Did you just finish paying off your debt? If so, congratulations! Paying off debt is a significant milestone that can feel incredibly freeing and empowering. It may have taken years to get to this point, but now that you’ve made the final payment on your loan or credit card balance, the journey isn’t quite complete.
Within this article, we’ll discuss some of the crucial things you should do after you’ve paid off your debt to maintain your newfound financial freedom going forward.
Paying off debt is hard. It takes discipline and sacrifice. Once you’ve hit your milestone, don’t be afraid to treat yourself.
“Paying off debt is a significant achievement, and it opens up some exciting possibilities for your financial future,” said Jon Morgan, CEO of Venture Smarter. “Once you’ve paid off your debts, the first thing you should do is celebrate! Give yourself a pat on the back and acknowledge the hard work and discipline it took to get there.”
You don’t need to go overboard, but treat yourself to a nice meal at your favorite restaurant or buy yourself that new pair of shoes you’ve had your eyes on. To pay for the splurge, use the money that would have gone toward your debt payment.
Adjust Your Budget
Recently, much of your discretionary income has been used to pay off your debts. Now that you’ve accomplished your goal of becoming debt-free, it’s time to adjust your budget accordingly. Now that you no longer have to worry about paying down your debt, you must decide what to do with this income.
You may want to save for a home improvement project, or you want to invest more into your brokerage account. No matter what your new goal might be, this should be laid out in an updated budget.
Increase Your Savings
A recent GoBankingRates.com survey found that most Americans have less than $1,000 in their savings account. However, the most staggering number was that 11% had no savings at all.
If you ended up in debt because of an unexpected expense, medical bill, or job loss, you now understand the importance of an emergency fund. Emergency funds are created to help you cover the cost of something you hadn’t planned for. Most financial experts recommend having at least three to six months’ worth of expenses in your emergency fund.
If your emergency fund doesn’t have enough to cover your living expenses for an extended period, this should be a priority. The inability to pay for an expected expense can land you right back in debt again.
Think About Retirement
The unfortunate reality is that too many people haven’t saved nearly enough for their retirement. Once you no longer have debt payments to make each month, you can increase the amount you’re investing in your retirement accounts. Contributions to an Individual Retirement Account (IRA) or a company-sponsored 401(k) have tax advantages, and the compounding returns can help you reach your retirement goals quickly.
If your employer offers a matching 401(k), ensure you’re taking advantage of what’s essentially free money.
Diversify Your Investments
As you were paying off your debt, you probably weren’t putting much into investments. Now that you have extra money in the budget, your priorities are changing. While most people stick with stocks and mutual funds or ETFs, consider diversifying into alternative investments like real estate, art, and wine.
“Where you put your money will depend on your risk tolerance and financial goals,” said Morgan. “Diversifying your investments can help spread the risk and potentially earn you higher returns over time.”
Pay Off Your Car Loan or Mortgage
Once you’ve paid off your high-interest debt, you can look toward the lower-interest debts you might have. These are things like a car loan or your mortgage. While these have probably taken a backseat in their priority level because of their lower interest rates, they can now become a focus if you choose.
Start Saving For College
If you have kids, you could start putting away money in a 529 account that will be used to pay for their college education. Not only could you receive a tax deduction for your yearly investments, but you’ll also give your children the gift of a debt-free start post-college.
“Don’t forget about some of your long-term objectives, like your children’s college education,” said Morgan. “You might want to consult with a financial advisor to help you create a personalized plan that aligns with your objectives.”
The Bottom Line
Paying off your debt can feel like a heavy weight has been lifted off your shoulders. However, the job isn’t complete. You need to have a plan so that you don’t fall back into debt in the future.
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