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 down the path to financial independence, read on.
If you listen to the podcast, Brad and Jonathan often talk about different “levers” you can pull to save more money and optimize what you have. When or how you decide to pull these levers is up to you. Your financial situation will be unique, so these areas of focus will help you figure out what can be beneficial for you to focus on. And, remember, they can be implemented at different times in your journey.
First, Make Sure Your Spending Serves You
Like anyone who has been on a strict diet and finally shaved off those unwanted pounds, and you’re now free to eat carbs again–you might feel the urge to rebound and rebound hard! The same type of “deprive and reward” behavior relates to money. Your debts are paid off, so surely you will have more wiggle room in your budget to indulge!
But before you bite into the spending equivalent of a double chocolate chip cookie, or even devouring the whole box, take a minute to examine your behavior before you “treat yo’self.” Debt had you laser focused on getting your “amount owed” down to zero, and without it, you might start to feel a little lost.
Yes, you’ve been AWESOME at not pushing the “Buy Now” button on Amazon for months. But beyond telling yourself “no,” from now until forever which is not only hard but darn near impossible, it might be worth understanding why you had to say “no” in the first place. Why does the urge keep coming up and is it serving you?
Did you spend because you had a stressful day at work? Because new clothes make you feel good at first but regretful later? Sit with your feelings–what purpose is the behavior serving for you?
You, likely, have room in your budget now to indulge, but if you don’t address the behavior that contributed to the debt, your will power will only last so long without that ugly looming debt stacking back up. When you’re debt free, treat yourself with intention so you don’t simply relapse.
Now, Build Your Cash Flow
If you have avoided relapsing to spending temptation–you can simply store your extra cash away in a savings account until you have decided where it should go. In the aforementioned “levers” of FI, you will need some cash to invest with, and it may take you some additional time of financial discipline, and some continuing education on what to do with the cash you accumulate.
Treat your budget just like you did while you were paying down your debts and instead of sending that monthly payment off to a loan company, sock it away. Keep treating that payment as real–except you’re paying yourself. At first, you may not have a plan for this cash; but as you accumulate dollars, keep learning and adding knowledge that will help you optimize your personal situation. Soon your stash, which will be safely waiting for you, will be ready for you to put those dollars to work.
At this early stage, you’ll want to keep the good habit of paying yourself and saving. You can figure out later if it should be put in a retirement account, towards a down payment on a home or investment property, or, part of an emergency fund in a savings account. There’s a lot to learn and a lot of tactics you can tinker with, so while you save, learn and learn some more.
Tax Optimization Is Sexy
You know what’s exciting? Saving serious money on groceries. You know what’s not exciting? Spending time with tax law to figure out how you can be smarter about how much you send to Uncle Sam. Well, it’s not sexy until you see those dollar signs!
Tax optimization can be a bit on the dry side for some of us, but it’s prudent to try and keep the cash you earn as much as possible. Tax optimization can be as easy as making steps to better track your medical expenses and document them accordingly to be written off later, to more sophisticated strategies like figuring out how to lower your taxable income by putting that aforementioned budgeted money into a 401k plan.
There are plenty of resources out there, and Episode 25 with the Wealth Accountant is a great primer for tax optimization strategies .
Hack Your Employment
If you’re working for an employer, how can you make the most of it? Now that you’re debt free and you have a wee bit more headspace to be thinking about other money savvy strategies, are you taking advantage of every nickel and dime of value your job provides you?
A few ideas would be to max out your 401k beyond the match. See if your employer offers discounts on any services you spend money on. Look over your health plan to ensure it’s meeting your needs (or exceeding your needs) and check to see if they offer a Health Savings Plan.
If your employer is a bit sparse on the benefits, maybe it’s a good time to pool together with some fellow employees and ask collectively for a subsidized gym membership or a flexible work from home policy to save on commuting costs.
Learn About Investing
If you’ve been throwing all of your money at your debt and now have cash to spare–where should you be investing it? Take a look at The Simple Path To Wealth and take time to learn what strategies would be best for you.
Since everyone’s different–you may want to max out your 401k, Roth IRA or start investing in stocks on your own. Episode 19 goes into how to start with index investing & VTSAX to boot. Others will choose a path of real estate investing or maybe a combination of methods. Now that you’re debt free, you can use your previously allocated funds to start building your own perpetual money making machine through investments. Now your money is working for you, instead of simply servicing your debts. Investing is an awesome tool to begin learning about, and your path is customizable for your needs!
So, if you’ve read this far, CONGRATULATIONS! on paying off your debt and taking the next steps towards financial freedom. Your community is here for you, and we are cheering for your FI success!
- Debt Snowball Vs Debt Avalanche: Does It Really Matter?
- FIRE Essentials: Low-Cost Index Fund Investing