I’m Out of Debt! Now What?

You submitted your final payment and you are out of debt. Congratulations! That is truly an accomplishment worthy of celebration. You did it!

Now what?

For many people, paying off debt is a mountain they had to climb. It meant sacrificing current desires to pay for money borrowed in the past. It required learning how to squeeze money out of the budget to pay off debt faster and save on interest payments. When the debt is gone (yes!) there is a sense of newfound freedom. A weight has been lifted and a burden removed. Like a bird whose cage door has been flung open, there are now choices to be made, and determining where to start can be difficult.

Let me first acknowledge that every story is different. A lottery winner paying off a mortgage in one day and a teacher paying off a thirty-year mortgage after twenty years through extra principal payments each month are not the same journey. The first scenario involved a large influx of cash to pay off the house, while the other required a steady discipline of sacrificing monthly to become debt free. While both result in paying off the debt, the discipline built over the long haul established a financial muscle in the teacher that was not developed in the lottery winner. That doesn’t diminish that the lottery winner choosing to retire the debt (good call), but that does explain why we hear stories of lottery winners or people in highly paid professions filing bankruptcy. That hard-fought discipline will continue to serve our example teacher well.

What does any of this have to do with your next move after paying off your debt? Plenty. This article is assumes your journey was that of the teacher. You travelled the second path – paying off your debt through intentional sacrifice. In doing so, you have developed a financial discipline that you can now use to your advantage moving forward.

The temptation when your debts are paid is to letdown your guard and perhaps get a little sloppy financially. However, if you continue to use the financial muscles you have built, they will literally pay you dividends in the future. Consider the following steps:

1. Build an Emergency Fund. If you don’t already have a buffer between you and the next unexpected financial situation, build that buffer now. Take the money you were paying on your debt including any extra money you carved out of your budget each month and put it in a high-yield savings account. The obvious point of an emergency fund is to have money in case an emergency arises. It is the squirrel stashing away acorns knowing that winter is coming. For Christians, the emergency fund follows a biblical principle of saving and setting some of your provisions aside in case you need them later. Proverbs 21:20 in The Living Bible says “The wise man saves for the future, but the foolish man spends whatever he gets.” Having that financial buffer when life throws you a curve ball can mean the difference between a having a small hiccup and a going into a financial tailspin. A good rule of thumb is to have 3-6 months of expenses in your emergency fund. That tends to be enough money to handle many major expenses like an air conditioner that needs to be replaced or a water heater that broke. This money stash can also buy you some time to find work in the event of a job loss. The amount is up to you, but it’s the first place you should direct your money after you get out of debt.
2. Save for Retirement. In a recent study of millionaires, the biggest component of wealth building was retirement accounts. 80% of millionaires invested in an employer-sponsored 401(k) or a Roth IRA. These accounts don’t grow overnight, but they do showcase the power of consistent investment in the stock market over a long period of time. Using monthly auto drafts or withholding money from your paycheck to fund retirement investments can be a painless way of investing because it is money that you don’t have to handle in order to invest. Set it and forget it. Taking advantage of an employer match in a 401(k) plan is accepting free money, and who doesn’t want that? Putting away money now for your future allows you take advantage of what Albert Einstein called “the eighth wonder of the world,” compound interest. The more time you have, the greater the compounding effect and the more money your savings will produce.
3. Save for a House. Home prices rose swiftly during the pandemic years, but homeownership is still a key component to building wealth. Buying a house builds ownership known as equity in a real estate property. As you make mortgage payments, the equity in your home increases which serves as a “forced savings” for you. With each payment you are increasing your savings which you can eventually access when you sell your house. Historically, houses go up in value over time. The 25-year average appreciation for a house is 3.9% per year meaning you gain almost 4% per year in house value. After 20 years, the value of the house would double as your equity in the home increases. As a quick example of the value of home ownership, let’s say you bought a $200,000 home by paying a 20% down payment and taking out a $160,000 mortgage at 7% for 20 years. You would pay $160,000 in principal (the loan value) and $137,715 in interest. Yikes! That means you would pay $297,715 for a $200,000 home. But wait, there is some good news. In that 20 years since you bought the house, the value rose 3.9% per year and is now worth $413,738. Now you feel smart because you paid under $300,000 for a $413,738 asset. What a deal! Yes, there are some nice tax deductions for property taxes and mortgage interest, but the main benefit is the increase in the home value. Five years later if the value continues to rise at the same rate, your house would be worth $500,960! You got a 40% discount on that property and the deal gets better every year.
4. Save for Kids’ Education. Be it a technical degree, a college degree, trade school, or some other specialized training, it is a good idea to save money towards education beyond high school for your child(ren). If traditional school in not their forte, there are plenty of other options including online learning and trade schools. In case you think trade schools are not a viable option, plumbers make an average wage of $63,350 with no need for a 4-year degree. HVAC Engineers positions average just over $81,000 on ZipRecruiter, a position that is attainable with an Associates degree in many cases. Regardless of the path, saving for education now can help set the stage for a good career and can avoid costly student loan debt later. There are several options including 529 Plans, Coverdell Education Savings Accounts (ESA), prepaid tuition plans, and investing in a brokerage account. While the temptation may be to save for college before retirement out of love for your kids, remember that there are fewer options for retirement income and you’ll likely need a much larger amount than for you educating your children. There are other options to pay for that education – including your children helping pay their own school bills by working part-time – which is why I recommend retirement investing before saving for college.
5. Give. Giving is often overlooked when setting financial goals. When giving to a reputable charitable organization, that giving has a positive impact on the giver and the recipient. Giving – especially in secret – is one of life’s great pleasures. You get the chance to be a part of helping someone through your generosity. It feels good to give, and when you give money, you are recognizing two things. First, we recognize that life does not revolve around us. Holding what we have been given loosely and sharing it with others allows us to experience empathy and express hope and appreciation towards others. For Christians, giving to others reflects the belief that God owns everything and we are stewards of the resources God gives us. As God has blessed us, so should we use a portion of what we have to bless others. For those not following Christian beliefs, there are several benefits of giving such as happiness from doing good in the world, improved health, making social connections, and sparking giving in others. Giving produces gratitude and a generous heart which are two components of positive mental health. Giving can also help your wallet because there can be tax benefits to charitable giving, but developing a desire to give generously can be a fulfilling endeavor by itself.

Now that you are out of debt, make a pact with yourself to stay out of debt. Building an emergency fund will provide you a financial buffer, and saving for big goals like a house, retirement, and your child(ren)’s education can help you stay focused on making your money work for you. I excel in help people build and execute a financial plan to help you achieve you financial goals. To schedule a free consultation, click below to set up an free consultation.