Debt sucks. It restricts you and enslaves you to someone else until it’s paid off. What often gets lost in the process is what you do after you pay off your debt.
Personally speaking, I was so focused on paying off debt that I forgot a lot of other things. I was so engulfed in trying to kill my debt that when I finally did pay it off, I had absolutely no idea what to do with my money next.
It was a great feeling to pay off debt, but I felt like I needed to re-learn how to financially walk once I reached my destination. I know I’m not alone and many ask themselves what they need to do after paying off debt.
If you’re in a similar situation, here’s what you need to do after you pay off your debt for good.
The most important thing to do after paying off debt, especially a large amount of debt, is to celebrate your accomplishment. Take a moment to enjoy the culmination of the process and bask in your newfound freedom.
Don’t be afraid to spend some money to do this either. My wife and I went out for dinner at one of the best restaurants in town to celebrate paying off my debt. It felt good to go out for that meal knowing we had the money for it and didn’t have to worry about how it was going to impact our debt repayment efforts.
Find something you want to do to celebrate. Take the time to plan it out and make it as simple, or extravagant, as you want – so long as you can afford it, of course. You’ve made it through the gauntlet of paying off your debt; you deserve it.
Grow your savings
People go into debt for a variety of reasons. I was addicted to spending and used credit cards as a way to finance the life I wanted but couldn’t afford. Others may get into debt because they have no savings to fall back on and their credit card serves as an emergency fund.
Regardless of your reason, the first focus after you pay off your debt should be to grow your emergency fund. I actually believe this is the first thing to do when paying off debt as it gives you a safety net.
You may not have focused on saving for emergencies while paying off debt. Now that you have extra money you can divert it to savings each month.
Many experts say you need to have 3-6 months of living expenses saved. That’s a good long-term goal but focus on saving your first $500, then $1,000 and so forth.
Pick an online bank to get started.
Plan out your future
Debt can easily become all-encompassing. It takes all your emotional and mental energy to pay off, leaving you unable to look at what you want for the future. Now that you’ve paid off your debt you can and should shift that energy to other areas in your life.
It’s okay to take time with this process (and you should), but step back and ask yourself what you want. It can be as practical as needing to budget to buy a house or car, or even focusing on starting a side hustle, or some other professional goal.
If you didn’t live on a budget when you were working to pay off your debt, now may be the time to make a budget – here’s a great guide on how to make a budget.
By killing your debt, you hit the reset button on your finances. This allows you the opportunity to sit back and think over what you now want and how to best use your money to accomplish those new goals.
Start investing after you pay off your debt
Paying off debt vs. investing is a common debate in the personal finance community. I personally waited to invest until I paid off my debt. If you did the same thing, now is the time to start investing in the stock market.
That likely means you’re starting with little money, and that’s okay. You can invest with little money and do quite well – so long as you start. The best option is to start with your employer-sponsored 401(k), especially if it has a match.
The match instantly doubles your money, and many plans offer free resources to help you start investing.
If you find that you have more extra money in your budget than you thought, you shouldn’t stop with your 401(k); open a brokerage account to invest more money.
Find one that you like and start investing. With the amount of free resources available to teach you how to start investing in the stock market, it’s not as difficult as it may seem.
Don’t close your credit cards
I know it may sound counterintuitive, but if your credit cards are still open, don’t close them. This may not apply to you if it was student loans you paid off or had to close your credit cards while paying them off, but if they’re still open, you should keep them that way.
No, it’s not so you can go back out and charge up more debt. It’s so you don’t lose valuable age, which is an important part of your credit score. Your score may not be very good right now, but those older cards can help improve your credit score.
By working to improve your credit score, you will put yourself in a better position when you want to do anything from buying a house or car, to lower rates on a variety of services.
Additionally, it gives you access to a card you can use to make small purchases to pay off each month to help you build financial confidence.
Give yourself freedom to spend
This is something I really had to work on after paying off debt. I spent so many years depriving myself to have the money I needed to kill my debt that I got used to not spending money at all.
I don’t believe I’m the only one who struggled, or struggles, with this issue. As we go through the process of paying off debt, we equate spending money on pleasures as bad and think we should stop.
Yes, overspending is a problem, but that is much different than giving yourself the freedom to spend.
The goal is to find balance. You want your spending to be wise and healthy, not an extreme. This can be as simple as giving yourself an amount you can spend each week or month.
You can even analyze it a few months in to make sure you’re not only giving yourself the freedom to spend, but also that it’s in line with your budget.
Don’t go into debt again
This is a no-brainer. The last thing you want to do after you pay off your debt is to go into debt again. Doing so would be like the person who loses a lot of weight, and then puts it right back on once they stop their diet.
The goal is to move forward, become financially stable and grow in your financial confidence – not step back. This can be difficult to manage if you’re addicted to spending or don’t take the time to set yourself up for success.
Don’t be ashamed if you need to get someone to keep you accountable, or if you religiously need to track your spending, or something else. The key is to use tools that help move on to a life of freedom.