You’ve Paid off All That Debt … So Now What?

There are few things in life that feel better than paying off that last debt. It took time and patience and there were probably days when you felt it was a hopeless task. But you persevered. Maybe you even had to take on a second job but hallelujah! You’re finally totally debt free.

We say congratulations! You fought the good fight and you won. There’ll be no more phone calls from creditors. And no more lying in bed nights wondering how you’ll ever get your debts paid off. Just imagine. Every cent you earn is now all yours. Want to take a weekend trip to the mountains or beach? No problem. Feel like meeting your friends for drinks and dinner? Hey, why not? You can afford it … finally.

But what comes next now that you’ve paid off your debt and freed yourself from that awful burden? Here are some things to do to make sure you’re never ever in debt again.

Understand what got you into debt

If you’re not careful you could fall back into those habits that got you in trouble. This is why it’s important that before you decide to take off for that fun weekend or make other changes in your behavior that you take the time to think and understand why you got into debt to begin with. The answer might be simple like because of student loans. Or it may not be that easy. Stop and think about how you approach your personal finances and how your friends and experiences shape your attitude towards money.

What were the behaviors or choices that lead you into so much debt? If you can identify them it’s likely you’ll see some patterns. Maybe you never got around to paying off your credit cards on time so that you fell victim to the power of compounding interest. Or maybe you bought clothes you knew you really couldn’t afford because you wanted to look good to your friends. According to a study published on AICPA.org, Millennials tend to rely on the financial habits of their peers to define their own. The important thing is to develop a good understanding of how you think about money as this can help keep you from falling back into debt.

Budgeting is now more important than ever

We assume you had a monthly budget that helped you get out of debt. It’s now critical to develop a new one. You’re going to now have more discretionary income than ever before and you need to have a plan for how you’ll spend and save it. Having a budget will prevent you from falling back into those old habits especially now that you have discretionary income that could tempt you into spending on unnecessary stuff. You’re used to paying your creditors and now you should pay yourself. Consider saving at least 20% percent of your disposable income. Make saving money nonnegotiable and as important as it was to get out of debt.

Make new goals

Now that you no longer need to worry about paying off your debt and have committed to saving money you need to next determine what you are saving money for. One good way to do this is by thinking in terms of short, medium and long-term goals.

For example, a good short-term goal would be to build an emergency fund. According to an article published on Forbes.com, 6 out of 10 Americans do not even have $500 to cover an emergency. If they run into a financial emergency such as a serious illness or unemployment their only alternative is to rack up debt. If you have an emergency fund you will be protected from sudden unemployment, if your car were to break down or some other big, unexpected expense. You should try to save the equivalent of six months of your net income, which would then give you enough money to get through a bad stretch without having to take out loans. If the idea of saving six months of your net income seems unattainable try to save at least three months worth. But also be sure to pay off your credit card bills at the end of each month so that you don’t begin running up unnecessary interest that could get you back into trouble. Plus, this is money that should be going into your emergency fund.

Think about a medium-term goal

Have you always wanted to take a tour of Costa Rica, visit Paris or buy a home? Whatever it is you’ve always wanted to do could be your medium-term goal. Once you have an emergency fund. begin saving money to fulfill that goal. Maybe you won’t achieve it next year or even the year after but when you have a goal like this you’ll be able to see every month that you’re coming closer and closer to realizing it.

 What’s your long-term goal?

If you want to retire at a decent age it’s important to get your retirement fund going, which might be your long-term goal. If your company has a 401(k)plan that’s a great place to start – especially if it provides matching funds. You should try to contribute the maximum amount and when your employer matches your contributions that are basically free money. You should be able to have your deductions automatically taken out of your paycheck, which makes things simple and the money you then don’t see is money you won’t miss.

If you’re self-employed or if your employer does not offer a 401(k) plan you should start an IRA. If you choose a standard IRA your contributions are called pre-tax income because they won’t be taxed. However, you will have to pay taxes on the money when you begin withdrawing it but that will be many years in the future.

An alternative to this would be to open a Roth IRA. This is the reverse of a standard IRA in that the money you contribute to it will be taxed but then tax-free when you withdraw it. There are pros and cons to both these plans and it’s important to understand what they are. Discount brokerages such as Charles Schwab are good places to start an IRA and you should be able to get some good advice as to which type would be best for you. Whichever plan you choose try to set up a monthly draft payment system. This would be similar to a 401(k) as your contributions would be automatically taken out of your paycheck and deposited in your brokerage account.