Chloé Daniels had a goal at 27: to be debt-free of 33. He was nearly $ 70,000 in the hole and says he had a bad relationship with money.
“Money was causing a tremendous amount of stress, anxiety and depression in my life due to my student loan debt and the fact that I didn’t understand how on earth to go from paycheck to paycheck lifestyle,” he says. Daniels to 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 all about Clo Bare, a personal blog for mental health and relationships. Coping with personal trauma, anxiety and depression was her focus when she started blogging in September 2017. In her first year, blogging played her part as both an outlet and a responsibility for personal growth. She also led her to an important discovery: she needed to have a better relationship with money, and that meant having a budget and learning personal finances.
Then came another awareness: he not only learned about debt, but also how to invest. Were all the debts bad debt? Should you invest while in debt?
“I think the default in our country is: ‘Debt is bad,'” Daniels now says. “Not all debt is bad and you shouldn’t just automatically do everything you can to pay off the debt and not even think about investing. Most of the time, people can do both. ”
Daniels quickly learned that getting out of debt by age 33 was not the goal he should have been working for. She was learning to do Both of them: repay the debt and invest.
He started an emergency fund, raised his contributions by 401 (k), and hit the top of his Roth IRA. Daniels was able to pay off her debt using a zero-based budgeting strategy and increased 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 his journey into finance, he grabbed a pen and a small notebook and made them close friends. She counted his debt and wrote down everything his money would earn in the next two weeks. This zero-based budgeting strategy forced her to allocate every penny of her income to a goal of spending, paying off debt, or saving, and by the end of the budget period, she ended up with a zero dollar difference.
Daniels ran the numbers, chose a timeline, and then treated his goal as an account. His main question while making changes to his 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 $ 40,000 of her $ 60,000 in student loans. A great start.
Should you invest while in debt?
Different voices in personal finance have very different views 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. He set up an emergency fund
In January 2020, Daniels prioritized bailing out its first emergency fund. This helped her accumulate 3-6 months of out-of-pocket expenses, in case something happened. If you are particularly nervous about starting investing, an emergency fund can offer you the security you need to embrace the learning curve of investing.
2. He got correspondence with his employer no matter what
Over the same period, Daniels increased its contributions by 401 (k) to approximately 17%. By the end of 2020, he had a fully funded emergency fund and a maximum of 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 are in high interest debt. Where else will you get free money?
3. It turned high interest into low interest debt
Daniels took a look at his student loans and thought his interest rate was decently ok. He wasn’t. , “My interest rate on my student loans was around 8%,” says Daniels. “I thought it was fine. I was like, ‘Well, that’s less than 10%. They are not two digits. It’s not 20%. “He says he didn’t know any better. So when he started learning about interest rates, he refinanced twice. He lowered his interest rates to 4.75% the first time and to 3%. , 54% the second.
You don’t need 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 through it. I thought investing was just something that was reserved for “those kinds of people”. ”
If you can relate, Daniels shares her three starting points:
- Robo-advisers: If you’re nervous about picking your investments, robo advisors are a great way to get over that hump and invest while you’re still learning. They ask you to fill out a survey to provide your needs, goals, and desires, then they will use an algorithm to suggest a portfolio to meet those needs. They generally come with a low-cost commission – around 0.25% – but there are also brokers who offer free robo-advisors. Robo advisors are one of the best ways to manage your investments and are great for both beginners and experienced investors.
- Pension fund target date: Target date funds are designed to be invested completely hands-free for people who don’t want to choose their 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 fund with a target date of 2050. Within the fund there are a number of mutual funds or ETFs. Over the years, the fund will slowly reallocate from high-risk stocks and bonds to low-risk assets as we get closer to that target, 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 index fund investor and founder of Vanguard, John Bogle. The idea is that you can have a low-risk, low-fee, and good-performing portfolio with just three funds: a US stock market index fund, an international stock market index fund, and a US total bond fund. With these three funds, you own a small portion of every stock in the world and avoid paying high fees because index funds are notoriously low fees. 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 involves buying solid, diversified assets that you can hold onto for a long time, if not a lifetime.
You learn from doing, not analyzing
To learn, you have to dive in at some point, says Daniels. “You can think about it, you can worry about it, and you can think about what the worst case scenario is, but until you really do it, you won’t be able to realize, like, ‘Okay, this isn’t that bad. It’s okay,’” he says.
It’s okay to make mistakes along the way. Just make sure that when you are a beginner you don’t put yourself in a risky situation. Buying individual stocks is a riskier situation for novice investors than a well-balanced, diversified and distributed portfolio. Make sure your money is protected by hundreds of companies rather than a select 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 the Wall Street brothers standing in a room yelling at each other, Wolf of Wall Street kind of thing, and it’s not what it is, “he says.” It’s actually very boring. And once you realize that a good investment is actually very boring, you don’t need to be a Wall Street brother to be successful. . It’s very revolutionary. “