Chloé Daniels had a goal at 27 — to be debt free by 33. She was almost $70,000 in the hole, and she says she had a bad relationship with money.
“Money was causing a huge amount of stress and anxiety and depression in my life because of my student loan debt, and not understanding how the heck to get out of the paycheck to paycheck lifestyle,” Daniels tells NextAdvisor.
“It just made me feel trapped. It was like, ‘I’m never going to be able to do any of the things I actually want to do because I don’t know how to handle this stuff.’”
So she started writing everything down in Clo Bare, a personal blog for mental health and relationships. Working through personal trauma, anxiety, and depression was the goal when she started blogging in September 2017. In her first year, the blog played its part as both an outlet and as accountability for personal growth.It also led her to a major discovery: She needed to have a better relationship with money, and that meant getting on a budget and learning about personal finance.
Then came another realization: she not only learned about debt, but investing as well. Was all debt bad? Should you invest while in debt?
“I think the default in our country is: ‘Debt is bad,’” Daniels says now. “Not all debt is bad, and you shouldn’t just automatically default to doing everything you can to pay off debt, and not even think about investing. Most of the time, people can be doing both.”
Daniels quickly learned that becoming debt free by 33 wasn’t the goal she should be working towards. It was learning how to do both: pay down debt and invest.
She started an emergency fund, upped 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, and raised her net worth by $300,000 in just three years. Here’s how she did it.
Learning Is the Gateway to More Learning
As Daniels started her finance journey, she grabbed a pen and a tiny notebook and made them close friends. She tallied up her debt and wrote down everything her money was going to over the next two weeks. This zero-based budget strategy forced her to allocate every penny of her income toward an expense, debt payment, or savings goal, and at the end of the budget period, she ended up with a zero-dollar difference.
Daniels ran the numbers, picked a timeline, and then treated her goal like a bill. Her main question as she made adjustments to her budget was, “What do I think is reasonable?”
This plan paid off, because from October 2018 to January 2020, she stuck to it and paid off $40,000 of her $60,000 in student loans. A great start.
Should You Invest While in Debt?
Different voices in personal finance have vastly different opinions about this. A helpful followup question Daniels asks is: What kind of debt do you have?
Here’s how Daniels structured her debt payoff strategy:
1. She set up an emergency fund
In January 2020, Daniels prioritized saving her first emergency fund. This helped her stock away 3-6 months of living expenses, just in case something happened. If you are especially nervous about starting to invest, an emergency fund can offer you the needed security to embrace the learning curve of investing.
2. She got her employer match, no matter what
During this same time, Daniels upped her 401(k) contributions to around 17%. By the end of 2020, she had a fully funded emergency fund and a maxed out 401(k), plus her Roth IRA. If you’re just getting started, take full advantage of what your employer will match. Even if it is 2%, you’re getting free money from your employer. This should be non-negotiable, even if you’re in high-interest debt. When else are you ever going to get free money?
3. She turned high-interest into low-interest debt
Daniels took a look at her student loans and thought her interest rate was decently okay. It wasn’t. , “My interest rate for my student loans was like 8%,” Daniels says. “I thought that was fine. I was like, ‘Well, it’s less than 10%. It’s not double digits. It’s not 20%.” She says she didn’t know any better. So as she started learning about interest rates, she refinanced — twice. She got her interest rates down to 4.75% the first time and 3.54% the second time.
You Don’t Need to Be a Professional to Start Investing
Daniels says when she started investing, she felt nervous and scared. “The people who I knew in high school and college who were investing were incredibly smart and incredibly 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 ‘those types of people.’”
If you can relate, Daniels shares her three places to start:
- Robo-Advisors: If you are nervous about picking your own investments, robo-advisors are a great way to get over that hump and invest while you are 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. Generally they come with a low-cost fee – around 0.25% — but there are brokerages that offer free robo-advisors as well. Robo-advisors are one of the best ways to handle your investments, and they’re great for newbie and hands-off investors alike.
- Target Date Retirement Funds: Target date funds were designed to be completely hands-off investing for people who do not want to pick 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 purchase a target date fund for 2050. 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 the closer you get to that target, 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-fee, and well-performing portfolio with only three funds: a U.S. total stock market index fund, an international total stock market index fund, and a total U.S. bond fund. With these three funds, you own a small portion of every stock in the world, and you avoid paying any high fees because index funds are notoriously low-fee. Plus, since you only have three funds to manage, it’s low maintenance and easy to rebalance when needed.
Good investing is boring. It involves buying solid, diversified assets that you can hold onto for a long time, if not for life.
You Learn From Doing, Not Over Analyzing
In order to learn, you must dive in at one point, Daniels says. “You can think about it, you can worry about it, and you can ponder about what the worst case scenario is, but until you actually do it, you won’t be able to realize, like, ‘Okay, this isn’t so bad. This is okay,’” she says.
It’s okay to make mistakes along the way. Just make sure when you’re a beginner you don’t put yourself in a risky situation. Buying individual stocks is a riskier situation for beginner 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 a select few. Index funds are a great way to make sure your money stays protected.
As you learn to invest, it’s important to know your risk preference and risk tolerance. If you are terrified about investing in the stock market, then make sure you have an emergency fund, make sure your high interest debt is covered, and then start investing.
Good Investing Is Actually Quite Simple
Good investing is boring, Daniels says.
“I don’t know about you, but when I thought about investing, I thought of 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 good investing is actually very boring, you don’t need to be a Wall Street bro in order to be successful at it. It’s very game-changing.”