“What should I do after paying off debt?” This question is common among those people who are about finishing or have just finished paying off their debts. If you have been in debt and have been paying it down gradually, you must have been looking towards to a date when you will completely be out of debts. By now, you will agree with me that it is easy to get into debts but it is not easy to get out of debt. One thing about debt is that, you will end up paying more than the amount you borrowed as a result of interest and other incidental fees. The interest or fees you will pay on your debt depend on many factors such as the debt amount, its duration, the type of the debts, the lender and your credit score. Don’t let me focus on that now. The important thing is that you have paid off the debt. For this, I say congratulations! Now that you have paid off the debt, what next are you supposed to do? I will like to suggest the following:
There is nothing bad if you give yourself a treat after a long debt repayment which must have made you deny yourself of certain pleasures. You can celebrate its by doing that thing which gives you joy. But this does not necessarily mean that it must be expensive. You don’t need to spend huge amount throwing a party. It can mean going to a restaurant to have your favourite meal or ice cream. Possibly you have been cooking your own meal in order to make some savings from what you spend on feeding so that you can be able to aggressively pay down your debts. So, after paying off the debt, this may be a good time to relive that experience. I am not saying that you need to go back to that lifestyle. You will be in the right position to determine whether your finance will support the lifestyle or not. Also, I like you to bear in mind that I only mention going to a restaurant as an example. To other people, it may mean going on a pleasurable trip. Just do something that is within your budget. If I were you, I will budget the amount I have been paying on a monthly basis towards the loan repayment on my treat. You should be able to do this conveniently as you are used to paying that amount on a regular basis. Anything above this amount may not be appropriate.
Maintain the discipline
It takes determination and discipline to pay off debt. If you are not disciplined, you may stop the repayment of the debt along the way especially at the point when the loan has gone down considerably that you no longer feel the interest burden any more. Now that you have fully paid that loan, you need to maintain the same level of disciple in order to continue living a debt free life. You need to have a reflection of how you went into debt in the first place. Try as much as possible to avoid living beyond your means. If you plan to make a big purchase, it is better to save towards it instead of buying on credit and thereafter begin to pay interest on the credit. If you want to keep your credit card active, you may want to be using it. In such a case, you should not use the card for large purchases. Endeavour to keep your credit utilization ratio below 30% and pay off the balance every month.
Develop a budget
You need to draw up a budget for yourself. You will include all your monthly income in the budget. You can then allocate the income to all your expenses. Remember to cut off all unimportant items from your expenses. You can’t afford to live flamboyant life especially when you know that your income cannot support the lifestyle. I expect that your budget should have a positive balance. That is, your budgeted income should be greater than your budgeted expenses. This will allow you have positive cash flow at he the end of the month. It is when you have positive balance that you can think about savings.
Open an emergency fund account
Emergency situation such as a need to urgently pay a medical bill is one of the reasons some people find themselves in debts today. It is true that nobody prays for bad things. But they happen at times. In most cases, they happen when you list expect or prepare for them. No matter how careful you are, you may not be able to prevent certain emergency. Therefore, the best approach is for you to open an emergency fund account from where you can easily withdraw any time such events occur. No matter how small, you should ensure you make deposit into the account every month until the account reach a minimum amount you are comfortable with. Any time you draw from this account, you should endeavour to replenish the amount.
You don’t need to wait until you have thousands of dollars stacked in your account before you start thinking about investing. You can start by investing in mutual fund. Some mutual fund companies can accept as low as $200 as their initial investment requirement. There are different mutual funds. There are stocks funds, money market funds, bonds funds, balanced funds and target date funds. Your age, risk tolerance and your investment goals will determine which one is best for you. So, don’t think that mutual funds are the same. You need to choose the one that is right for you. Good enough, they usually have prospectus. You can pick it up and study the type of funds the company has. Also, in the prospectus, you will find the “Fees Table” containing different fees you may need to pay if you invest in the fund. On the other hand, you can seek advice if you are a beginner.
Use your card responsibly
I need to re-emphasize this. Holding a credit card is not the problem. It is how you use the card that determines whether it will help you build your credit or not. If you know that you are the type that usually buy things on impulse, you may not carry your card everywhere you go. Before you buy anything, try to compare your spending so far and what you want to buy with your budget. If your budget can’t accommodate this, you can pass it to the next month.
Read Also: Understanding Mutual Funds Investing
Review your credit report
After paying off debt, you will do yourself good to obtain your credit report and review it for possible errors. In most cases, those people in debts don’t like looking at their credit report. But now that you have paid off the debt, you can apply for your free credit report. If you find any charges you don’t understand, quickly report this to the credit bureau. Don’t overlook any unfamiliar transaction or entry in your credit report. It may be a red flag that your identity has been compromised. Therefore, you need to follow up on anything you don’t understand in the report.