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.
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{ 17 comments… read them below or add one }
The most important thing to do is to make sure you never get into debt again if at all possible.
I cannot understand why so many people are obsessed with having a gazillion credit cards and being up to their eyeballs in debt.
Don’t buy stuff if you haven’t got the money to pay for it. Focus your efforts on how you can increase your income instead.
All of the above – particularly the emergency fund. It allows greater peace of mind.
I know this sounds cheesy, but I am going to call Dave Ramsey when I am debt free. He offers, simple yet life changing advise if you follow it.
The first thing my wife and I did was scream on Debt Free on the Dave Ramsey show which is heard by millions. This was our way of celebrating so I put that on top of my list. Now my wife and I are building a huge emergency fund. Great post. Debt Free Hispanic
11/18/11, just made the last payment on our condo, my wife and I paid off her home (from a previous marriage) and my condo (about $200,000) in eight years. We will be calling Dave Ramsey next week. Thanks for posting.
Awesome to hear about your accomplishment after 2 years! Have fun with the call
I celebrate a bit (like a cup of my favorite coffee from Starbucks every time I pay off completely one of my credit cards. As of today I got three credit cards left to pay-off, but it is extremely hard for me to estimate the year/month when I’ll be debt free…
This is contrary to common advice, but with car loans at 0 or very low percents, consider borrowing rather then using cash. Why tie up $25- 30,000? Put it to work in the market and just make monthly payments at low or no interest rates. You can even use the principal to draw down and pay the monthly payments. Or, you can even keep this money in safe short term investments as an emergency fund, and slowly spend it down to make your car payments. No need to tie it up in a depreciating asset anyway.
Exactly. I keep reiterating that going debt free is not some panacea. There is bad debt and then there is smart debt. Businesses use it successfully because they believe it’s the right financial tool to use. I’m sure people pay off low interest student loans just to go debt free and then they have to borrow money for something else at a much higher interest rate. Mortgate interest is (still) deductible.
I agree with you, but I think the context of this article revolves around credit card debt. I could be wrong. But adding to both of your statements, having some kind of debt is critical in maintaining a good credit score as well.
It’s a difficult balancing act between paying down debt and saving for the future but for me paying down debt still comes first.
Very tricky question. I am re-evaluating the balancing act of debt repayment and savings as things change in my life. The answer will change depending on the kind of available income, I guess. I have been without an income and living off both savings and debt for almost a year now, and I can see the value of savings while adding to my debt situation. And till I find a revenue stream, this debt will only accumulate while wiping my savings out. I feel that both debt repayments and savings need to go hand in hand, but getting out of debt is a bigger priority.
I like the list you have made. I particularly like automated investments and IRA’s as they are the most important for retirements goals. Emergency Fund is certainly paramount for the inevitable.
Great read
I would personally add charity or tithing to the list as well.
I will be debt free in January 2012. I plan to create an emergency fund and a fund for new car so I do not have to rely on my IRA as much. I am retired. I retired at age 50 and soon will be 61. My house is my last debt..and then I will feel more secure. I also like the freedom it gives me.
Considering that most people who become debt free will become “repeat debtors”, I think having a sound financial budget is important as well. But I guess that kinda goes hand in hand with having an emergency fund/retirement fund. If you’re able to set aside money for that, I guess you’re doing something right..right?
It’s surprising how nobody wants to answer Steve’s and my comments on how going debt free is not always a good thing. The key is not going into more debt than you can handle. It’s like you’ve all been drinking debt-free Kool-Aid!
I’ll chime in. My husband and I just paid off $70K in credit card & business debt. It took us 24 months. Because we own our own business, we did just borrow $32k for a new company vehicle at 2.99% interest. We need some type of write-off and considering the miles we put on the previous car (170K on a 2005 model, which we kept for schlepping around in), it just made sense to finance the car and keep the cash on hand in case of darker times. We are now debt free with the exception of the 2 mortgages, with one of those being a rental unit. I’m in no rush to pay both of these houses off. We’re adding $200 a month to each mortgage, and investing the money we were using to pay off debt into additional 401K’s. I’ll agree that some debt is good debt – like mortgages and an automobile for business use, but I will NOT go into credit card debt again. We have to a have a credit card for traveling expenses, but those expenses get paid off every month. We’re only 51, so we have some time to build some additional wealth. Also, even though we paid off our debt in two years and followed the Dave Ramsey TMO plan, we did not call Dave to announce it to millions of folks. We’re just fine keeping it to ourselves (well mostly – not counting this comment!)…Great advice in this article.