What to Do After Paying Off Debt

January 25, 2013

After Paying Off DebtIf you’ve ever been deep in debt, it might be said that you’re a potential credit junky. That’s not a medical classification of course, but credit has all the capability of being a certified addiction. The problem is that it’s easy to get into, and just as hard to get out of.

If you’ve recently paid off substantial debt, the battle is only half won. The other half will be remaining debt-free. You can think of getting out of debt as winning the battle. But staying out of debt is about winning the war.

What should you do after paying off debt to make sure that you never get in that position again?

1. Stay on the budget you were on when paying off debt.

In order to get out of debt, you probably had to be on some sort of budget that freed up your income so that you could direct it into debt payoff. The best course of action is to stay on that budget. You’ve already developed financial discipline as a result of having the budget, and if you’ve been using it for a while it’s probably become a habit. And habits are always easier to maintain than they are to establish.

The other thing a budget does is that it recognizes the necessity of living beneath your means as a way of avoiding debt. The only way you will achieve any financial goal will be to adopt this strategy. If you already have it up and running, do what you need to keep going.

2. Redirect debt payments into savings.

Next to living beneath your means, the best way to avoid going back into debt is by living out of savings, rather than out of credit. To do this, you’ll need to create and continue to build a healthy savings account balance.

Now that your debts are gone, you should direct the money that you were using to make debt payments into savings. Since you have already learned to live without that money, it should be pretty easy to move it into savings.

But like just about any other discipline in life, saving money is about establishing good habits. If you’ve never done that up to this point, take advantage of the shift in your finances to develop the habit now. Once you have a healthy savings balance, you’ll probably find you don’t need credit anymore. And once you’ve done that, you will be closer to beating your debt problem for good.

3. Pay cash for whatever you buy.

Now that you’re out of debt, plan on paying cash for everything you buy. That doesn’t mean cash literally as in currency (although it doesn’t exclude it either), but it does mean that you should do most of your buying and bill paying with either checks or a debit card. The more that you can pay using cash or cash equivalents, the less reliant you’ll need to be on credit.

As for the convenience of credit cards, in the vast majority of purchase situations, a debit card will be just as convenient. Credit card use should be limited to situations in which either buyer protection is necessary, or there’s a higher risk of fraud in the transaction.

4. If you have to borrow to buy then you can’t afford it.

In addition to being convenient, credit allows us to buy what we cannot otherwise afford. But make a policy going forward that if you have to borrow money to buy anything, then you can’t afford it.

This single change in philosophy can keep you out of debt forever. Very little of what most of us buy is absolutely necessary. Most purchases are optional, and the notion that they are in any way necessities exists primarily in our own minds.

5. Remove anything from your life that may have encouraged debt.

This isn’t to say that the reason anyone gets into the debt is that “the devil made me do it,” but there are often external factors that can help the process along. You will have to identify as many of these factors as you can, then come up with a plan to either minimize them or eliminate them from your life completely.

Here are some potential sources to help you get started:

  • Cut back on “down time” – Or put another way, get busy! Downtime is necessary, but too much of it leads to boredom, and boredom is often remedied by spending money. Engaging in constructive activities is one of the best ways to avoid spending more money.
  • Cut back on TV time – We’re often only minimally aware that TV is mostly one giant commercial. Most of the time you spend in front of the TV is watching programs that are trying to get you to buy something that you wouldn’t on your own. The less time you spend in front of the TV the more control you will have over your finances.
  • Get rid of major assets that cause you to spend more money – This is a loaded point because the possibilities are almost unlimited. It could be that your house is so expensive that it’s keeping you on the financial edge. You could also have a car payment that’s out of proportion to your budget. Consider selling any possession you have that’s draining your finances.
  • Make some new friends – If you have friends who are free spenders, you might want to consider finding some new friends. Friends with expensive hobbies and consumption patterns can hurt your finances for a lifetime.
  • Expensive hobbies – Expensive hobbies can cause you to spend more money than you should, and this is another potentially very long list. Take a look at your past times and see which ones are costing the most money. For example, if an expensive skiing hobby is taking up too of your budget, you may want to consider replacing it with swimming at your local community swimming pool instead.

This list will be different for just about everybody, but it’s just to help you get started. Take a look at your own spending history, then determine where it is you are spending a disproportionate amount of money. Be purposeful about making changes where necessary.

If you’ve recently gotten out of debt, what kind of changes have you made in order to make sure that you don’t get back in? Leave a comment!


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Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry. He lives in Atlanta with his wife and two teenage kids and can be followed on Twitter at @OutOfYourRut.

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10 Responses to What to Do After Paying Off Debt

  • Sam Scott

    Great Post! Actually what I did when I got into debt a few months ago, I took a car title loan, which really helped me to firstly gain my mental stability as I was really going nuts from financial worry! and secondly, it helped me balance my account debts. I’ve never experienced this situation, and so ever since I took out the loan 6 months ago which straightened my account, I am calculating every single expense I have! I will definitely take some of the tips mentioned above! Thanks for this.

  • Suzanne

    Great advice. I went through the same thing when I paid off my debt and intuitively decided to continue living below my means. It’s enabled me to pay off my car (a 2002 Saturn VUE – so modest and functional), my house, have a healthy savings account, investmentes and recently, to take a year sabbatical to reassess what next, without having to worry about finances.

    The only thing I would add is that to pay everything with credit cards, keeping to a monthly limit (you can do this by lowering available credit if you can’t stick to it on your own) and pay off your bill every month. Why? Two reasons: 1) Points either in cash back or travel related credits and 2) disputes. a) If your unhappy with a purchase and are getting nowhere with the company, dispute it through your credit card. I’ve never had a problem getting money back in this way. b) If you use a debit card, the burden is on you if you dispute or if it’s stolen. If you use a credit card, the burden is on the company. Good luck everyone!

  • Shannon-ReadyForZero

    This is a really great blog post! I’ve often heard of those who pay their debt off feeling somewhat anticlimactic and wondering what to do next – but I think keeping the momentum moving and applying what were debt payments to savings and other goals is the best way to go!

    • Kevin

      Hi Shannon–You hit the nail on the head with momentum. Life is really about getting into positive directions, but that only happens with planning and follow through. Getting lazy or sloppy is when bad stuff starts to happen.

  • William Cowie

    Great post. What I found worked best was when we took every payment (car payments, mostly) and created a payroll deduction straight into our savings account. We had no online access to our savings account, so it was always a hassle to actually go to the bank to get money from it.

    I know, idiot psychology, but it worked. Once a year we took stock of what we had thrown into our savings account and used that to fund that year’s IRA contributions. And we always left a couple of thousand to buy our annual upgrades and improvements (new fridge, repaint the house, etc.)

    But the bottom line is to never regard a completed debt payment as a raise to go spend on “stuff.”


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