If you are reading this, you have reached an incredible milestone in your financial journey — you’re finally living debt free! But what happens now?
Without a plan for managing your finances, you may fall back into a cycle of excessive spending that will leave you with little to show for your hard work. While you should enjoy some well-deserved relaxation and treat yourself, remember that your financial journey is not over. Here are 10 action items you can take to stay debt free.
1. Focus on the Future
Debt has a way of consuming every aspect of your life, especially if you are dealing with high-interest debt, leaving little room for thoughts of the future. With the weight of debt lifted from your shoulders, you can finally breathe freely and envision a brighter future for yourself.
Perhaps you’ve dreamt of owning a house, starting a business, or purchasing a new car. Whatever your ambitions are, now is the perfect moment to map out new financial goals and create a plan to achieve them.
Take into account both your short-term needs and long-term aspirations. It’s essential to strike a balance between enjoying the present and setting yourself up for future success. Additionally, consider milestones along the way that will bring you closer to your goals.
While debt freedom can bring relief and accomplishment, this is not the time to become complacent. To keep yourself from going into debt again, you need to maintain the financial habits and discipline that enabled you to overcome your debts. For example, if you use a credit card, always make at least the minimum payments every month, though it’s best to pay your credit card debt in full and on time every month.
2. Continue Budgeting
With your debt behind you, your financial landscape has changed—and so must your monthly budget. Go through your bank statements to see what your monthly expenses look like. Once you get a better sense of how much you are spending, you should create a new budget and determine how to allocate the extra money you’ll have each month. Divide your money into categories, such as essential expenses, savings, and discretionary spending.
When adjusting your budget, consider popular approaches such as the 50/30/20 budget or 80/20 budget. These percentage-based budgeting methods offer a balanced approach, allowing you to continue saving while incorporating some discretionary spending into your life.
Note that there are various budgeting strategies available, and you should select one that aligns best with your specific needs and financial goals. Whether it’s the envelope system, zero-based budgeting system, or an app-based budgeting tool like Mint, explore different options to find the approach that resonates with you.
3. Set Up Your Emergency Fund
Ideally, as you were working towards paying off your debts, you were also contributing to an emergency fund. If that’s the case, now is the time to increase your contributions. Ideally, you should aim to save at least 3 to 6 months’ worth of expenses, though I typically have at least 6 to 8 months of expenses set aside to be safe. However, if you haven’t yet started saving for emergencies, you should prioritize it immediately.
An emergency fund serves as a safety net, shielding you from needing to rely on credit cards when faced with unexpected financial emergencies. Whether it’s major vehicle repairs, unforeseen medical expenses, or everyday costs during a period of job loss, having an emergency fund allows you to navigate these challenges without slipping back into debt. Remember, you just freed yourself from the burden of debt, and the last thing you want is to be blindsided by an emergency and find yourself having to get out of debt again.
4. Start Investing
If you stopped investing to focus on paying off debt or never invested before, it’s time to consider incorporating investing into your financial strategy. Anyone can invest, regardless of how much money you have. Whether you choose real estate, bonds, or index funds, you have plenty of options.
Investing allows you to start building wealth and provides opportunities for diversification and protection against inflation. However, keep in mind that investing involves risk. Before making any investment decisions, do some research on the types of investments you are interested in and how they fit in with your financial goals.
I started by investing in individual stocks and dabbling in options. But, recently, I’ve been investing in index funds and have some money in bonds and cryptocurrencies. I also have money in a high-yield savings account with Marcus by Goldman Sachs, earning an average percentage yield of 4.15% (as of July 2023).
5. Investigate Your Retirement Options
Retirement may feel like a distant concept, particularly if you are young, but it’s essential to start saving as soon as possible. Take the time to investigate the retirement savings options available to you, including those offered by your employer, such as a 401(k), and consider additional options like a Roth IRA. If you’re self-employed, explore retirement plans such as a SEP IRA, Simple IRA, or Individual 401(k).
If your employer offers a 401(k), you should at least meet the minimum needed to get the company match. Otherwise, you are leaving free money on the table. You can have both a 401(k) and a Roth IRA. The key difference is that a 401(k) is funded using pre-tax dollars, while a Roth IRA is funded using post-tax dollars.
Regardless of the specific retirement account or savings vehicle you choose, it’s best to contribute make consistent retirement contributions and commit to preserving the funds until you retire. The last thing you want is to scramble to find ways to fund your retirement later on in life, or worse, not have any savings when you are ready to retire.
6. Organize Your Financial Life
If you’ve successfully paid off your debt, you likely already have some level of organization in place. However, there’s always room for improvement.
The first step is to set up auto-pay for as many bills as possible. This process simplifies your financial management and eliminates the risk of late payments or missed deadlines. You can take automation a step further by setting up automatic contributions to your retirement accounts and establishing automatic transfers to your emergency fund and savings accounts. By doing so, you remove the burden of manually managing these financial aspects and create a seamless process for building your financial security.
In addition to automation, now is the perfect time to establish sinking funds and organize your financial paperwork. Sinking funds allow you to set aside money for specific future expenses, such as vacations or home repairs, ensuring you have the necessary funds when the time comes. As for financial paperwork, create a system that works for you, whether it’s digital or physical, ensuring that all your important documents are organized and easily accessible.
7. Give Generously
When you are knee-high in debt, it may be impossible to help others since you are living paycheck to paycheck yourself. When you are debt-free, you have wiggle room for life, including the opportunity to make a meaningful difference in other people’s lives. You can extend a helping hand to those around you, whether it’s treating a friend to dinner, buying gifts for your family, or leaving a generous tip to appreciate a server’s hard work.
But generosity extends beyond monetary contributions alone. You can also share your time, skills, and talents. By volunteering or using your unique abilities to help others, you can create profound impacts and make the world a better place.
8. Review Your Insurance Coverage
While working towards the financial goal of becoming debt-free, you may have had to rely on minimal insurance coverage to keep costs low. However, now that you have more financial flexibility, consider reviewing and potentially increasing your insurance coverage. This includes essential policies such as life insurance, medical insurance, dental insurance, and vehicle insurance. Additionally, as you approach middle age, exploring long-term care insurance can provide added security for your senior years.
By investing in comprehensive insurance coverage, you safeguard your financial well-being and provide a safety net for yourself and your loved ones. Take the time to research reputable insurance providers, compare quotes, and seek professional advice if needed.
9. Follow Your Passions
Living in debt not only burdens you financially but also robs you of your time as you scramble to pay off your debt. Attaining debt freedom liberates both your time and your financial resources. It provides you with the opportunity to pursue your passions and invest your hard-earned money in activities that make you happy.
Take this opportunity to reflect on what truly matters to you, what sparks joy, and what brings a sense of fulfillment. Explore your hobbies, interests, and talents. Embrace the freedom to pursue them wholeheartedly, as they can bring a renewed sense of purpose and joy to your life.
Following your passions doesn’t necessarily require a substantial financial investment. You can start small, dedicating pockets of time each day or week to nurture your interests. For example, I typically go on runs around the city several times a week. All I need to pay for are a new pair of running shoes every few months.
10. Treat Yourself
Amidst these responsible actions, don’t forget to treat yourself! You’ve invested significant time, effort, and dedication to conquer your debt. You deserve to celebrate and reward yourself for making it out to the other side.
Consider hosting a celebration with loved ones to commemorate your debt-free milestone. You can also pamper yourself with a visit to a five-star restaurant, treat yourself to a spa day, or buy yourself a new outfit. The possibilities are endless—choose what brings you the most joy and fulfillment (within reason).
The Bottom Line
Getting out of debt and living debt free is no small feat. Now, you can start working on other financial goals that will enable you to build a healthy financial future. But don’t forget to celebrate first!