Congratulations! You paid off that last debt and you’re officially debt free. After the celebration party ends, you’re likely to be confronted with one thought: Now what? You’ve just spent months or years focused on the goal of getting out of debt. Now that you’re there, what do you do next? It can be difficult to make the transition from “getting out of debt” to “living without debt.” There are a lot more options available for you and your money now. You have to make decisions about investing, saving, and having fun. It can be more overwhelming than figuring out how to get out of debt. So how do you get started? Here’s a plan.
Spend a night or a weekend revising your budget: All of that money that you were paying toward debt is now available for other things, so you’re going to need to sit down and figure out exactly how much you have to work with once your utilities, insurance, food, and other necessities are paid for. once necessities are paid, you’ll have a chunk of money available to save, invest, or spend.
Set your priorities: What do you need that extra money for the most? Do you need to beef up your emergency fund? Do you need to set some aside for a new car? Do you need to save more for retirement or a child’s college education? Decide on the things that are most important to you and then list them in order of importance and urgency. For example, retirement is very important but if your car is on its last leg a new(er) car is urgent. You may want to temporarily put the car at the top of your list.
Allocate money to each priority: From step one you know how much total money you have to use to reach your goals and from step two you know what your goals are. Now, allocate your extra money to each goal. Generally the most important goal gets the biggest share and so on down the list until you are out of money. Depending on how urgent some of the top goals are, you may not have enough to give money to every goal right now because the most urgent needs should get more money. That may mean there is little to nothing to cover the bottom of the list. That’s okay. Once those top goals are met, the ones at the bottom of your list will move up in importance.
Decide which goals will be ongoing and put them down as line items
in your budget: Saving for retirement will likely be an ongoing goal, with a fixed amount of money going toward it each month. Anything that must be saved for on a continual basis (new car or appliance fund, college, retirement, etc.) should become a line item in your budget, just like utilities and food. That way, you always take those goals into account each month. Goals like vacations and home improvements, which are usually temporary, will remain on your priority list until you do them, and then they will fall off. These goals get whatever money is left over after you pay for your necessities, including your ongoing savings goals.
Educate yourself: Now that you have money to use, you need to learn about investing, estate planning, and money management. Read a lot of books and magazines, attend classes, or get help from expert friends. You need your money to work hard for you and a savings account won’t cut it. To avoid being taken advantage of or making big mistakes you need to know how to handle your money.
Exercise restraint: It’s very easy to go nuts when you become debt free. Suddenly there is all this money in your budget and it’s tempting to go on a binge. Be careful. Too much of that can put you right back into debt. Sure, go ahead and have a little fun, but be cautious. Go through steps 1-4 as soon as you can so you don’t just have all that money sitting idle and tempting you to spend.
Living a debt free life can be a big transition if you’re used to years of debt bondage. If you’ve spent years focused on paying off debt, it can be jarring to suddenly have to think about other priorities. Take your time, put it all down on paper, and educate yourself about money management. You’ll be able to make your money work hard for you while also enjoying your new freedom.