Chloé Daniels had a goal at 27: to be debt-free by 33. She had almost $70,000 in the hole and says she had a bad relationship with money.
“Money was causing a lot of stress, anxiety, and depression in my life because of my student loan debt, and I didn’t understand how the hell to get out of the paycheck-to-check lifestyle,” Daniels tells NextAdvisor.
“It just made me feel trapped. It was like, ‘I’ll never be able to do any of the things I really want to do because I don’t know how to handle these things.
So he started writing everything on Clo Bare, a personal blog about mental health and relationships. Working through personal trauma, anxiety, and depression was the goal when she began blogging for her in September 2017. In its first year, the blog played its role as a means of escape and responsibility for personal growth. . She also led her to an important discovery: She needed to have a better relationship with money, and that meant sticking to a budget and learning about personal finance.
Then he realized something else: he learned not only about debt, but also about investing. Was all debt bad? Should you invest while in debt?
“I think the standard in our country is: ‘Debt is bad,’” says Daniels now. “Not all debt is bad, and you shouldn’t automatically go to great lengths to pay off debt and not even think about investing. Most of the time, people can be doing both.”
Daniels quickly learned that being debt-free at 33 was not the goal he should be working toward. she was learning to do both: Pay off debt and invest.
He started an emergency fund, increased his 401(k) contributions and maxed out his Roth IRA. Daniels was able to pay off his debt using a zero-based budgeting strategy and increased his net worth by $300,000 in just three years. That’s how he did it.
Learning is the gateway to more learning
As Daniels began his financial journey, he grabbed a pen and a tiny notebook and made good friends. He tallied up his debt and wrote down everything he was going to spend his money over the next two weeks. This zero-based budgeting strategy forced her to allocate every penny of her income to a spending, debt payment, or savings goal, and at the end of the budget period, she ended up with a difference of zero dollars.
Daniels ran the numbers, chose a timeline, and then treated his goal like an invoice. His main question when he made adjustments to his budget was: “What do I think is reasonable?”
This plan paid off, because from October 2018 to January 2020, he stuck with it and paid off $40,000 of his $60,000 in student loans. A great start.
Should you invest while in debt?
Different voices in personal finance have very different opinions on this. A helpful follow-up question Daniels asks is: What kind of debt do you have?
Here’s how Daniels structured his debt repayment strategy:
1. She created an emergency fund
In January 2020, Daniels made saving her first emergency fund a priority. This helped her store 3-6 months of living expenses, in case something happened. If she’s especially nervous about starting to invest, an emergency fund can offer her the security she needs to embrace the investing learning curve.
two. You got the match from your employer, no matter what
During this same time, Daniels increased his 401(k) contributions to about 17%. By the end of 2020, he had a fully funded emergency fund and maxed out 401(k), in addition to his Roth IRA. If you’re just starting out, take full advantage of what your employer will match. Even if it’s 2%, you get free money from your employer. This should be non-negotiable, even if you have high-interest debt. When else are you going to get free money?
3. Converted high-interest debt to low-interest debt
Daniels took a look at her student loans and thought her interest rate was pretty good. it wasn’t. “My interest rate on my student loans was like 8%,” says Daniels. “I thought it was fine. I was like, ‘Well, it’s less than 10%. They are not two digits. It’s not 20%.” She says that she didn’t know any better. So when she started learning about interest rates, she refinanced twice. She lowered her interest rates to 4.75% the first time and to 3.54% the second time.
You don’t need to be a professional to start investing
Daniels says that when she started investing, she felt nervous and scared. “The people I knew in high school and college who were investing were incredibly smart and privileged,” she says. “They had parents who had taught them how to do it and parents who had guided them through it. I thought that investing was just something that was reserved for ‘that kind of people’”.
If you can relate, Daniels shares his three places to start:
- Robo Advisors: If you’re nervous about choosing your own investments, robotic advisors are a great way to get over that hurdle and invest while you’re still learning. They ask you to fill out a survey to provide your needs, goals, and wants, and then they’ll use an algorithm to suggest a portfolio to meet those needs. They usually come with a low cost fee, around 0.25%, but there are also brokers that offer free auto advisors. Automated advisors are one of the best ways to manage your investments, and are great for both novice investors and non-interventionists.
- Target Date Retirement Funds: Target date funds are designed so that people who don’t want to choose their own investments can invest them entirely on their own. These funds are designed with a “target retirement date” in mind, meaning they become less risky over time. For example, if you want to retire in 2050, you can buy a 2050 target date fund. Inside the fund are a bunch of mutual funds or ETFs. Over the years, the fund will slowly reallocate from high-risk stocks and bonds to low-risk assets as you get closer to that goal or retirement date. Target date funds are great investment vehicles without much effort on your part.
- Three fund portfolio: This is an allocation strategy created by the original index fund investor and founder of Vanguard, John Bogle. The idea is that you can have a low-risk, low-cost, high-return portfolio with just three funds: a US Total Equity Market Index Fund, a Total International Equity Market Index Fund, and a US Total Equity Market Index Fund. Total US Bonds. With these three funds, you own a small portion of all the world’s stocks and avoid paying high fees because index funds are notoriously low. Plus, since you only have to manage three pools, it’s low-maintenance and easy to rebalance when needed.
A good investment is boring. It’s about buying solid, diversified assets that you can hold onto for a long time, if not for life.
You learn by doing, not over analyzing
To learn, you have to dive into a point, says Daniels. “You can think about it, you can worry about it, and you can ponder what the worst case scenario is, but until you actually do it, you won’t be able to realize, like, ‘Okay, this isn’t too bad. This is fine,’” she says.
It’s okay to make mistakes along the way. Just make sure that when you’re a beginner you don’t put yourself at risk. Buying individual stocks is a riskier situation for beginning investors compared to a well-balanced portfolio that is diversified and spread out. Make sure your money is protected among hundreds of companies instead of just a few. Index funds are a great way to make sure your money stays protected.
As you learn to invest, it is important to know your risk preference and tolerance. If you’re terrified of investing in the stock market, make sure you have an emergency fund, make sure your high-interest debt is covered, and then start investing.
A good investment is actually quite simple
A good investment is boring, says Daniels.
“I don’t know about you, but when I thought of investing, I thought of Wall Street brothers standing in a room yelling at each other, wolf of wall street kinds of things, and that’s not what it is,” she says. “It’s actually very boring. And once you realize that a good investment is really very boring, you don’t need to be a Wall Street bro to be successful at it. It’s very innovative.”