We talk a lot about paying off debt here at The College Investor. One thing we often forget to talk about is what to do once that debt has been paid off.
You see, when you work on a financial goal for a long period of time you often build up in your mind what it will feel like when you accomplish the goal. Then the day comes that your goal is achieved and…………nothing. For many it can feel anticlimactic.
Yes, it’s amazing that you’re now out of debt. BUT, since your focus has been on debt payoff for so long you can feel lost as what to do next. It can be hard to stay motivated.
I’ve been there and paid the price of lots of wasted money while I was trying to figure out my next move. You don’t want to do the same. Here are seven things to do after you pay off your debt.
# 1 – Reassess Your Budget
The first thing you should do is reassess your budget. You’ve had all of your extra money going toward your debt payoff and it’s now time to redirect the money somewhere else. But that doesn’t mean you aren’t allowed to use any of the money for fun either.
If you’ve been working yourself to the bone and pinching pennies over the last several months or years take the time now to figure out how you want to reallocate your income.
If you plan on putting a portion of that money toward things you consider fun like home improvement, clothing or a trip, decide how much that will be. While it’s absolutely okay to cut yourself some slack, if you don’t carefully plan you’ll end up spending all of your extra money on fun stuff rather than just the small portion you were planning.
Remember, using a tool like Personal Capital is a great way to keep track of your budget for free.
# 2 - Increase Your Savings
If you’ve been living on a starter emergency fund while paying down your debt then there’s no doubt, now is the time to beef it up.
If your emergency fund is full you can also consider things like car savings, a house down payment or saving for a debt free Christmas or vacation.
Check out these accounts to get started: Best High Yield Savings Accounts.
# 3 – Put More Toward Retirement
When I was working on building up my finances to a level I considered stable one thing I definitely slacked on was retirement savings. If you’re like me now is a good time to increase your contributions.
Even increasing your retirement savings by 5 or 10% can go a long way. This is also one of our favorite strategies for reducing the taxes you have to pay before the end of the year.
# 4 – Look Into Other Investments
Now that you have more money freed up each month you have the freedom of looking for ways to earn even more. One of these methods could be through alternative investments.
None of these ideas are for everyone but if interested here’s a list of things to consider:
- Investing in Real Estate
- Learning How T Start Investing
Be sure to thoroughly research any new investment idea. Learn as much as you can before investing large amounts!
# 5 – Start ASide Business
When you’re saddled with debt taking any type of risk with income can seem scary. Perhaps that debt has held you back from trying out a new side business idea you’ve been interested in? If so, now is a good time to get your feet wet and give your idea a fair try.
(If you need some side business ideas you can browse dozens of ideas in our earn more archives!)
# 6 – Pay Off Your Mortgage
The mortgage is usually the last debt to be paid off. If you’re debt free sans the mortgage you might consider tackling this next.
Here are tenways to pay off your mortgage faster.
# 7 – Stay Away From Future Debt
You’ve worked so hard to get rid of your debt – DO NOT let it come back. Keep your cash savings high so that you can cover emergencies and plan for future purchases.
Don’t rely on your credit cards or personal loans for anything. In fact, if credit cards are what got you into debt it may be a good idea to get rid of them altogether!
Stay Goal Oriented
It was easy to stay focused on paying off your debt (most of the time) because you had a strong goal. You knew exactly how much debt you had to pay off and could calculate how much time it would take based on your extra monthly cash flow.
That goal kept you motivated.
If you want to keep improving your personal finances stay goal oriented. While it’s perfectly fine to loosen the reigns a bit you’re going to need to set yourself strong goals to stay focused on the end game.
If you’ve paid off your debt I’d love to know what steps you took to prevent lifestyle inflation.
FAQs
It's possible that you could see your credit scores drop after fulfilling your payment obligations on a loan or credit card debt. Paying off debt might lower your credit scores if removing the debt affects certain factors like your credit mix, the length of your credit history or your credit utilization ratio.
What should I do after I pay off all my debt? ›
Congrats, Your Debt Is Paid Off! Now What?
- Start Retirement Savings. The sooner you start saving for retirement, the better off you'll be. ...
- Tackle Another Debt. ...
- Create a Safety Net. ...
- Save for a Major Purchase. ...
- Use What You've Learned.
It's possible that you could see your credit scores drop after fulfilling your payment obligations on a loan or credit card debt. Paying off debt might lower your credit scores if removing the debt affects certain factors like your credit mix, the length of your credit history or your credit utilization ratio.
Why did my credit score drop 40 points after paying off debt? ›
If you take out a loan to consolidate debt, you could see a temporary drop because of the hard inquiry for the new loan. Your credit score can take 30 to 60 days to improve after paying off revolving debt. Your score could also drop because of changes to your credit mix and the age of accounts you leave open.
What happens when all debt is paid off? ›
Without any debts to worry about, your monthly expenses will drop, freeing up your personal cash flow and allowing you to focus on savings and daily living expenses. Few people understand just how free you can feel when you're no longer beholden to a slew of banks and lenders.
How much will credit score increase after paying off debt? ›
If you're close to maxing out your credit cards, your credit score could jump 10 points or more when you pay off credit card balances completely. If you haven't used most of your available credit, you might only gain a few points when you pay off credit card debt. Yes, even if you pay off the cards entirely.
How long does it take to rebuild credit after paying off debt? ›
It can take weeks or even days for you to notice a change in your credit score. If you have recently paid off a debt, wait for at least 30 to 45 days to see your credit score go up. Will it be beneficial for my credit score if I pay off a debt? Your payment history will not be removed after you pay off a debt.
Is living debt free worth it? ›
Only good debt can contribute to long-term financial growth, and any form of excessive debt strains your resources and impacts your well-being. A debt-free lifestyle, meanwhile, has plenty of advantages: You don't have interest payments and fees, which results in lower overall living expenses.
What are the disadvantages of paying off debt? ›
Whether you're paying off a loan with a lump sum or you plan to chip away at it with larger payments, paying off your loan faster will likely mean tightening up your budget. Consider where you'll get the money to pay off your debt — is it being diverted from your retirement savings plan?
What is the feeling after paying off debt? ›
Once debt is paid off, your self-confidence can make a fast turnaround. Some individuals even share their debt stories out of a renewed sense of confidence, according to Dlugozima. “You become more open about it because you've gotten through the other side,” said Dlugozima. “It's empowering.”
Making on-time payments to creditors, keeping your credit utilization low, having a long credit history, maintaining a good mix of credit types, and occasionally applying for new credit lines are the factors that can get you into the 800 credit score club.
How to raise your credit score 200 points in 30 days? ›
How to Raise Your Credit Score by 200 Points
- Get More Credit Accounts.
- Pay Down High Credit Card Balances.
- Always Make On-Time Payments.
- Keep the Accounts that You Already Have.
- Dispute Incorrect Items on Your Credit Report.
For a score with a range between 300 and 850, a credit score of 700 or above is generally considered good. A score of 800 or above on the same range is considered to be excellent. Most consumers have credit scores that fall between 600 and 750. In 2023, the average FICO® Score☉ in the U.S. reached 715.
What to do after you pay off debt? ›
7 Things You Must Do When You've Paid Off Your Debt
- Treat Yourself. Paying off debt is hard. ...
- Adjust Your Budget. ...
- Increase Your Savings. ...
- Think About Retirement. ...
- Diversify Your Investments. ...
- Pay Off Your Car Loan or Mortgage. ...
- Start Saving For College. ...
- The Bottom Line.
For a conventional mortgage in California, you typically need a minimum score of at least 600. If you qualify for certain government-backed loans, however, you may be able to buy a home with a score as low as 500.
Should I use my credit card after paying it off? ›
You can use your cards more frequently once you have your debt paid off and know how to avoid new debt. As long as you pay your balance in full and on time each month, you can use credit cards for rewards to your advantage.
What happens when you pay a debt in full? ›
If you have an outstanding debt, one option is to pay off the full amount so your credit report no longer shows it as being due. This is an option even if it's late or in collections. If you choose to pay the debt off, your credit report will note that this account was paid in full.
Is it smart to pay off all debt at once? ›
Paying your entire debt by the due date spares you from interest charges on your balance. Paying off your credit card debt in full also helps keep a lower credit utilization ratio, which measures the amount of your available revolving credit you're using.
Is it good to pay off debt in full? ›
By paying off the full balance owed, you will eliminate the debt and keep your credit report clean of any derogatory remarks related to the debt. And, in some cases, your credit score may even increase due to the lower credit utilization.
Should I cancel my credit card after paying it off? ›
In general, keep unused credit cards open so you benefit from longer average credit history and lower credit utilization. Consider putting one small regular purchase on the card and paying it off automatically to keep the card active. At Experian, one of our priorities is consumer credit and finance education.
