What to Do Immediately After We Become Debt Free

by David@MoneyNing.com · 47 comments

blue skyWe 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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{ read the comments below or add one }

  • Mike Daniel says:

    Wife and I paid off the only remaining debt we had last year—the home mortgage. $400K over last 15 years. Celebrated by taking a month long trip to San Sebastian in northern Spain. Had a wonderful time. This year it will be a month long trip to northern Italy in the Venice area. The mortgage payments were $3000 a month. The Spain trip cost $5000. We found an Airbnb a block from the beach. Used trains and walked everywhere. Hiked/walked 10 miles a day to see the sights. I really like this kind of a trip. A “slow” vacation I guess you could call it.

  • Brian says:

    IMHO, once we are debt free we should begin working on building passive income. This can be done very easily with Real Estate, REITs, MLP’s, BDC’s and good ol dividend paying stocks (ETF’s too!)….being debt free isn’t being free. You need to be financially independent to truly be free!

  • Millionaire Next Door says:

    It really isn’t that hard. Live below your means, always take advantage of any law allowing contributions to a tax deferred account – to the limit of what the law allows (or to what you can possibly afford), be happy with what you have, make everything you buy do double duty, and have a budget.

    You must put some fraction of what you save into equities. If not, you will have a guaranteed stack of cash at the end of the game alright, but it will have had a large fraction inflated away. More so now and going forward with our socialist President’s programs. Equities have a history of beating inflation.

    I agree with many of the comments here on Dave Ramsey. Mixed feelings… His message is golden. His plan works. But yes, he is a capitalist, and entrepreneur, and an entertainer. He does make money selling advertising time to companies.

    I started late in my 30s saving money and living WAY below my means. Not uncomfortably mind you. Just with far less junk than I could have bought. Now I am a millionaire and am able to retire early. Young people, let me tell you… you will get old someday and not want to work. Tighten the belt now, because if you do not you may be cooking that same belt for soup when you get old…

  • Steve says:

    It’s better to have a low interest tax deductible mortgage with money in investments, than to pay off the mortgage and have nothing. There are posters here saying now that the debt is paid off, they will start saving and creating an emergency fund. What happens if they have an emergency now, and all their money is sitting in their low appreciating home? If you can get a low interest mortgage, you can get a tax deduction on the interest, which reduces the actual rate you are paying, and then you can have the principal available if you need it. All the while, if you invest it properly, it can grow at a rate greater than what the mortgage costs. And if an emergency arises, you now have access to the money.

  • SirDuke says:

    It amazes me how people say “Im debt free EXCEPT I HAVE A MORTGAGE” then you are not debt free dummy! Debt free means you OWE NO ONE MONEY! Its simple concept.

  • John says:

    I’ve always been debt free – I rented until I could afford a small house, then traded up a couple of times when cash was available (after maxing out 401K and IRA contributions), and always bought cars for cash. The downside – it took an awful long time to establish a good credit score, since I didn’t have a lot of visible financial activity, but now I’m considered an excellent risk by organizations I’ll never need to borrow from.

  • Steve says:

    I am somewhat surprised at the number of Dave Ramsey disciples commenting here. His advice is so simple and remedial, and some is not good or wise. Same with Suzie Orman. With Ramsey it sounds almost religious. Truth is, both of them get filthy rich from the advertisers who sell to their listeners. Orman pitches cars and I heard even credit cards. Not sure if that’s true. They both sound like preachers getting rich off of uneducated consumers. They preach common sense.
    Simple solution is no credit card debt, only buy what you can afford, and save some of your earnings. Of course, if you do not work or make reasonable money, you will have problems. Wealth is relative. Control spending and live within your means and you can accumulate wealth over time.

  • Scott says:

    I have been debt free for 20 years. I use credit cards for convienence ONLY. May not be the soundest financial advice but I haven’t been in the stock or bond market either for a bit more than that period of time. I sleep very well. I have only been a lender.

  • LLB says:

    Ha. Ha. Ha.

    I will never ever, never ever, never ever, never ever, become debt free, even if I live to be 200.

  • Brian says:

    The smart thing to do immediately after you become debt free…. is to take out a loan!

    Low interest debt is important for your financial health. If you have low interest student loans, do not pay them off. If you have a low-interest mortgage or car payment, do not pay it off. Save enough money to pay off the loan, but invest the money in safe investments that return more than your interest payment.

  • alagna says:

    The American financial system is totally corrupted.
    The system protects and promotes the 1%’s assets and destroys everyone else’s.
    Two definitions worth remembering:
    Asset: something that creates income.
    Investing: the act of purchasing an asset.
    Do you spend to create income?

    • Bowler800 says:

      You’re kidding right? You know the rules, if not you can learn them.
      The system destroys everyone’s assets but the 1%? C’mon.
      You can acquire the same assets with a good plan and discipline. It took me 11 yrs to get completely debt free, including mortgage and another 4 to reach the $1 million net worth threshold for private equity and private placements. I just checked out books at the library and listened to podcasts. Our household income never exceeded $100,000 in any year. We’ve been married since 1995 with 2 girls (now 15 and 13).
      ANYONE can learn to do this if they have the will.

      • Mike says:

        Amazing, Bowler800! We’re using the following model: 10% of gross income for investing/retirement, 20% of gross income for debt (only mortgage left), and the remainder for taxes and living expenses. Curious, did you have a set plan based on percentages, or a different model?

  • alagna says:

    The 5 advice points made in the article are moronic, with the exception of saving your money, termed “emergency fund”.
    The 10 points made by a reader are excellent.
    My advice: Save up 5 million dollars over a lifetime and spend the rest freely, making wonderful memories with friends and family…

  • Early Financial Freedom says:

    I may sound a bit different. My wife & I do not have any debt, have NEVER had any CC balance, have paid our 30-year mortgage within 5+ years in April 2012. How did we do it all? Below are some Financial Rules that Our Family Practices:

    -First and foremost, have your family in order. A stable family where husband and wife have similar or same set of goals is the bedrock of financial and emotional stability.
    -It’s always The Family Finances, never his or her finances.
    -Be happy with what you have, not with what you could or should have!
    -Do not compete with Joneses! One of the best ways of doing this is to live in a neighborhood that does not force you to compete with others in the first place. For example, drive a modest car and live in a place where everyone drives modest cars. Don’t get me wrong competition can be a good thing, but in the case of “Keeping up with the Joneses” it can lead many to an unhappy bankrupt life.
    -Be mindful of your financials. Always plan ahead. Never ever carry any credit card debt. That does not mean don’t use credit cards. Do use cash reward credit cards all the time so you can track your expenses AND earn money, but don’t go above what you know you can’t afford.
    -Try to make as much money as you can. One of the best ways of doing this is to work for you; own a business. Keep in mind that owning a business could be as simple as having a website or selling something that is in demand and you know how to make or provide!
    -Save as much as you can. Choice of saving may vary, but do save!
    -Always live below your means, regardless of your income.
    -Know, plan, and track your cash flow for short-term and mid-to-long term
    -OVER estimate your future/potential expenses and UNDER estimate your future/potential income.
    -Live in a good public school district so you can avoid the expense of a private school and take advantage of the free amenities, such as library, community center, tennis court, etc.

  • UH2L says:

    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! 🙂

    • Debtfree2011 says:

      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.

    • G Calvo says:

      The key is spend less than you make! The only thing worth going into debt for is a home. The payment shouldn’t be more than 1/4 of your take home pay after deductions. I use a credit card and pay it off as soon as the bill come and I never put more on that card than I have to pay it off at the end of the month. The only reason for using a credit card is I don’t like carrying around a lot of cash. I was debt free when Dave Ramsey was going bankrupt.

  • Kevin @ Debteye says:

    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? 🙂

  • Donna says:

    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.

  • MoneyPerk says:

    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.

  • subhorup dasgupta says:

    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.

  • Jonathan says:

    It’s a difficult balancing act between paying down debt and saving for the future but for me paying down debt still comes first.

  • Steve says:

    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.

    • UH2L says:

      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.

      • Kevin @ Debteye says:

        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.

        • nodebt says:

          My federal student loans are at 7.9% and 6.8%. Mortgage rates are at less than half that. I graduated two years ago with over 100k in student loans.

          I’m putting almost half my take home pay ($3,000) a month towards my student debt and only putting into retirement the amount my company matches (less than 200 dollars per month). I’ll worry about saving for a house after I’m debt free.

          Disregarding student loans is detrimental. That 7% on my 100k clicked up almost 600 dollars a month like clockwork. Sure, you can put it in the market or on a house and argue that you are making out better in the long run, but you cannot tell me that doesnt have inherent risks. Is there a guaranteed 7% return on your money anywhere? Nope, not unless you own my student loan anyway.

    • Rejean says:

      Did you consider that car dealers who finance at 0% interest have already added to the car price the interest that would be paid for the period they finance? Due diligence is called for.

    • Jim says:

      Why on earth would you buy a $25,000 car? That’s just stupid.

      • Rob says:

        Jim, maybe because that person enjoys driving and loves cars. I ask why on earth someone would have more than one child. To me, that’s just stupid. Luckily, you and I don’t make the rules, right?

        If someone can responsibly afford something that makes them happy, that is one of the reasons we work. Being smart with money doesn’t mean being miserly and not having fun.

        • Dude says:


          I’m debt free and when my truck finally gave up the ghost last year I decided to purchase a brand spanking new 2012 VW Golf TDI with the 5yr 100k mile warranty– about $30K financed at 1.9%. I had a banner year at work last year and have only $t thaleft on the note. I could have kept that money, but I chose instead to knock out the car note instead…aggressively. Savings accounts are crap right now and I plan to run this diesel car right into the ground and love driving it every minute.

          The best financial advice I know is this:

          Spend well on the things you love, and be absolutely merciless on the rest.

          I cut my own hair, make my own soap, cook my own meals, haven’t had cable/internet since I moved out of my parent’s house over 15yrs ago. I’ve also traveled all over the world, eaten at wonderful restaurants, and stayed at beautiful hotels, but everything is cash. I’ve got $5K in the bank and another $1000 in cash at the house.

          Take care of business folks. Good luck. 🙂

          • Oldtimer says:

            Howdy There Dude,

            I think it is great that you stay out of debt, very smart indeed. My only comment to you is that your post puts your age at about 30, give or take. I hope you are not saying that you only have $6,000 to your name. At this rate, you will be 60 and have $12,000?

            My advice, ease up on the world travel, start saving, and hope that Social Security will still exist in your old age.

            Good luck to you, and kudos on being debt free!

        • kreg kreeg says:

          What Rob said.

      • Steve says:

        I bought a $50,000 car because I can. Nothing stupid about it. Wy do some folks buy homes or $1,000,000? Because they can . Not everyone is poor. There is good debt and bad debt. Anything with high interest rate should be paid off.

      • Mark says:

        I just bought a $24K car. Brand new Sonata..WIll have it for at least 10, probably 15 years. My last car was a 2000 Lexus with 180K..It was starting to cost me serious money. Before that I had a 1996 Camry that lasted for 13 years. Before that a 1988 Accord that got me thru 15 years..Try finding a high quality, solid car for less than $25K..P.S>, I’m beyond Corollas

    • jeffhre says:

      Be careful.

      0% car loans are often not what they seem to be. The costs are borne by the auto makers marketing budget, so there will be trade-offs that affect you. Often you are entitled to thousands of dollars in discounts on the car “OR” 0% interest. Adding thousands of dollars to the price of a car is “NOT” a $0.00 cost of financing deal.

  • Glenn Mako says:

    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…

  • Debt Free Hispanic says:

    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

    • Debt Free Hispanic 2 says:

      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.

  • Dusty says:

    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.

    • Steve says:

      Just don’t take his investing advice. He’s not very good in that area

    • Steve says:

      Why call him after you are debt free? Shouldn’t you call him before because he gives advice on how to get debt free? But don’t follow his investment advice or pay too much attention to doing business with the partners he recommends. He doesn’t know them. They pay for his endorsement, which is kind of sleazy to me. He’s in it for the money, so buyer beware, with his advice as well.

  • Until debt do us part says:

    All of the above – particularly the emergency fund. It allows greater peace of mind.

  • Let's Discuss Money says:

    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.

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