One of the keys to taking control of your finances is to get rid of your debts, especially consumer debts such as credit cards and personal loans. But what do you do after paying off debt? After an extended battle with debt it can feel as if there is a void in your life when the last debt payment is sent off and you are finally debt free.
If you are in this situation or expect to be sometime soon here are 8 things you can do to keep on the golden financial path once you pay off your debts.
- Treat yourself – Whether you’ve just paid off $5000 or $50,000 in debt it’s a major achievement and a great step forward. Celebrate and reward yourself by treating yourself to something special. The reward is up to you and can range from something simple like a dinner out at your favorite restaurant to something more extravagant like a dream vacation. Just make sure it fits within your budget and DON’T go back into debt to do it, there’s no sense in that. When my wife and I paid the last credit card we splurged on a trip to Mexico that we had been dreaming of for some time. I didn’t feel guilty about it at all because the cost of the whole trip was equal to 1 month’s debt repayment. To us it was well worth it and by using the same amount we had been paying the debt down with it reinforced in our minds how valuable it was to not have any debt.
- Don’t start slacking off – After your celebration get right back into your normal routine. Don’t let it be a signal for an extended spending holiday. There is nothing worse than accomplishing such an amazing feat and then sinking right back to where you came from. Don’t be one of those people. You now have some control over your money, make sure it stays that way.
- Reevaluate your budget – Once you’ve paid off that last debt your budget is out of balance. Because your budget drives your financial planning you need to address that immediately. In fact, you should start making plans for reallocation as soon as you send off the last debt payment. The excess money can be used for a wide variety of purposes, but one thing it should not be used for is to encourage lifestyle creep. If you don’t make plans for the excess money in your budget it will be all too easy to let your expenses begin to balloon and you want to avoid that.
- Set a new goal/plan – Part of the budgeting process involves deciding where your money is to be spent. Without a plan it is all too likely that the money will go towards dinners out, new electronics, clothing and other unnecessary purchases. Making a new goal now that your debt is paid off will encourage you to avoid those types of expenditures. Your new goal may be to further reduce your debt by paying down your mortgage faster or it could include setting up small easy access saving accounts and funding them. No matter what goal you choose (and it can be more than one) make sure it is included in your budget and that it accounts for all the money you have freed up by eliminating your debts.
- Max out retirement savings – One of the best uses for the extra money is to max out your retirement savings. Increase your 401(k) to the point where it is maxed out. Fully fund your IRA this year or start one if you haven’t before. Tax free growth is a powerful tool and one that everyone should use as fully as possible. If you are able to max out your retirement accounts and still have some money unaccounted for at the end of the month consider the next step.
- Choose other investment vehicles – While it is likely your 401(k) will be invested primarily in stocks there are other investments you can use to increase your current cash flow as well as diversify. Real estate is one popular way many use to increase cash flow and a solid portfolio of real estate not only provides current cash, but should also increase as an asset by itself, giving you increased net worth. Another solid investment to increase cash flow is dividend bearing stocks. Not only do these provide you with cash on a regular basis, they also help keep your taxes lower since dividend income is taxed at a low 15% currently. Other possibilities include precious metals, bonds and P2P lending.
- Stay vigilant – Now that your debt has been eliminated make sure to stay vigilant and focused in regard to your finances. It is easy to become complacent and slip back into the same habits that caused you trouble in the first place. I know because it happened to me. There is nothing worse than having to eliminate debt a 2nd time in your life. Stay focused on your goals, avoid unnecessary purchases, keep saving and maintain your frugal lifestyle. These 4 small things will get you to financial freedom if you stick with them.
- Let me know about it – If you’ve tackled a debt problem, large or small, let me know about it here. I would love to feature your story here on Money Infant to help provide motivation and hope to those who are currently struggling with too much debt or are just beginning their journey towards a debt free life. Contact me here to submit your story.
There you have 8 tasks to take care of once you have paid off your debts. And here’s a bonus – Enjoy your new debt free life!
Let me know if you have any other ideas about things you need to do after paying off debts in the comments below.