The First Thing to Do After Paying Off a Large Debt

Posted on by

When I was 20, I paid off my student debt and it was amazing. For the first time in my life, I had discretionary income : money left over after I needed it. Other than buying a bunch of crap I didn’t need , I had no idea what to do with that money. If this sounds familiar, whether you’ve paid off your car loan, student loan, or credit card, here are a few steps to take.

Make a plan to stay out of debt

After you’ve paid off a big debt (or better yet, your entire debt), the last thing you want to do is mess up your progress by going back into debt. However, many people do it. To avoid this, think about where your debt came from in the first place and how long it took you to pay off. Some types of debt are easier to recover than others. For example, you are probably less likely to accumulate debt on a student loan again than on a credit card.

Many people assume that people go into debt because they lack self-control, but this is not always the case. Sometimes people go into debt in a hopeless situation. Maybe unforeseen circumstances are your trigger. About every month something pops up: your car needs adjustments, your dog needs surgery, or YOU need surgery. If in emergencies you continue to receive credit card money to survive, focus on creating an emergency fund. You also don’t need to save on traditional 3-6 months living expenses.

You can start small and save just enough to stay out of debt. Yes, there are still costs in your life for contingencies, but if you are prepared for these costs, you are in a better financial position and you do not need to make desperate and vulnerable decisions .

And sometimes ordinary spending sneaks up on you. Holidays are a good example of this. A lot of people go into debt during the holidays because they just aren’t prepared to spend. But this does not mean that you cannot foresee it. If the holidays are a debt trigger for you, get rid of it in the bud this year by saving now. Use an online budgeting tool to help you calculate your expenses, then allocate a percentage for your holiday expenses every month.

Of course, the problem for some of the costs – this is actually a problem. Ask yourself a few questions about money that may sound silly but may actually reveal some interesting attitudes and habits:

  • How did your parents manage money?
  • How did you feel about growing up money?
  • How do you define “needs” versus “wants”?

I know these are a few sensitive questions, but they can tell you a lot about how you got into debt. For example, my family fell apart when I was growing up, so I loved the idea of ​​being able to spend my money on whatever I want, whenever I want. My student debt was not a good example of this, but the money I saved up on credit cards was. I realized that if left unattended, my impulsive spending could put me back in debt. However, there are also practical triggers to consider. The Daily Worth offers several examples :

For example, do you succumb to pressure from friends who spend them on expensive meals, trips or shopping trips, or do you go to the mall when you are bored or depressed? Identifying these patterns and ways of thinking and then taking action to change your behavior can help avoid debt, Perez said.

If your trigger is impulsive spending, you can come up with a few rules to avoid temptation and punish yourself for squandering, for example:

But in the end it all comes down to focusing not only on the trigger or response, but also on the gap in between. To truly avoid going back in debt, you can’t just focus on what is causing your spending and how you react when you’ve already spent. You should primarily focus on resisting the temptation to spend. To do this, consider impulsive spending as the enemy of your financial goals (don’t you have goals? Don’t worry, we’ll come back to that).

Come up with a new goal

If you have paid off a large debt but still have others, obviously you should tackle them first. Choose a method such as Snowball (focus on the smallest debt), Stack (focus on the debt with the highest interest rates), or Blizzard (a combination). Chances are, if you’ve paid off a large debt, you’re already on the right track to paying off others . But what happens next?

I bought so much junk after I paid off all my debt. Hundreds of dollars worth of clothes that I rarely wore. I really didn’t need phone upgrades. A vintage ALF lunch box I found at a garage sale (which was cool, but not the best use for my money, as it has been collecting dust in the back of my closet for years).

There are arguments in favor of “this is your money, spend it on what you want,” but that’s the point: I didn’t. I had no idea what I wanted. I knew it was good to save money, so I saved up the required amount in the 401 (k) bank , but other than that, I knew nothing. So I started thinking about the possibilities and made a list of things that I would like to do regardless of money: move and travel abroad. I now had a goal for my discretionary income: save for the big trip and save for the big move. All of a sudden, my finances had purpose again, and I stopped throwing them in the trash to use them for purposes that really mattered to me.

However, you don’t need any big, clichéd travel destination for your money. Perhaps your goal is to start saving money for your child’s education or to make your family more comfortable. Be that as it may, a clear goal is the first thing you should do to get your money in order. Once you know your goal, it’s time to adjust your budget accordingly.

You should also have several practical goals. If, for example, your emergency fund is simply helping you, you want to fund it now . And then there is savings for retirement. How much you save depends on a number of different factors, from how much time you have left before retirement to what lifestyle you want in retirement. Fortunately, there are many online retirement calculators available to help you calculate your monthly amount. Enter your numbers and make sure you save enough.

Beyond that, let’s say you don’t really have any medium-term goals like travel or savings for your home: you just want to save more for the future. This savings pyramid is the ultimate guide to prioritizing your long-term savings accounts. After saving up for an emergency , getting a 401 (k) match, and paying off the debt, your next steps are:

Of course, your situation may be different. You can have a terrific, inexpensive 401 (k) and are better off saving more on it than opening an IRA right now – that’s okay. These are just general suggestions for optimizing your long-term savings.

Keep track of your finances in the future

If you want to avoid debt and achieve new financial goals, you need to keep an eye on your money going forward. This means keeping track of your expenses and staying on budget.

This is obvious, and is probably what got you out of debt in the first place. Beyond the obvious, though, it’s very important to keep track of your credit after you get out of debt. After all, you have proven your creditworthiness by paying back what you owe, which is why you want to make sure your credit rating and report reflects that. There are many ways you can monitor your credit for free, but Annualcreditreport.com is the best site to get a free copy of your report that you are entitled to annually. So what are you looking for? Few things.

First, you want to make sure the invoices you paid show that you paid them. Your balance should be zero, and your status should look something like this: “current” or “paid by agreement”.

Second, it may take several months, but your credit rating should go up. Your payment history makes up a large part of your rating, and if it is positive, your rating should eventually improve. Credit use also accounts for a large percentage of your rating. This is the amount of credit you have compared to how much you actually use. After paying off the debt, if the account is still open (like a credit card), you still have credit available, you just don’t use it. This means that the use of the loan is lower and your score should be higher.

Paying off debt is a big deal! You are now more in charge of your finances, and if you want to continue to be in charge, you must keep your money goals in mind. Spend fifteen minutes daily on personal finances . Explore the next step, whether investing or saving for a home. The more you keep money management in mind, the better you can ensure that you stick to your plan and don’t end up in debt.

More…

0
Personal Finance

Leave a Reply