Chloé Daniels had a goal at age 27 — to be debt-free by 33. She had nearly $70,000 in the hole and she says she had a bad relationship with money.
“Money caused a tremendous amount of stress, anxiety, and depression in my life because of my student debt, and I didn’t understand how the hell I was supposed to get from paycheck to paycheck,” Daniels tells NextAdvisor.
“It just made me feel trapped. It was like, ‘I’ll never be able to do the things I really want to do because I don’t know how to deal with these things.’”
So she started writing everything down in Clo Bare, a personal mental health and relationships blog. Processing personal traumas, fears and depression was the goal when she started blogging in September 2017. In its first year, the blog played both an outlet and a responsibility for personal growth. It also led her to an important discovery: She needed to have a better relationship with money, and that meant getting a budget and learning about personal finance.
Then came another realization: She learned not only about debt, but also about investing. Were all debts bad? Should you invest while in debt?
“I think the standard in our country is, ‘Guilt is bad,'” Daniels says now. “Not all debt is bad, and you shouldn’t automatically do everything you can to pay off debt, and not even think about investing. Usually people can do both.”
Daniels soon learned that becoming debt free at 33 was not the goal she should be working towards. It was learning how to do both: paying off debts and investing.
She started an emergency fund, increased her 401(k) contributions, and maxed out her Roth IRA. Daniels was able to pay off her debt by using a zero-based budgeting strategy, increasing her net worth by $300,000 in just three years. Here’s how she did it.
Learning is the gateway to more learning
When Daniels began her financial journey, she picked up a pen and a small notebook and made good friends. She added up her debt and wrote down everything her money would go to over the next two weeks. This zero-based budgeting strategy forced her to allocate every cent of her income to an expense, debt payment, or savings goal, and at the end of the budget period, she had a difference of zero dollars.
Daniels checked the numbers, chose a timeline, and treated her goal as a bill. Her main question when she adjusted her budget was: “What do I think is reasonable?”
This plan paid off as from October 2018 to January 2020, she stuck with it and paid off $40,000 of her $60,000 in student loans. A great start.
Should You Invest While You Have Debt?
Different voices in personal finance have vastly different opinions on this. A helpful follow-up question Daniels asks is: What kind of debt do you have?
Here’s how Daniels structured her debt service strategy:
1. She has set up an emergency fund
In January 2020, Daniels prioritized rescuing her first emergency fund. This helped her save 3-6 months worth of livelihood, in case something happened. If you’re particularly nervous about starting investing, an emergency fund can give you the security you need to embrace the learning curve of investing.
2. She has her employer match no matter what
In the same time, Daniels increased her 401(k) contributions to about 17%. By the end of 2020, she had a fully funded emergency fund and a maximum 401(k), plus her Roth IRA. If you’re just starting out, make the most of what your employer will match. Even if it is 2%, you will get free money from your employer. This should be non-negotiable, even if you have a high interest rate. When will you ever get free money again?
3. She turned high interest into low interest debt
Daniels looked at her student loans and thought her interest rate was pretty decent. It was not. “My interest rate on my student loans was about 8%,” Daniels says. “I thought that was fine. I thought, ‘Well, it’s less than 10%. It’s not double digits. It’s not 20%.” She says she didn’t know any better. So when she started learning about interest rates, she refinanced — twice. It lowered its interest rates to 4.75% the first time and 3.54% the second.
You don’t have to be a professional to start investing
Daniels says she felt nervous and scared when she started investing. “The people I knew in high school and college who invested were incredibly smart and incredibly privileged,” she says. “They had parents who taught them how to do it, and parents who guided them through it. I thought investing was just something reserved for ‘people like that’.
If you can understand, Daniels shares her three places to start:
- Robo-advisors: If you’re nervous about choosing your own investments, robo-advisors are a great way to get over that bump and invest while you’re still learning. They ask you to fill out a survey to give your needs, goals, and desires, and then they will use an algorithm to suggest a portfolio to meet those needs. Generally they come with a cheap fee – about 0.25% – but there are brokers who also offer free robo-advisors. Robo advisors are one of the best ways to handle your investments, and they are great for both novice and hands-off investors.
- Target date Pension fundsTarget Date Funds are designed to be completely hands-off investing for people who don’t want to choose their own investments. 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 target date fund for 2050. The fund contains a number of mutual funds or ETFs. Over the years, the fund will slowly move 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 developed by the original index fund investor and founder of Vanguard, John Bogle. The idea is that you can have a low-risk, low-fee, high-performing portfolio with just three funds: a US Total Stock Market Index Fund, an International Total Stock Market Index Fund, and a Total US Bond Fund. With these three funds, you own a small fraction of all the stocks in the world and avoid paying high fees because index funds have notoriously low fees. And since you only need to manage three funds, it’s low-maintenance and easy to rebalance when you need to.
Good investing is boring. It’s about buying solid, diversified assets that you can keep for a long time, if not for life.
You learn by doing, not by analyzing
To learn, you have to dive in at some point, Daniels says. “You can think about it, you can worry about it, and you can think about what the worst-case scenario is, but until you actually do it, you can’t realize, like, ‘Okay, this isn’t that bad. This is okay,” she says.
It’s okay to make mistakes along the way. Just make sure that if you’re a beginner, you don’t put yourself in a risky situation. Buying individual stocks is a riskier situation for novice investors compared to a well-balanced portfolio that is diversified and diversified. Make sure your money is protected with hundreds of companies instead of a select few. Index funds are a great way to keep your money protected.
As you learn to invest, it is important to know your risk preference and risk 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.
Good investing is actually very simple
Investing well is boring, says Daniels.
“I don’t know about you, but when I thought about investing, I thought about Wall Street bros standing in a room yelling at each other, wolf of wall street kind of stuff, and that’s not what it is,” she says. “It’s actually very boring. And once you realize that investing well is actually really boring, you don’t have to be a Wall Street brother to succeed. It’s very game-changing.”