We should do nothing, absolutely nothing. Don’t get me wrong, as the day we become debt free is an important point in our lives. Having no debt payments will also drastically increase our cash flow, but we really shouldn’t wait until the day we are debt free to act.
Becoming debt free doesn’t happen overnight, and we should know months ahead of time (at least!) before our last payment is due. Therefore, we should plan for the money that will be freed up when we don’t have to put that towards paying off debt.
Here are some places to consider putting your money at work:
- 401k/IRAs – Chances are good that you don’t max out your 401k or IRAs. You should consider doing this right away to maximum the tax-advantages with the extra cash. If you don’t save it, you will likely lose it to careless spending.
- Emergency Fund – Some will argue that most people who are debt free already have an emergency fund in place but most people actually don’t. I’m not talking about the money that we have in a safe stock. I’m talking about money that we can take out at anytime without thinking about the value of our account in the event of an emergency.
- Automated Investments – Hopefully you set up automatic payments for your debt and not needing to remember all the payments helped you simplify your finances over the years. Now that the burden if lifted from us, this should be the time we put the extra amount of money to grow for us. Low cost index funds are always recommended and having it automatically taken out of your income to be invested is even better.
- Upgrade Our Lifestyle – Maybe not the advice most articles will put down but this is the opportunity to really think about our goals and see if we should upgrade our lifestyle a little bit. With proper planning we should be able to afford a higher quality of life but remember that we also need to still keep our retirement in mind. Reward yourself, but don’t lose sight of the big picture.
- Celebrate – We really need to plan our celebration so that we don’t blow too much money. Just like a birthday party, the day we become debt free should be marked down and celebrated like any other day. Perhaps it’s a nice vacation with your family, or maybe it’s a prized possession on your dream list. As long as you can afford it, then why not? Remember to also make a toast one day and congratulate yourself on a job well done.
Just like paying off our debt (here are 25 tips on reducing your debt), planning on what to do with the extra cash takes discipline. Otherwise, you might waste years of effort by spending excessively. Be committed to become financially free, and you will get there rather comfortably.