Paying off debt is exciting! You’ve finally conquered your credit card, car loan, student loan or even mortgage payments that you’ve been paying for years.
No more sending money you’ll never see again to the banks. But what do you do with the money you used to send in every month?
You Shouldn’t Spend Your Old Debt Payments
You no longer have to worry how to pay off your debt. You’ve even freed up some cash flow in your monthly budget.
You’ve adjusted to your debt payments over time. You make them every month, so you don’t even consider them as money you can spend in your monthly budget anymore.
However, now that the cash flow from these old debt payments no longer has to go toward paying down debt, people automatically assume they can spend it.
That can be a mistake if you haven’t followed the guidelines below.
This new found money is a great opportunity to continue bettering your financial position. You need to make sure you take full advantage of this opportunity.
So What Should You Do With Your Extra Cash Flow?
If you’ve just paid off a debt, there is still a good chance you owe money on other credit cards, car loans, student loans or mortgages.
Personally, the first thing I’d do with my extra cash flow is pay off other high interest rate debt. Take the exact amount you used to pay toward your old, paid off debt and apply it to your other debt obligations.
Some people will advocate that you use the debt snowball or debt avalanche method when applying extra money toward your debts. You can learn everything you need to know about the debt snowball method here and the debt avalanche method here.
What should you consider high interest rate? Definitely anything over 8% and you can even go as low as 6% in many cases depending on the situation.
Don’t Have High Interest Rate Debt?
Congrats! Not having high interest rate debt is a pretty awesome place to be in. However, your finances probably aren’t bulletproof yet. Do you have an adequate emergency fund?
I think most people should have anywhere from 3 to 12 months worth of expenses (not income) in an emergency fund depending on their financial situation. If you haven’t met your personal emergency fund goal, your old debt payment should be going straight to your emergency fund.
I personally keep my emergency fund at an online bank where it is a bit harder to access my money, like Capital One 360 (read more about it and learn how to earn a $50 bonus in our review here).
The best part is you can set up automatic transfers to your emergency fund account on a recurring basis, just like your payments with your now paid off debt! This way you can be sure that you won’t be tempted to spend the money.
Already Have An Emergency Fund?
Having an emergency fund fully funded is a rarity these days, so good for you. However, I’m guessing you still aren’t financially bulletproof yet. How are you doing with your short term goals and investments such as retirement accounts?
Shore Up Your Short Term Goals
The next step I’d take is making sure that I’m on track for any short term goals that will require spending money in the near future.
You don’t want to go back into debt if you’re planning on buying a replacement car in 2 years. Instead, start applying your old debt payment to a special savings account for your next replacement car or other short term goal.
Get On Track With Your Retirement Plans
I’d also check to make sure my retirement is on track. If you aren’t on track, start contributing more money to a regular or Roth IRA. Alternatively, you can simply increase your contribution percentage to your 401(k) or other workplace sponsored retirement plan to match what your old debt payment was.
Even if you’re doing well with your retirement savings and investments, you may want to consider kicking some of your old debt payment money into a higher contribution rate. You may be able to retire earlier than you originally thought.
Invest In A Taxable Account
If you don’t want to invest any more money in retirement accounts, you can always invest in taxable accounts. Most people are scared of investing, but most of the wealthy didn’t get rich until they started investing.
Whatever you do, don’t let inflation eat away at your money as it sits in cash in a low interest checking or savings account.
Financially Bulletproof? Spend It
If you’re doing awesome and on track with all of your other goals, then you might be able to spend that recently retired monthly debt payment. Just be careful because you could be inflating your lifestyle. You’ll have to reexamine all of the above with that higher lifestyle cost if that’s the case.
There’s nothing wrong with spending money if you’re in good financially shape and you do so consciously. Just don’t let that old debt payment turn into mindless spending.
So, what will you do with your old debt payment? Where are you on the list of steps above? Will you be paying off other debt or investing?
Photo by: AMagill Text added by: Lance Cothern