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Baby Steps to Financial Freedom

8 Things You Must Do After Paying Off Your Debt

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 your 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.

  1. 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.
  2. 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 and be able to make money on blogging, make sure it stays that way.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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.
  8. 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.

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25 Responses to “8 Things You Must Do After Paying Off Your Debt”

  1. The Stoic says:

    Great list! For me, number four has been most important. I paid off just over 40k in student loans last year and when I knocked it out I had this huge void to fill. All my energy and dedication had been spent on paying those off and when you accomplish a goal like that you have to have a new direction to channel that focus and dedication.

    • Thanks! I think that setting goals is the most powerful way we have to channel our energy. You can have the best intentions, but if they are vague and unformed they can easily turn against you.

  2. Ashley @ TheCCI says:

    We treated ourselves to a nice dinner out when we finally paid off the last of our credit card and school debt.

    We also budgeted in some blow money for each of us. It’s so nice now to have a bit of money that we can spend on whatever we want. It helps to keep us focused on our savings goals without feeling like we are depriving ourselves.

    • We actually took a trip to Mexico when we paid off the last debt. And I didn’t feel one bit guilty because #1 it cost about the same as 1 months debt payments and #2 we never deviated from our budget after that one celebration. And yes we added in some blow money as well to help keep our sanity.

  3. CultOfMoney says:

    I completely agree with you, especially with #4 and #7. If you don’t have a plan for your new cash, and you aren’t vigulent about what you spend on, there is almost a trust-fund effect where you just spend money because you have it. Granted it is probably a small trust fund, but it’s the effect on you that is so harmful. Great article!

    • It’s so easy to slip back into the “I deserve it” mindset once you are debt free. Plus you may have the idea that with all that extra cash you can start using the credit cards freely again. Better to just stick with your lowered expenses and use the extra money as savings and investments.

  4. Modest Money says:

    Yes it is quite easy to slip back into old habits once debt is paid off. You suddenly see all this extra money and end up convincing yourself that you deserve more than just a little treat. The wise move is to put that extra money into savings or other investments.

  5. Jon Rhodes says:

    I think the most important thing is to not slip back into debt again. I agree there should be some sort of treat after the long haul of repaying debt, but yes you should quickly get back to focus. A saving or investment plan is probably the way to go with those extra notes that are no longer being used to pay off debt. The last thing you need to be is a yo-yo borrower! It’s just not an efficient use of your cash.

    • Definitely Jon. Once you go through the pain of being deep in debt once you don’t want to fall into that trap once again. Vigilance is necessary to avoid complacence.

  6. MyCanadianFinances says:

    Great article,
    For me #7 to stay vigilant is by far the most important. Only way to continue on the right track is to know where you stand. This is far from possible if you stop tracking your finances.

    • Staying vigilant is the one thing on the list that you need to continue doing, so yeah it is the most important. It is so common and so easy for people to slip back into their spending ways without even realizing it.

  7. Shilpan says:

    Steve, great advice. This is akin to losing weight. There are lots of similarities between staying debt free and staying fat free. :)

    • You’re so right Shilpan, I’ve often thought the same thing myself. Mostly though I think it boils down to will power and conscious living.

  8. Parenting and Money says:

    Good post. Item #3 is a good point. It’s important to reallocate. When we paid off our cars, we put the same amount we were paying monhtly into our emergency fund. We were used to not having the money so it was an easy transition.

    • I’ll bet the emergency fund filled up fast too. One great thing about once the debt is paid off is that you usually have a pretty large chunk of cash each month to reallocate to other goals and they become pretty darn easy to accomplish.

  9. femmefrugality says:

    Ooooh great tips. Sometimes we get so caught up in paying back debt that we forget there is maintenance afterwards!

  10. Savvy Scot says:

    Great Post – I agree that point 4 is critical. I have heard of people going back into debt, just so they can get back the sense of achievement by paying it back again! I think treating yourself is also very important :) Glad you had a nice vacation to Mexico

    • Going into debt just so you can feel good about paying it off again…wow. I’m just fine with the achievement I feel in saving and investing :)

  11. frugalportland says:

    helpful! I’m worried that I’ll lose focus once I’m out of debt entirely. But right now I am so so focused on the debts that it will be a relief to have savings options!

    • Once you get close to having all the debts paid off (maybe 6 months away), start to plan for how you will handle the excess cash flow. Do a mock budget to see where you can use that money most effectively. And make another long term goal to strive for, this will help you stay focused.

  12. Dana says:

    Thanks for this article!! I really needed to hear #1. We have paid off almost $100,000 worth of debt and are now updating our house (paid in cash) to celebrate. I feel so guilty about not doing our other goals right away. So it is nice to hear that someone else took the time to reward themselves too!!

    We are following the Dave Ramsey baby steps so our next goal is to beef up our emergency savings fund. Then to save more for retirement and start the kids college fund. After that though, is the goal to pay off the mortgage. However, we will be putting aside a large down payment for our next house instead.

    • If you’ve paid off $100,000 in debt you deserve to have a celebration, especially if it is paid in cash. That is one heck of an achievement and really no one else is going to appreciate it or reward you like you can yourself. And it sounds like you have a great plan and goals in mind for when the debt is gone.

  13. Karin @ HR Degree Directory says:

    We had a loan of about $17,000, and my husband and I paid it off in two years. For average income earners, paying off that amount in 2 years is more than an achievement.

    From the must do’s you listed above, we did items 1, 4 and 6.

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