You did it …
Congratulations! Mazel Tov! Felicitations! After months — or years — of funneling money toward an outstanding debt, you’ve paid it off. Now that you have extra money coming in each month, you can start working toward long-term savings goals, tackling other debts and treating yourself with the extra cash. Click on to discover what to do after paying off a debt.
1. Treat yourself.
Congratulate yourself on a job well done. “I like to encourage clients who pay off a debt to take what would have been the next month’s payment and spend it on something to celebrate the payoff (a special meal out, a delayed purchase or even a little getaway, depending on the size of that payment),” writes Charlie Bolognino, a certified financial planner and owner of Side-by-Side Financial Planning LLC in Plymouth, Minnesota, in an email.
2. Prioritize financial goals.
After your celebratory splurge, consider which savings and debt-payoff goals to tackle next. “Financially, the biggest opportunity whenever cash flow is freed up in the monthly budget is to determine what the next highest priority is to tackle,” writes Jean Keener, a certified financial planner and principal at Keener Financial Planning in Keller, Texas, in an email.
3. Tackle another debt.
Did your lower-interest credit cards, student loans or car payment take a back seat while you focused your efforts on paying off a more important debt? Set your sights on the next debt-payoff priority and redirect your cash toward that new goal.
4. Boost your emergency fund.
If your debt repayment came at the expense your emergency savings account, “use one-third of the payment to start an emergency fund. Contribute that amount every month until the account is funded,” recommends Kim E. Jones, a certified financial planner and owner of Jones Strategic Financial Planning LLC in Broomfield, Colorado, in an email. Jones recommends that the remaining two-thirds go to funding long-term investment goals and treating yourself.
5. Consider long-term savings.
Reroute that cash toward your retirement savings, which may include boosting contributions to your employer-sponsored 401(k) or other retirement accounts.
6. Ramp up college savings.
If you, a child or a grandchild is headed to college, consider funding a 529 account, a tax-favored college savings account, for a savvy way to pay for a college education.
7. Save up for the next big purchase.
Make sure that you don’t need to take out credit to fund your next big purchase. Save the extra incoming cash toward your next spending goal, be it a new car, vacation or home renovation project.
8. Avoid temptation.
What got you into debt in the first place? If it was something avoidable (say, running up a credit card bill), make changes to ensure that you won’t be in that position again. “If you pay off your credit card debt, you need to avoid accumulating credit card debt again down the road,” says Brian Pon, a certified financial planner and financial advisor at Financial Connections Group in San Francisco.
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