If you’re not sure what to do after paying off debt, you’re in the right place!
Getting out of debt is one of the greatest feats you can achieve. And it doesn’t happen by accident. To get where you are today with all your debts paid off, you had to be resourceful, plan ahead, and make sacrifices.
After spending so much of your time and energy focused on becoming debt-free, you may be wondering – what’s next?
It can be challenging to shift your attention away from a goal you’ve prioritized for so long. But creating a new plan for your money in this next stage will keep you moving in the right direction with your finances.
To keep you going on the right track, we’ve compiled this list of the best things to do after you’ve finally made your last consumer debt payment (i.e. everything but your mortgage).
With the right action plan going forward, you’ll avoid ever ending up in debt again, and you’ll pave your way to a healthy financial future.
1. Save An Emergency Fund
Now that you’re debt-free, your top priority should be creating a safety net to prevent you from getting into debt again. After all your hard work, the last thing you want is to go backward and ruin all your progress.
Establishing this safety net begins with saving an emergency fund.
Here’s the thing, unexpected expenses will crop up, and when they do, you need to be prepared.
Without an emergency fund, things like car trouble, a health emergency, or a broken home appliance will become much more serious ordeals.
By saving for unpleasant financial surprises like these, you’ll be able to navigate emergency situations without the added stress of financial uncertainty.
How much should you save for your emergency fund? We recommend saving enough money to cover three to six months of expenses. To calculate this number, look back at your budget from the last few months and add up all of your fixed living costs. This might include your rent or mortgage payment, utilities, food costs, insurance, and travel expenses.
After you determine your savings target, go after your goal with the same energy and dedication you had when you were paying off your debt. The sooner you establish your safety net, the sooner you can begin working on financial goals that are more fun and rewarding.
2. Invest Heavily In Retirement
After you have a fully-funded emergency savings account, your next financial priority should be saving for retirement. And if you think you’re too young to start focusing on retirement, think again.
The sooner you start saving for your golden years, the better off your future self will be.
The best way to start saving for retirement is through a Roth IRA and/or 401k.
Also, make sure you’re fully taking advantage of your employer’s 401k match (if they offer one). And if you do open a Roth IRA, do your best to max out your annual contributions.
Roth IRAs are incredible investment accounts. As long as you don’t withdraw your investment earnings early, you won’t have to pay any taxes on the returns you earn in them.
If you’re feeling unmotivated to set aside money every month for retirement, take a look at Dave Ramsey’s retirement savings calculator. This online tool provides a general estimate of how much money you’ll have by the time you retire.
3. Start A College Fund
Another great idea when you’re wondering what to do after paying off debt is to start saving for college. Whether you dream of higher education for yourself or for your children, a college fund will help you get there.
These days, college tuition is higher than ever! So, unless you have a solid financial plan in place, putting yourself or your kids through school will likely remain a dream.
Many people take out astronomical student loans to put themselves through college, but you know firsthand how difficult it can be to pay loans off.
By saving money to pay for school, you’ll be safeguarding yourself or your children from piles of student loan debt.
Saving for a college education is a worthwhile goal, as it can give you or your children greater earning potential. Since many well-paying jobs require candidates to have a college degree, higher education is usually an wise investment.
Higher-paying jobs will allow you or your children to gain even more financial freedom and flexibility. So, while a college education is expensive, the long-term benefits are worth saving for.
4. Start A Few Sinking Funds
When you were paying off your debt, your budget was probably your best friend. You had to learn how to allocate your money responsibly, and you became familiar with tracking your expenses.
Now that your debt is gone, you’re probably a budgeting expert.
To capitalize on the money management skills you’ve cultivated, kick your budgeting efforts into high gear by starting some sinking funds.
A sinking fund is essentially just a savings account where you can save money for any anticipated major expenses. For example, you might create sinking funds to save for car maintenance, vacations, or Christmas gifts.
By preparing ahead of time for expenses you know are coming up, you’ll create more financial peace and freedom. Rather than worrying about whether you can afford to go on vacation, you’ll have a plan in place to get you exactly where you want to go.
When you were focusing on paying off your debts, you likely couldn’t save for large expenses ahead of time. Now that you’re unburdened from debt, you can focus on staying ahead of the curve and minimizing as much financial stress as possible.
Sinking funds will make you feel even more in control of your money and will eliminate unpleasant financial surprises.
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5. Stay On A Budget
After paying off all your debt, it’s easy to let your foot off the financial gas.
While it’s ok to relax a little, don’t stop budgeting or staying on top of your finances. Instead, use the positive momentum you’ve generated over the last several months (or years!) to start building wealth!
Being debt-free means you finally have some financial margin to work with. Now that you’re not tied to debt repayments, you have more freedom to decide how you use your money.
But you mustn’t use this newfound freedom as an excuse to spend your money recklessly.
Paying off your debt was just step one in your financial journey. If you can keep this perspective, you’ll be able to set your sights on bigger financial goals, and you’ll be more likely to stick to your budget.
Be sure to continue diligently using a budget and tracking your expenses. This will ensure that you stay in control of your money rather than the other way around.
6. Avoid Consumer Debt
As we’ve already mentioned, the last place you want to end up is back in debt! You’ve worked so hard to get to this point, and it would be devastating to find yourself back in the red.
Do everything you can possibly do to avoid consumer debt.
This means saying no to credit cards, car loans, and personal loans of any kind. Remember that loans aren’t free. While they may satisfy a short-term want or need, they come with mountains of interest that can take years to pay off.
Even if a purchase is only slightly beyond your reach, never use a credit card to pay for something you can’t afford. These small rationalizations can add up over time to equal tremendous amounts of debt.
If you want to continue moving forward in your financial journey, stick to paying for everything with cash. This is the best way to avoid getting back into debt and having to start from scratch.
7. Save For A House
If you’re not sure what to do after paying off debt, start saving for a down payment on your future house. Property ownership is one of the best ways to build wealth.
You may worry about taking on a mortgage since, after all, a home loan is a form of debt. However, mortgages are often exceptions for those who consider themselves debt-free. This is because the financial advantages of owning property often outweigh the downsides of having a mortgage.
If you decide to take on a mortgage, do so wisely. We recommend sticking to Dave Ramsey’s guidelines of a 15-year mortgage where you put at least 20 percent down and make sure the payment is less than 25 percent of your monthly take-home pay.
With the same strategies you used to pay off your debt, you can work toward paying off your mortgage.
8. Start A Business
One of the most rewarding things you can do after paying off debt is to use your extra financial margin to start a business. Whether you start a side hustle in addition to your day job or dive head-first into entrepreneurship, starting a business can result in greater financial fulfillment.
Of course, starting a business does involve taking on some risks. You’ll probably have to use your own money for start-up costs (unless you engage investors).
But after you’ve paid off your debt and saved up an emergency fund, you’ll have a solid safety net to catch you if you fail.
The ability to start your own business is a privilege you’ve earned by working hard to get out of debt. Now that you have more financial freedom and flexibility, you have some wiggle room to take small financial risks and to invest in your business ideas.
So, if you’ve been sitting on a business idea for a while, now is the time to start working on it! Just start small, and obviously, avoid any kind of business debt.
9. Celebrate Your Achievement
We’d be remiss if we didn’t mention the importance of celebrating your massive achievement! Paying off debt can be a grind, and you should take the time to reflect on everything it took to accomplish this lofty goal.
Not everyone can get out from underneath their debt. But you had the determination and tenacity to make it happen for yourself.
So, don’t be afraid to celebrate your achievement. Go out to a nice dinner. Take a small vacation. Treat yourself to a spa day. Just be sure to pay cash for it!
While the journey to financial freedom typically involves plenty of delayed gratification, don’t forget to enjoy some of your money in the here and now.
Yes, saving for the future is vital for your long-term financial health. But that doesn’t mean you aren’t allowed to spend money on yourself!
By treating yourself to small rewards for reaching your financial goals, you’ll motivate yourself to continue managing your money well.
Final Thoughts
Congratulations on becoming debt-free! You should be incredibly proud of yourself for reaching this huge financial milestone.
While it can be difficult to know what to do after paying off debt, we hope these ideas gave you some helpful guideposts.
By establishing some new goals for your money, you’ll continue building positive momentum and improving your financial health.
Now that you’ve dug yourself out of a financial hole, you have an excellent foundation on which to build wealth!
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