You just got out of debt. Now what? 6 things to do once your debt is paid off.
You’ve pinched every penny and finally clawed your way out of debt. It was a struggle but the relief of being debt free makes it worth it. No more stress, no more worry – you have accomplished much. But now what? Use your momentum to carry you forward and accomplish the things I have listed below to ensure your financial security for you and your family for generations to come.
Save for Emergencies
Now that your debt is paid off use the money that was going towards the debt and start an emergency fund. Try to get about 4-6 months of expenses in something very liquid and accessible like a bank account. I keep my emergency funds in a Money Market Account at Capital One 360, which currently yields 0.75%. Not bad compared to 0.01% at your local brick-and-mortar bank. Remember this savings should be in addition to your every day transactional account. I highly recommend keeping these separate so you don’t accidently overspend and dip into your emergency funds. Having these funds in place will help you avoid getting back into debt when something comes up like a job layoff, a big auto repair or other “emergency.” It will happen eventually, and if it doesn’t, well, more money for you.
Don’t throw out the Credit Cards Yet
Credit Card debt is one of the worst types of debt with high interest rates and hidden fees. This debt can be so distressing that many people end up hating the credit card companies. So, when they finally pay off the debt they cut up the offending credit card so that it can never get them into the mess again.
Well, I’m going to tell you something that you may not like (or maybe you have already figured out for yourself). It wasn’t the credit card companies fault. They didn’t get you into debt it, YOU DID! So, even if you hate credit cards now, with time I hope you will come to love them, like I do. You just need to think of the Credit Card as a tool. And a great tool at that! One little plastic card can replace all other forms of payment such as cash or checks. If you lose your cash, it’s gone. If you lose your credit card you can get a replacement mailed to you within a couple days with the credit card company footing the bill for any fraudulent charges. But convenience isn’t the only reason to use your card; the best reason is the rewards. Use your credit card for every purchase as long as you plan to pay it off, on-time, every time. If you don’t have the money already in your bank account then don’t make the purchase. Simple as that.
As for the rewards, just go with the cash back. No need to mess around with gift cards or travel miles – these things only encourage more spending. Typical cash back card will give you 1% but I have seen cards that provide 2% and even up to 5% on specific purchases. While 1% doesn’t seem like a lot I can tell you that it can add up to tens of thousands of dollars over a lifetime, depending on your level of spending. Every time you are going to write a check, pay with cash, or use a debit card ask yourself, “Can I pay this with a credit card?” And “Do I have the money in the bank to pay this off right away?”
Here comes the fun part – Investing!
You have been a slave to your money for a long time now it’s time to turn the tables and make your money work for you, through investing! But do it smartly – start by contributing to your 401k plan at work. Make sure you contribute at least up to your employer match but the maximum contribution limit for 2014 is $17,500 or $23,000 if you are age 50 or older. If you don’t have a 401k or max out your contributions consider opening a Traditional, Roth, or Educational IRA and save another $5,500 or ($6,500 if age 50 or older). This is subject to IRS restrictions, so you may need to do a little extra research based on your own situation. Finally assuming you have utilized all of your tax deferred options open an after-tax brokerage account.
401k, 403b, IRA, and Brokerage accounts are all just types of accounts; they are not the actual investments. This is just where your money is held waiting to be invested. You need to purchase stocks, mutual funds, exchange traded funds, or bonds in the accounts. You should consider using low cost, highly diversified ETFs and Mutual Funds from a reputable company like Vanguard. The type of stocks and bonds and the allocation between them all depends on your personal financial situation so I can’t provide specific recommendations in this article.
Create a Financial Plan
Ok, you have your emergency funds and you’ve started investing. Now might be the time to consider creating comprehensive financial plan. You can do it yourself – here is a Do-it-yourself Investment Guide to help – or you can hire someone to help.
If you decide to do it yourself here are some steps to help:
- Create a Net Worth Statement – This will help you understand what you own and what you owe. Once you complete this you will update this regularly (annually) and watch it grow.
- Create or Update your Budget – You may have created and used a budget to get out of debt. Now that your cash isn’t going to pay off your debt it can be allocated elsewhere.
- Determine your Goals – Create a list of your financial goals. Examples are education, retirement, a house, etc. Assign a dollar amount to each goal so you know exactly what it takes to achieve it.
- Analyze your cash flows – This involves looki
- ng at all your cash inflows and cash outflows and determining how much you need to save and invest to achieve your goals.Invest – If you have already started investing you are ahead of the game here. Now instead of just investing to grow your money you can invest with the purpose of achieving each of your goals. This might mean changing up your allocation to stocks and bonds.
- Monitor your Plan and you Portfolio – Major life events and changing markets will affect your financial plan. Revisit it often when these things happen to make sure you are still on track and make changes if necessary.
If you decide to hire a professional, make sure they have a certification such as a Certified Financial Planner (CFP) or a Chartered Financial Analyst (CFA) and make sure they are Fee-Only. This ensures that they are competent and that their compensation structure is transparent and free from conflicts of interest.
Basic Estate Planning
Now that you are starting to grow your assets you should consider creating an estate plan in order to efficiently pass on those assets if something were to happen to you. Even if you don’t have assets (yet!) you should consider an estate plan as it will plan and prepare for incapacity. This is when you are no longer able to make financial or medical decisions due to an illness or disability. This also involves choosing legal guardians for your children.
Don’t forget the kids!
You have learned a lot on your journey out of debt. Don’t forget to pass on this knowledge to your progeny. The schools won’t do it! Your struggle with debt is something you wouldn’t wish on your worst of enemies, so ensure your children never have to go through it by preparing them early. Here are some creative ways to start the education:
- Open a checking account and deposit their allowance directly into the account – show them how to use it.
- Buy them books – You can find financial books for almost any age.
- Make them pay for non-essential purchases. Show them how to work and save. They may realize they don’t really need it after they have to work so hard to get it.
- Once they get the hang of a transactional account, encourage them to open an investment account. Teach them about stocks and bonds and let them pick a mutual fund or two.
I applaud you for getting out of debt but that is only the beginning of getting your entire financial house in order. I hope these six tips will help you continue to grow your wealth and continue on the path to prosperity. Please share your other tips after you were able to get out of debt in the comment section below.