Chloe Daniels had a goal at 27 – to be debt free by 33. She had almost $70,000 in the hole and she says she had a bad relationship with money.
“Money was causing a tremendous amount of stress, anxiety, and depression in my life because of my college debt, and I couldn’t figure out how the hell out of the paycheck lifestyle,” Daniels told NextAdvisor.
“It just made me feel trapped. It was like, ‘I’ll never be able to do any of the things that I really want to do because I don’t know how to deal with that stuff.’
So she started writing everything in Clo Bare, a personal mental health and relationship blog. Working on personal trauma, anxiety and depression was the focus when she started blogging in September 2017. In its first year, the blog served its role as both an outlet and a responsible for personal growth. It also led her to a major discovery: She needed to have a better relationship with money, which meant budgeting and learning about personal finance.
Then came another realization: She not only learned about debt, but also about investing. Were all debts 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 automatically do everything you can to pay off your debt, without even thinking about investing. Most of the time people can do both.
Daniels quickly realized that getting out of debt at age 33 wasn’t the goal she should be aiming for. It was learning to do both: pay down debt and invest.
She created an emergency fund, increased her 401(k) contributions and maxed out her 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. Here’s how she did it.
Learning is the gateway to more learning
As Daniels began her finance journey, she grabbed a pen and a small notebook and made some close friends. She counted her debt and wrote down everything her money was going to over the next two weeks. This zero-based budgeting strategy forced her to allocate every penny of her income to an expense, 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, picked a timeline, then treated his goal like an invoice. Her main question as she made adjustments to her budget was, “What do I think is reasonable?”
This plan paid off, as from October 2018 to January 2020, she stuck to it and paid off $40,000 of her $60,000 in student loans. A good start.
Should you invest while in debt?
Different voices in personal finance have very different opinions on this. A useful 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 prioritized saving his first emergency fund. It helped her store 3-6 months of living expenses, just in case something happened. If you’re particularly nervous about starting to invest, an emergency fund can give you the security you need to navigate the learning curve of investing.
2. She got her employer match no matter what
During that same period, Daniels increased his 401(k) contributions to about 17%. At the end of 2020, she had a fully funded emergency fund and up to 401(k), plus her Roth IRA. If you’re just getting started, take full advantage of what your employer will offer you. 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 are you ever going to get free money?
3. She turned high interest rates into low interest debt
Daniels took a look at his student loans and thought his interest rate was acceptable. This was not the case. , “My interest rate for my student loans was about 8%,” says Daniels. “I thought it was good. I was like, ‘Well, that’s less than 10%. That’s not double digits. That’s not 20%’. She says she doesn’t didn’t know any better. As she began to learn about interest rates, she refinanced – twice. She lowered her interest rates to 4.75% the first time and 3.54% the second time.
You don’t have to be a professional to start investing
Daniels says 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 incredibly privileged,” she says. “They had parents who taught them how to do it and parents who guided them. I thought investing was just something that was reserved for “those types of people”.
If you can relate, Daniels shares his three starting points:
- Robo-advisors: If you’re nervous about choosing your own investments, robo-advisors are a great way to overcome that difficulty and invest while you’re still learning. They ask you to complete a survey to provide your needs, goals, and desires, and then they’ll use an algorithm to suggest a portfolio that meets those needs. Typically, they come with a low fee – around 0.25% – but there are brokerages that also offer free robo-advisors. Robo-advisors are one of the best ways to manage your investments, and they’re great for first-time, hands-off investors.
- Target Date Retirement Funds: Target date funds were designed to be completely stand-alone investments for people who don’t want to choose their own investments. These funds are designed with a “target retirement date” in mind, which means they become less risky over time. For example, if you want to retire in 2050, you can buy a target date fund for 2050. Inside the fund are a set of mutual funds or ETFs. Over time, the fund will slowly reallocate from higher-risk stocks and bonds to lower-risk assets as you get closer to that goal or retirement date. Target date funds are great investment vehicles without too much effort on your part.
- Portfolio of three funds: This is an allocation strategy created by the original investor in index funds and founder of Vanguard, John Bogle. The idea is that you can have a low-risk, low-cost, high-performing portfolio with just three funds: a total US stock market index fund, a total international stock market index fund, and a total US bond fund. With these three funds, you own a small portion of all the stocks in the world and avoid paying high fees because index funds are notoriously inexpensive. Plus, since you only have three funds to manage, it’s low maintenance and easy to rebalance when needed.
A good investment is boring. It’s about buying solid and diversified assets that you can keep for a long time, even for life.
You learn by doing, not by analyzing
To learn, you have to dive at some point, says Daniels. “You can think about it, you can worry about it, and you can think about the worst-case scenario, but until you do, you can’t realize, like, ‘Okay, that’s not too bad. This doesn’t matter,” she said.
It’s normal to make mistakes along the way. Just make sure that when 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, diversified and spread portfolio. 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 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.
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, The wolf of Wall Street stuff, and that’s not what it is,” she said. “It’s actually very boring. And once you realize that good investing is actually very boring, you don’t have to be a Wall Street pal to be successful. It’s really a game-changer.