When you’re focused on the goal of getting out of debt, it’s easy to get caught up in the process and not think beyond achieving that goal. But the fact is, if you are consistent and committed to paying off your debt, it will happen. So what do you do then? If you don’t have a plan for what to do with your money once your debt is paid off, it can be all too easy to start a cycle of over-spending that will leave you with little to show for it. Sure, you can relax and have a little fun, but your financial journey is just beginning. Here are several things you need to do once you are debt free.
Get Serious About Your Emergency Fund
Ideally, you will have been contributing to an emergency fund as you were working to pay off debt. If that’s the case, increase your contributions so you can reach your goal of having six months of expenses in that account sooner. If you haven’t yet started to save for emergencies, you must do it now and deposit as much as you can into that account every month. Why is emergency savings so important? It will help you avoid using credit cards to pay for a true financial emergency, such as major vehicle repairs, a new air conditioner, emergency medical bills, or everyday expenses in case of job loss. Remember, you just got out of debt. The last thing you want to do is get blindsided by an emergency and get right back into debt by having to use a credit card to pay for it.
Investigate Your Retirement Options
The sooner you start saving for retirement the better, but it’s never too late. Look into the retirement savings options offered by your employer along with additional options such as a Roth IRA. If you’re self-employed, look into a SEP IRA, Simple IRA or Individual 401(k). No matter what how you choose to save for retirement, the important thing is to be consistent with your contributions and leave the money alone until you reach retirement age. You already know you have the discipline to pay off debt; apply that same discipline toward saving for your retirement.
Organize Your Financial Life
If you’ve managed to pay off all your credit card debt, there’s a good chance you’re already at least somewhat organized, but there’s always room for improvement. Set up as many bills as possible for auto-pay, so you never again have to risk paying late or missing a payment. Get all your financial documents in order and devise a filing system that works for you. Opt out of pre-screened credit card offers to minimize the temptation to overspend, not to mention cut down on annoying junk mail.
Review Your Insurance Coverage
You may have been getting by with bare minimum insurance coverage while working to become debt free, but now that you have more money every month, you may want to consider increasing your insurance coverage. For example, if you’ve been meaning to get life insurance but couldn’t afford it, now is the time. If you’re approaching middle age, look into long-term care insurance to add security to your senior years. Of course medical, dental and vehicle insurance coverage are all necessities, too.
Start Saving for a Major Purchase
If part of the motivation for getting out of debt was so you could start saving for a major purchase, such as a home or a new vehicle, it’s time to start making that dream a reality. Establish a savings plan solely dedicated to your goal and contribute to it regularly. You’ll be surprised by how quickly the balance grows.
FAQs
Life after debt: 4 steps to take once you're debt-free
- Create a budget. Eliminating monthly debt payments creates new financial flexibility for money that was previously tied up. ...
- Build an emergency fund. ...
- Pay off credit cards immediately. ...
- Invest extra funds.
What happens when your debt is free? ›
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.
What is a good debt move? ›
Debt that helps put you in a better position may be considered "good debt." Borrowing to invest in a small business, education, or real estate is generally considered “good debt” because you're investing the money you borrow in an asset that will improve your overall financial situation.
How much money do you need to retire if you have no debt? ›
By age 40, you should have accumulated three times your current income for retirement. By retirement age, it should be 10 to 12 times your income at that time to be reasonably confident that you'll have enough funds. Seamless transition — roughly 80% of your pre-retirement income.
What to invest in when debt free? ›
Once you're debt-free and have your emergency fund built up, you can really start investing—by putting 15% of your income for retirement into good growth-stock mutual funds. Because guess what? You won't have any payments! You can start putting away more cookies in the jar and actually get to eat those cookies later.
How to build wealth after paying off debt? ›
Once you've paid off your debt, redirect that extra money to savings and investments. And try to pay your credit card balance in full each month, whenever possible, to avoid owing interest in the future.
Are you rich if you are debt free? ›
Myth 1: Being debt-free means being rich.
A common misconception is equating a lack of debt with wealth. Having debt simply means that you owe money to creditors. Being debt-free often indicates sound financial management, not necessarily an overflowing bank account.
At what age are most people debt free? ›
The Standard Route is what credit companies and lenders recommend. If this is the graduate's choice, he or she will be debt free around the age of 58. It will take a total of 36 years to complete. It's a whole lot of time but it's the standard for a lot of people.
Is it rare to have no debt? ›
Debt-free people are a rare breed . . . especially in today's world. Just about everyone has bought the lie that financial peace only happens when your FICO score is above average, you've got credit card points out the wazoo, and your mailbox is full of credit card applications.
Is $20,000 a lot of debt? ›
U.S. consumers carry $6,501 in credit card debt on average, according to Experian data, but if your balance is much higher—say, $20,000 or beyond—you may feel hopeless. Paying off a high credit card balance can be a daunting task, but it is possible.
According to the 28/36 rule, you should spend no more than 28% of your gross monthly income on housing and no more than 36% on all debts. Housing costs can include: Your monthly mortgage payment. Homeowners Insurance.
What debt should you avoid? ›
Generally speaking, try to minimize or avoid debt that is high cost and isn't tax-deductible, such as credit cards and some auto loans. High interest rates will cost you over time.
How long will $1 million last in retirement? ›
For example, if you have retirement savings of $1 million, the 4% rule says that you can safely withdraw $40,000 per year during the first year — increasing this number for inflation each subsequent year — without running out of money within the next 30 years.
What is a good monthly retirement income? ›
The ideal monthly retirement income for a couple differs for everyone. It depends on your personal preferences, past accomplishments, and retirement plans. Some valuable perspective can be found in the 2022 US Census Bureau's median income for couples 65 and over: $76,490 annually or about $6,374 monthly.
Is it OK to have no debt? ›
Being debt-free is a financial milestone we often hear about people striving for. Without debt, you can focus on building more savings, investing those extra funds and just simply having more peace of mind about your finances.
What to do when you can't afford your debt? ›
Here are some debt-relief options to consider.
- Create a Budget. ...
- Do Nothing and Get Debt Relief That Way. ...
- Negotiate With Your Creditors to Get Debt Relief. ...
- Seek Debt-Relief Assistance From a Consumer Credit Counseling Agency. ...
- File for Bankruptcy to Get Debt Relief. ...
- Get Help With Your Federal Student Loans.
Is debt free the new rich? ›
A common misconception is equating a lack of debt with wealth. Having debt simply means that you owe money to creditors. Being debt-free often indicates sound financial management, not necessarily an overflowing bank account.