What to Do After Paying Off Debt
January 25, 2013
If youâ€™ve ever been deep in debt, it might be said that youâ€™re a potential credit junky. Thatâ€™s not a medical classification of course, but credit has all the capability of being a certified addiction. The problem is that itâ€™s easy to get into, and just as hard to get out of.
If youâ€™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. Youâ€™ve already developed financial discipline as a result of having the budget, and if youâ€™ve been using it for a while itâ€™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, youâ€™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 youâ€™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, youâ€™ll probably find you donâ€™t need credit anymore. And once youâ€™ve done that, you will be closer to beating your debt problem for good.
3. Pay cash for whatever you buy.
Now that youâ€™re out of debt, plan on paying cash for everything you buy. That doesnâ€™t mean cash literally as in currency (although it doesnâ€™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 youâ€™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 thereâ€™s a higher risk of fraud in the transaction.
4. If you have to borrow to buy then you canâ€™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 canâ€™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 isnâ€™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” â€“Â Or put another way, get busy!Â 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 â€“Â Weâ€™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 wouldnâ€™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 â€“Â This is a loaded point because the possibilities are almost unlimited. It could be that your house is so expensive that itâ€™s keeping you on the financial edge. You could also have a car payment thatâ€™s out of proportion to your budget. Consider selling any possession you have thatâ€™s draining your finances.
- Make some new friends â€“Â 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 â€“Â 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 itâ€™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 youâ€™ve recently gotten out of debt, what kind of changes have you made in order to make sure that you donâ€™t get back in? Leave a comment!
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All posts by Kevin Mercadante