7 Money Moves to Make as Soon as You Conquer Debt

By Mikey Rox on 15 July 2016 1 comment

Congratulations — you're debt free! Now what?

The road to debt elimination was long and treacherous, but just because the black cloud of lingering bills is no longer hanging over your head, that doesn't mean your financial house is in order. It's in better shape, sure, but you've still got a ways to go. To continue working toward that goal, here are a few smart moves you should make as soon as you get out of the red:

1. Rearrange and Trim Your Budget

Your top priority when getting out of debt is to not get back into debt. To accomplish that, you'll need to make changes to your spending and savings habits. You'll also need to revisit your budget and rearrange your priorities. Now that you don't have credit card or loan payments bleeding you dry every month, you'll have more disposable income — and you need to decide what you'll do with it to improve your quality of life and set yourself up for the future. Cut out anything that's unnecessary: Maybe it's the cable that you don't watch much of, the gym membership you don't use, or subscriptions to services you can live without. Whatever is it, cut the fat and don't look back.

2. Get Back to Building Your Emergency Fund

If you've been digging yourself out of a negative-money pit, chances are you don't have much of an emergency fund — and that needs to change ASAP. Building an emergency fund is the best way to avoid a potential debt scenario in the future. You'll be able to draw from that account to pay off life's little surprises in full, so you're not constantly treading water every time something unexpected happens.

"I recommend having an emergency fund saved up equal to six months' worth of expenses," says financial planner Russell Robertson of Alidade Wealth Partners in Atlanta, GA. "This will give you time to get back on your feet if something unforeseen happens without completely disrupting everything in your life."

3. Check in on Your Credit Situation

Brace yourself. If you've been battling debt for an extended period of time — especially if you've only being sending in minimum payments — your credit situation is likely less than ideal. The good news, however, is that you're in the clear now (debt-wise, anyway), and this is the best time to start rebuilding your credit.

Having a solid credit score puts you in a strong position when you need to finance a purchase, like a house or car, or apply for a new line of credit. It's always a good idea to know where you stand with credit and take steps to improve it.

4. Max Out Your Matching-Dollar Opportunities for Retirement

Like your emergency fund, contributions to your 401K and IRA were probably low (or perhaps even nonexistent) while you concentrated on paying down your debt. With more funds freed up now, it's important to start concentrating on your future — especially your retirement goals — and that includes maxing out dollar-matching opportunities to take full advantage of free money.

"401K plans in 2016 have a contribution limit of $18,000 a year, plus an extra $6,000 for people over 50, so with no debt to pay, you might have the opportunity to reach that limit now," says financial planner and investment adviser Jaycob Arbogast of Arbogast Advisers. "Similarly, an IRA has a $5,500 limit for people under 50 and a $6,500 limit for people 50-plus, so maxing out those plans might be a good idea too. For example, with a 6% return, adding an extra $5,000 each year to your retirement savings from age 50 to 60 could add an additional $65,000 to your retirement savings. That's a great boost that someone in debt might not be able to maintain."

5. Start Investing With Long-Term Returns in Mind

Personally, I recommend investing in real estate, but what you invest in is up to you, so long as you're investing. Outside of your emergency fund, your money should never sit in a savings account earning fractions of pennies. Instead, you'll be better off putting that money in places that promise bigger returns over the long term, so you can meet your savings goals sooner and continue making more investments for (hopefully) a more prosperous life.

Alternatively, Robertson recommends the stock market.

"If your budget still has room for more saving, put that money to work by investing in the markets," he advises. "Exchange-traded funds (ETFs) are a great way to get diversified, low-cost exposure, and many online brokerages will offer commission-free ETF options as well."

6. Put Money Back Into the Investments You Already Have — Like Your Home

For many people, their homes are their biggest investments. To ensure that investment pays off the way you want and need it to, you have to maintain it. Thus, when you've paid off your debt, start thinking about home improvement projects that will increase value. Just be careful that you're not taking on projects that cost more than the house is worth. The last thing you need is to dump your savings into your home if the project doesn't enhance the house enough to make it worthwhile in the long run.

7. Open a Money Market Account for Higher Interest on Savings

If you have a substantial amount of savings in your emergency fund — and you should — that money shouldn't be in a traditional savings account. Contact your bank, or research others, to find savings accounts that offer the best interest rates, like money market accounts or high yield savings. Bottom line, there's absolutely no reason you shouldn't be getting the most bank for your buck, especially where savings are concerned.

Robertson agrees, and in this particular case, rescinds his recommendation to invest in stocks.

"If there is something specific you are saving up for — a celebratory trip to Europe? A wedding? — within the next two to three years, I would recommend keeping that money out of the stock market," he says. "Instead, consider a money market account or CD from an online bank. In many cases you can get close to 1% interest right now on cash that is still guaranteed up to FDIC limits (currently $250,000). In fact, this is a good idea for that emergency fund as well — something that earns interest and is separate from your everyday checking account."

What else should the newly debt-free do with their money?

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Guest's picture
Lisa

Debt is paid off this month and credit score is good - 753! I feel a huge relief. But also really scared because my emergency fund is only $750. I definitely don't want to go back into debt so I hope to grow it over the next year. The one thing on the list I feel lost about is investing. I know that's what I should be doing with my Roth IRA but it feels overwhelming so right now most of it is in a CD. I am just starting to read up on investing.

Guest's picture
Tim

Why would you worry about building up your credit score when you are completely out of debt? If you are, you should be able to, over several months or a couple of years, save up for a large purchase. It is not unheard of to pay for a car or house with cash.

Why would you want to get a better credit score just so you can secure a loan and go right back into debt?