You’re Debt Free, Now What?

You’re Debt Free, Now What?

You’ve worked hard for months, possibly years, to become debt-free. For some of you, this may mean you’ve paid off your student loans and credit cards. And for others, it means you have tackled your mortgage as well.

“Debt-free” is a term that means different things to different people, but if you’ve been laser-focused on a particular goal for a sizable amount of time and you’ve crossed the financial finish line to make your last payment, it can be slightly disorienting to figure out what comes next after debt–regardless of what it is!

If you’re now debt-free and trying to figure out what you can do to further yourself consider building your emergency fund, focusing on investing, saving for college for your children, and spending money on the things you love.

1. Build Your Emergency Fund

Before you do anything else–it's vital that you build up your emergency fund. Without a healthy emergency fund, you can easily fall back into debt as soon as a medical emergency, costly repair, or some other major expense pops up.

There are different opinions on how large an emergency fund should be. But most experts seem to agree that saving enough money to cover three to six months of expenses is a great start.

Related: Everything You Need To Know About Emergency Funds

Earn A Higher Return On Your Emergency Fund With A CIT Savings Builder Account

Any money that you may need to use in the next five years (like emergency funds) should generally not be invested in the stock market. The potential for short-term volatility is just too high.

But that doesn't mean that you should just stick your emergency fund money in a savings account that's paying you next to nothing. According to the FDIC, the national average rate on savings accounts is 0.09%. That's just terrible.

But you can earn over 20 times more interest with a CIT Savings Builder account. Currently, they pay an annual APY of 1.80%.

How much extra interest could you earn with a CIT Savings Builder account? With the typical savings account, a $25,000 emergency fund would earn about $22 per year in interest, while a CIT Savings Builder account would earn $454 per year. That's a huge difference!

But to qualify for the high APY, you'll need to meet one of two conditions. You’ll either need to make a monthly deposit into your account of $100 or maintain a balance of more than $25,000.

Open your CIT Savings Builder account.

Related: Earn More Interest On Your Emergency Fund: CIT Savings Builder Review

2. Invest In The Stock Market

Once you've built up your emergency fund, you now need to start thinking about your long-term goals. And one of the best ways to reach your long-term (five years or further out) goals is to invest your money in the stock market.

Why Investing In The Stock Market Is Important

When you were in debt, interest worked against you. But now that you're debt-free, you want to start having interest work for you. When money is saved in a bank (even when it's a high-yield account like the CIT Savings Builder), the interest you earn is barely outpacing inflation.

But with stock market investing, you could easily be looking at a 7% to 10% annual return. And through the power of compound interest, that 7% to 10% earns you more and more over time. That's why the earlier you can start investing, the better.

Also, if you're saving for retirement, you'll want to consider putting money away in tax-advantaged accounts like Traditional and Roth IRAs. If you hope to retire early, then a Roth is probably your best choice.

Here's why. With a Traditional IRA, you can't touch any of the money (without incurring a tax penalty) until you reach age 59 1/2. But with a Roth IRA, you can withdraw your contributions at any time. You simply can't withdraw your earnings until retirement.

How much of your income should you save for retirement? Well, it all depends on how early you want to retire. The rule of thumb is that you need 15 times your annual income to retire. So figure out how soon you'd like to retire and then simply do the backward math to see how much you need to save each year.

How To Invest In The Stock Market

If you're looking to get started investing in the stock market, but don't want to pay a 1.0% to 1.5% fee for a financial advisor, there are two main strategies that you can take.

The Self-Directed Strategy

First, you can take a fully self-directed strategy. In other words, you'll be making all of your investing decisions yourself and building your own portfolio. If you want to go this route, choosing an index fund or ETF fund investment strategy is usually a good idea, because it gives you immediate diversification.

Vanguard and Fidelity are both great options for index funds and ETF investing. Fidelity doesn't charge a trade commission on any of their ETFs and offers over 3,700 no-transaction-fee mutual funds. Vanguard boasts over 1,800 no-commission ETFs and over 3,000 no-fee mutual funds. Episode 19 goes into how to start with index investing & VTSAX to boot.

Related: Vanguard vs. Fidelity: Which Company is the Right Choice?

The Robo-Advisor Strategy

Another option would be to consider using a robo-advisor service. Robo-advisors use algorithms to create custom portfolios for you. And they'll automatically rebalance your portfolios to keep them in line with your risk profile.

Robo-advisors are known for being an inexpensive alternative to human advisors. Most robo-advisors charge an advisory fee of only 0.25% to 0.50%. But M1 Finance takes things to a whole different level by charging no advisory fees whatsoever.

Additionally, M1 Finance allows investors to buy fractional shares of ETFs, which is a feature that many brokers don't offer. Or some brokerages may charge a fee for fractional share investing. But M1 Finance doesn't charge any trade commissions.

And if you're looking to invest for retirement, M1 Finance does offer both Traditional and Roth accounts, as well as SEP IRAs. To open an account with M1 Finance, you just need to make an initial deposit of $100.

Learn more about M1 Finance in our full review.

3. Invest In Real Estate

Investing in real estate is a great way to diversify your investment portfolio. As a landlord, you'll receive monthly rent payments which can be a great source of passive income, especially in retirement. And by using turn-key real estate investing sites like Roofstock, you can buy the perfect real estate investment property from across the country…right from your laptop!

Check out our full review of Roofstock here.

However, the problem with buying a residential property is that you typically need more investment capital to get started than with stock market investing. In other words, the barrier to entry is higher.

But there are ways to invest in real estate with smaller chunks of cash. For example, there are many publicly-traded REITs (Real Estate Investment Trusts) and REIT ETFs that can be bought and sold on the stock market. But beware that many publicly-traded REITs come with high fees.

Non-traded REITs tend to be more affordable and have various tax benefits, but are often restricted to accredited investors. However, with Fundrise, you can invest in a non-traded eREIT for as little as $500. And you can even open a Fundrise retirement account if you'd like. Learn more about Fundrise.

Related: Your Options for Investing in Real Estate

4. Save For Your Child's College Education

College costs continue to rise each and every year. Currently, the average bachelor's bachelor's degree grad who graduates with debt will have nearly $30,000 in student loans. That's a nasty financial ball-and-chain for college grads to carry around as they begin their careers.

But if you'd like for your children to graduate with less student debt, you can help with that. Saving for your child's college should usually take a back-seat to your own finances being put in order. But once you've paid off your debts and are saving towards retirement, it's a great idea to starting putting money away in college funds for your kids.

If you do decide to start saving for kids' schooling, opening a 529 plan would be a great idea. With a 529 plan, you can invest money for your children's college education that grows tax-free. And as long as the money is used to cover college costs, withdrawals are tax-free as well.

Depending on where you live, your state may offer additional 529 tax benefits too. And if you don't like your state's plan, you can invest in the state 529 plan of your choosing.

Learn more about 529 plans.

5. Spend Money On Things That Make You Happy

Ok, so you've paid off your debts, you're investing for retirement, and you're preparing for your child's college education. Guess what? You're killing it!

And you definitely shouldn't feel guilty about spending a little more of your monthly budget on your passions or hobbies. Perhaps you love traveling, but you didn't' take any vacations while you were in debt-pay-off mode. That was probably a good idea at the time. But now that you've paid off those debts, you shouldn't feel bad about planning a vacation or two each year.

Just recently, when I asked my wife what she'd like for Christmas, she shocked me by saying that she'd love to start taking voice lessons next year. I had no idea that this was something that she'd be interested in. But come to find out it's something that she's always wanted to do, but she knew we didn't have the money in the budget to afford it before.

Well, now we do. And since we're taking care of all our other major financial goals, I'm stoked to be able to spend some of our money on this next year.

If you've been living a frugal lifestyle for a fairly long time, it can be hard to let yourself enjoy spending your money on you. But you've earned that right. So let your hair down and spend a little more of your money on things that bring you joy.

Enjoy Living Your Debt-Free Life!

So, if you’ve read this far, CONGRATULATIONS! on paying off your debt and taking the next steps towards financial freedom. But everything so far has just been the introduction to your financial story. Now it's time to start Chapter 1 and start achieving your short-term and long-term financial goals. Your community is here for you, and we are cheering for your FI success!

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3 thoughts on “You’re Debt Free, Now What?”

  1. Having a mortgage, supporting a wife and child felt like a heavy burden. Don’t get me wrong we were still comfortable middle class, but the stress was real.

    We (I), decided to prioritise that debt and managed to clear it just over a year ago (in my early 40’s). A huge weight was lifted, I no longer feel dependant on my job, and we splurged a little, upgraded the car, but to make sure we don’t sqander the extra income we have now that we are debt free I set up an automatic investment plan with vanguard equal to what our mortgage repayments were. So generally, our lifestyle continues, stress free and have the extra cash building and compounding in the background accelerating our path to FI

  2. We will be debt-free (including mortgage) in less than 3 months. We plan to do some home repairs and then buy our first rental property. I cannot wait for the celebration! I’m going to make the entire bank break out in a dance-off when we make our last payment.
    You might even see it on YouTube 🙂

  3. I think it’s important to be able to spend money on yourself here and there. If you’re out of debt, have an emergency fund, and are investing in your future, then you should definitely spend some money on yourself in the present.

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