.

Her fourth big mistake is she’s not going to negotiate her salary. And in her mind she is so thankful that she got a job that she’s not going to think about negotiating her salary. And she’s just going to wait for her boss to tell her when she gets one. And because of that, a few years later she’s still making just $35,000.

And the final major mistake that Jessica’s going to make is she’s not going to think about retirement in her 20’s. The reason she’s not is retirement is 43 years away. Why on earth would she think about it? She says. And because of that she doesn’t take advantage of her employer 401k match program, and she doesn’t open a Roth IRA.

Now I want to fast forward 15 years. Applying those exact same behavioral traits, not learning much more about personal finance, making a few more mistakes, Jessica’s going to get married and she’s going to have 2 children.

Fifteen years later, applying the national APR of 15%, Jessica’s going to be closer to $20,000 in debt. As her life grew, credit card was her answer. Her interest rate has of course gone up. From there, she still has about $10,000 of her student loans. So a decision she made 2 decades ago is still haunting her every single month.

Additionally her credit score has gone from that 622 to something more in the 500’s, and that’s because she’s amassed more debt and she’s missed more payments.

On a good note, she started thinking about retirement, but she currently has less than $10,000 in her future retirement savings. Which actually is about 54% of America right now. Beyond that, she doesn’t set up a 529 plan for her children because she has no other dollars to think about.

So I want to pause for a second and I want to think about the national impact. I just walked you through Jessica’s story and I want us to pause and I want us to multiply that by a thousand, by a million, and by tens of millions. Jessica’s story is the story of tens of millions of Americans living in our country today.

And you understand that when you pause and really think about it. It helps you better understand why we currently are a country where we have $2.5 trillion, yes trillion dollars in consumer debt.

We’re in a position where the American dream of home ownership is not a reality as 25% of applications are denied immediately. Where 31% of Americans today have no retirement savings and therefore the American dream of pausing when you’re 65, when your bones are starting to get brittle and being able to retire, they’re not going to have that as a reality.

And finally, and maybe even worse, money is the number one cause of fights in marriages. And married couples who fight are 30% more likely to end up in divorce.

So what this does is this gives you an idea of where we are today. But this doesn’t give you a sense of the domino effect. Jessica and her husband they have two beautiful kids. Those kids are going to go off to college with the exact same credit card debt and student loan debt that Jessica had.

But worse, they’re probably going to have to help Jessica with retirement. That domino is going to fall down for generations to come and as you can see Jessica has flipped a domino and the downward financial spiral that will continue for many generations.

So what if we could rewind? What if I told you that I really believe that there’s a solution to all of this? I really believe that we can go back to the tens of millions — we can ultimately go back to Jessica and there’s a simple solution. That we can take her before she enters the world, before all of our college seniors do, and we can basically stop and teach them 5 principles.

We can help them before they make mistakes, how not to make them, let them understand why a budget is so critical, and basically the principle of living beneath their means; help them better understand that debt is not an answer.

And in fact, it is absolutely so important to aggressively pay it down as it is designed to defeat you; help them understand that an emergency savings account is so critical. If anything happens, you want to be able to sleep at night and that’s what it’s there for.

Help them understand that they have to negotiate their own salaries along the way that their voice will always be the loudest.

And finally that retirement is something you have to think about in your 20’s.

I saw this graph many, many years ago. It’s a simple principle, it’s compounding interest. But it’s an individual who starts contributing to retirement in her 20’s versus her 40’s and they both contribute the same dollars. This is a really powerful graph and a really important thing, and I just always wonder what if we can make this go viral?

So I want to go back to the educated Jessica. Let’s say we did actually teach her all of these empowered facts. Well,  years later she’d be in a position where she could open the coffee shop she’d always dreamed of. Her and her husband, well they now own a home because they knew about credit score. They knew not to miss their bills and they simply knew to keep it in the 700’s.

Well they’re looking forward to their retirement. Because they took advantage of all those things in their 20’s and compounding interest worked its magic, and probably best yet, her children have 529 plans. And they’re going to go off to college and they’re going to be in a significantly better place than Jessica was decades ago. This is the empowered Jessica.

So I wish it weren’t true but it is, money is such a lifeline. If you love someone you’re going to travel around the world to see them, and if you’re sick, as I know this week you’re going to want to pay the best dollars that money can buy to get the best doctors. Money will affect us every single day of our lives until the day that we die, and I wish it weren’t true, but it’s a fact.

I really look forward to a future where we can pause, we can take all of the people before they enter the world and teach them these really basic financial principles. That we can empower them so that they can end up living really powerful financial lives. That they can feel great about money and from there it ultimately is going to have really fantastic impact on our balance sheets and as our nation as a whole. But most importantly it’s going to dwindle down for many generations to come.

When I think about money I think it’s not important to be rich. It’s not about being rich. It’s about being able to live your richest life. I want that for me. I want that for Jessica. I want that for the hundreds of millions of Americans who deserve just that.

Thank you.

 

Resources for Further Reading: 

An Honest Look at the Personal Finance Crisis: Elizabeth White (Transcript)

Everything You Need to Know About Finance and Investing by William Ackman (Transcript)

Safeguarding Your Money in Uncertain Times by Simon Mikhailovich (Transcript)

How Does The Stock Market Work? By Oliver Elfenbaum (Transcript)

 

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