3 Steps to Take After Becoming Debt Free
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Becoming debt free can be a grueling and challenging process. According to ValuePengin, 38.1% of all households carry some sort of credit card debt as of May 2016. Additionally, they reported the average debt for households who carry a balance on their credit cards is $16,048.
Add those numbers to the fact that so many currently have student loan debt, and there’s a pretty good possibility that many of you reading this either have debt right now or had it at some point in your lives.
It’s not all bad news, though. There has been so much attention on debt in America that many people are motivated to pay it off. In fact, there is story after story of people who paid off exceptionally large loans in short amounts of time, making all sorts of sacrifices and working extra to attain that luxurious bit of freedom we all know as financial independence.
Life After becoming Debt free
Paying off debt isn’t easy, though. It takes extreme focus and for many people, intense sacrifice sometimes for years at a time to accomplish this goal. Many people get used to living a certain way to attain their debt free goals, leaving them uncertain and confused on how to move forward with their lives after becoming debt free.
Sometimes, it’s hard for people to spend their money or indulge in any way after paying off large amounts of debt. However, it’s important to have some balance in life and to take advantage of the wealth building potential that a debt free life offers you. After all, once all your debt is paid off, you have a phenomenal opportunity to build significant wealth.
Here are some steps to help get you there.
Step 1: Build a Large Emergency Fund
When paying off debt, it’s common for people to throw all extra money they have to reducing their balance. So, the first step to getting on even more solid financial footing is building a large emergency fund.
Most financial experts recommend a six month emergency fund to help insulate you against job loss of a major health issue. So, calculate how much money you need to live comfortably for a month and multiply it by six.
Work hard to add money to that account quickly. I recommend putting the money in a separate account that offers quick liquidity. This is not money you are trying to invest. It’s money specifically for hard times; however, you can find a high yield savings account like the online ones available through Synchrony Bank so you at least earn a little bit of money while you save.
Hopefully you’ll never need to use this emergency fund, but having this plus being debt free really opens the doors to amazing possibilities.
Step 2: Invest a Large Portion of Your Income
Now that you’re debt free and have a large emergency fund, you can increase the portion of your income that you invest. If you don’t know where to start or don’t have much to begin investing with, consider opening an account through Betterment, who actually manages your investments for you. So, if you’ve only been investing 5-10% of your income, now you can raise that to 15% or even 20%. After all, you’re used to living on less, so use that to your advantage now.
With the amazing power of compound interest and no debt to hold you back, you can start to really increase the amount of money you’re saving for retirement relatively quickly and hey, maybe you can even retire earlier than expected.
Step 3: Spend and Have a Blast
Now, it’s not all about saving. I don’t use this word often, but after all your hard work paying off debt and saving so much, you deserve to spend a little!
This is one of the hardest steps for anyone who has paid of large amounts of debt because it just doesn’t come naturally. However, if you are actively saving 15% or more of your income and are investing in your retirement accounts, you have an emergency fund and you have money left over every month, you should be free to go on vacation or buy whatever you want as long as it’s not more than what you have.
Ultimately, paying off debt is just the first step to your journey of financial independence, but it’s the most important one because it sets the path for the rest of your journey to financial success. Just remember that life isn’t all about saving, saving and saving some more. Leave yourself a little bit of room to enjoy life’s little extras too, especially because you spent so much time setting yourself up for success.
What challenges did you face after paying off your debt? Was it hard to spend money after paying off debt? Did you start doing some of these things while paying off debt so you could hit the ground running?
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