Few people are more knowledgable on the topic of how founders should manage their finances than Alexa von Tobel. She is a certified financial planner, started her own company in the midst of the recession (which happened to be a wildly successful personal finance startup that sold for hundreds of millions of dollars) and is now a VC who invests and advises founders.
At Early Stage 2021, she gave a presentation on how founders should think about managing their own wealth. Startup founders can often put all their money into their venture and end up paying more attention to the finances of their company than their own bank account.
Von Tobel outlined the various steps you can take to stay out of debt, build credit and accumulate wealth through investments to ensure you have financial peace of mind as you take on the most stressful venture of your life: Starting a company.
Know your numbers
The first step in getting organized and being proactive is often taking inventory. Von Tobel believes that knowing your numbers and getting organized digitally is the first step to having financial peace of mind.
Know all your numbers. Know your net worth. What are your assets? What’s your debt? What does your total financial picture look like? Get everything online. You should have all the mobile apps downloaded so that, in minutes, you can actually see your full financial life. And keep it simple. Fewer accounts are better. I always tell people, if you have seven credit cards, plus three savings accounts, that’s a lot. You’re never going to be as good at managing your finances. Simplify your accounts. (Time stamp — 2:50)
Manage your credit and debt
Von Tobel stressed the importance of a good credit score, a big part of which comes down to holding debt. Step one, according to her, is to never miss a bill. It’s often easy to autopay or catch bills that are paid online, but medical bills that are mailed or parking tickets are easy to forget. Make a note of bills that may come through the mail in a digital app like a calendar or in your Reminders.
The second bit is to get debt down to zero. She said, in an ideal world, you’d pay off your credit card bill in full each month.
The last tip for improving your credit score is a bit less obvious.
Don’t close your oldest card. You can learn which card is the oldest by going to annualcreditreport.org. It’s free to do once a year and you can actually see all of the lines of credit that are open in your name. In a perfect world, you would know about all the lines of credit open in your name, but everybody has that random credit card that they opened in college or that they didn’t know existed. Go look. Then, you can only close one a year. So if you find six extra, don’t close them all at once. But the most important thing is that you want to keep your oldest line of credit open. And ideally, keep it active, because it just gives a longer line of time that they’ve known you. Credit scores are really important. They allow you to take out loans, allow you to get mortgages. Your credit score is really important for your overall financial picture. (Time stamp — 4:35)
The 50-20-30 Rule
After knowing your numbers and getting a handle on your credit score and debt, the next step is creating a budget. Von Tobel suggests following the 50-20-30 rule: 50% goes to essentials, 20% goes to savings and 30% goes to fun stuff.
Important here: 30% to 35% of the total amount would be your mortgage or rent. So that’s 30% to 35%. That is a really important umber. As a financial planner, that’s one of the first things I look at. Do you have too much that you’re paying in rent or mortgage? If so, you never can actually save. So in a scenario where you’re bringing in $10,000 per month, $3,500 is your max budget for rent or mortgage.
The Monopoly Step
The Monopoly Step is actually three steps, and it gets its name from the fact that without having completed all three steps, you should not pass go. The first is creating liquidity for an emergency. Von Tobel suggests saving up to six months’ worth of cash (based on your usual spending/budget) in a savings account. If you’re a CEO or founder, or making more than $100,000, you should probably save up to nine months of cash, as it’s harder to get a job in that range.
The second step is to eliminate credit card debt.
I say this with no judgment. Credit card debt is this thing that stresses everybody out. It’s this thing that makes everybody feel ashamed when you have it. The average American right now has about $9,000 in credit card debt. But in a perfect world, you get this to zero, because if an emergency happened to you, that credit card debt can grow really fast. And that’s one of the reasons why people go bankrupt. (Time stamp — 9:12)
The final piece of the Monopoly Step is your retirement plan. Von Tobel suggests setting up both a 401(k) and an IRA. A big reason for that is that the life expectancy of humans continues to go up due to advances in science and medicine.
You’re supposed to retire at 70, but let’s say you’re gonna live to 120 or 135 years. You only work from 25 to 70. That’s 45 years. So in 45 years of working, you’re supposed to be able to afford twice that for living. Think about it. These are big numbers. The retirement numbers that we all need are terrifying. It’s millions and millions and millions of dollars. So you should start in your 20s and do the full max out, which, by the way, the government incentivizes. You get tax deductions for doing so. That’s just free money. If you don’t do it, you’re literally paying more taxes. So you want to do it. (Time stamp — 24:30)
The Rule of Five
Once you’ve organized your assets, eliminated debt, invested in retirement and insurance, and set your budget, you can start having some fun. The main question to ask, says von Tobel, is whether you need access to this money in five years. Thus, the rule of five.
If you need it in five years, you shouldn’t dramatically have stock market exposure, because something like March of last year may happen and the money goes away. I always love low cost things: ETFs, index funds. They’re straightforward. You can go buy a basket of the S&P stocks, and set it and forget it. And because you don’t need it in five years, it doesn’t matter if the market trades off today, or if it has a really bad two or three months. Put the blinders on, set it up properly and move on. (Time stamp — 14:36)
Von Tobel also covered the topic of financial hygiene and answered dozens of questions from the audience. You can check out the full video of the session below, or read the transcript here.