If you’ve paid off debt, congratulations! Paying down debt is the top goal for many Minters when they start monitoring their finances. Getting out of the red takes focus and discipline, and luckily, there are many free resources to help you. But what happens after you’ve paid off debt and freed yourself from that burden?
Check out these steps to ensure you stay on the right financial path even after your circumstances have changed for the better.
Understand Your Debt Triggers
Staying debt free can be as difficult as getting into debt. So before you make any changes to your financial behavior, it’s important to assess and understand how you fell into debt in the first place. The answer might be as easy as student loans; however, for most people the answer is not so obvious. First, take a moment to think about how you approach your finances and how people and experiences influence your attitude towards money. Then, identify the behaviors and choices that led to your prior financial situation. You’ll likely identify some patterns. A deeper understanding of how you think about money will help keep you out of debt.
Re-establish Your Budget
A monthly budget is now more important than ever. Having a plan for where to spend and save your new discretionary cash flow will help you from falling back into old habits – especially when newly available funds may tempt you into spending on unnecessary extravagances. You used to pay creditors first; now you can pay yourself first. Consider saving 20 percet of your disposable income. Even though you are no longer in debt, make saving non-negotiable.
Set New Goals
Once you establish your new commitment to saving, you must determine what you are you saving for! Here are the first two goals you should considering setting:
Emergency Fund: Most people don’t have an emergency fund, which can protect you in case of sudden unemployment, a medical emergency or other unexpected expenses. This fund should be the equivalent of 3 to 6 months of your net income, which gives you enough to live on without taking out loans. However, don’t discount the cost of risk. Make sure you can pay off your credit card bills so that you don’t pay unnecessary interest that could otherwise be going to your emergency fund.
Retirement Fund: When it comes to retirement, the sooner you start saving, the better. A good place to start is with your company’s 401(k) plan which is free money! In most cases, you can have deductions from your paycheck automated and put into your 401(k) account. This simplifies the process and many companies will even match your contributions to your 401(k) account.
If you are self-employed or a full-time parent, consider opening an IRA account. This can be done at a discount brokerage firm such as Charles Schwab. Discuss whether a Roth or Traditional IRA is best for you, then set up a monthly automatic draft payment system. Similar to the 401(k), automate your savings by specifying an amount to be automatically withdrawn from your checking account each month. Be aware that the government limits how much money you can put tax-free into retirement savings annually.
Once you hit the maximum, it is time to move on to your next savings goal: perhaps buying a home or a well deserved vacation.
What’s your life after debt story? Share with us at @mint on Twitter!