8 Things You Must Do When You Get Out of Debt

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You are absolutely killing it. You’ve paid off the credit cards, the car loan, the medical bills, and now you’re getting ready to tackle the student loan debt head on. You’ve never felt better in your life and you can’t wait to be debt free! Only…what is it that you’re supposed to do when you get out of debt?

Should you…

  • Invest?
  • Pay off the house?
  • Relax and become more generous with your money?
  • Keep killing it and become a millionaire as fast as possible?

What’s the right answer? What must you do when you get out of debt?

things you must do when you get out of debt8 Things You Must Do When You Get Out of Debt

I was lucky. I had a bit of a windfall with a new job and a signing bonus. After moving back to Michigan, I simply stroked the $4,500 check to my parents (they graciously loaned me the money for my super-senior year of college…don’t ask). For the first time in my adult life, I was debt free.

…That was great and all, but I had absolutely no plan for what I would do next, which of course meant that I pretty much did it all wrong.

Here is what you shouldn’t do when you get out of debt:

  • Buy a house with 10% down and completely wipe out your life savings
  • Try to aggressively pay it off in 4 years when your wife isn’t really on board
  • Work like a mad-man for no reason other than to win at the money game and lose terribly at all the other games in life

This of course led to a divorce, more debt (from the settlement), and a long stretch of head scratching…wondering how it all could have possibly gone so wrong.

Maybe you’re perfect and can’t relate to my miss-steps with money and life (ie. either you’ve got life all figured out, or you’re even more arrogant than I am!!), but thankfully throughout this process I was able open my mind, learn a bit more about myself, and gain my 20/20 vision on what I should have done once I got out of debt.

1) Celebrate!

First of all, you’ve got to stop and celebrate. This is HUGE! You paid off all those loans! Unbelievable!

Even with all the naysayers and the constant heckling, you still pushed through and you made it happen! Take a break, invite some of your best supporters over, and have an “I slayed my debt” party. You earned it and it’s well worth the celebration!

what must you do when you get out of debt2) Take Your Speed From 120 mph down to 70 mph

When you were on your way out of debt, you literally sprinted, not just when you were at the finish line, but for the entire race!

  • You worked harder at your day job,
  • mowed the neighbors’ lawns,
  • created insane stuff on Etsy
  • sold nice stuff and put used crap in its place – just so you could make a few more bucks to put toward the debt

Now it’s time to stop driving 120 miles an hour. You’ve earned the right to slow down and enjoy the scenery a bit. Don’t stop, but just slow it down to cruising speed and keep earning that solid income at your day job. Without any debt, you’ll still have plenty of money to do all the other smart financial stuff in life (ie. all the stuff we’ll talk about in steps 3 thru 8 ;)).

3) Build Up Your 3-6 Month Emergency Fund

Up to this point, you’ve probably been surviving on a tiny $1,000 emergency fund. It’s time to beef that up to cover 3-6 months’ worth of expenses. So, when you sit down and look at your spending each month and your average outgo is $3,000 a month, then your emergency fund should have between $9,000 and $18,000 in it. (You can decide where you should be in the range based on the volatility of your career, the size of your family, your ability to earn income elsewhere, etc.)

Don’t get fancy with your emergency fund. Just put it in the bank, earn your 0.5% interest in a money market account, and leave it there forever. This fund isn’t meant to make you rich. It’s there to keep you from being broke.

4) Invest 15% of Your Income

Here’s where the investing games should begin — after you pay off your consumer debt and build up an emergency fund. Too often, people have this all backwards and they start investing while their in debt…which pretty much makes no sense (you’re paying money out in interest and earning some returns at the same time…likely creating a wash on the profit and loss statement of your household…you’re better off just tackling the debt if you’ve still got it).

So what do you invest in?

  • Start with the company-matching 401k option – if they have a Roth 401k, most of you are better off putting your investments there
  • Next, contribute to Roth IRA’s and Traditional IRA’s on your own
  • If you love real estate like I do, you could also squirrel some cash away to buy a property with cash in the future
  • Or, check out these 20 other ways to invest outside the market

Personally, I invest in my Roth 401k at work and put most of the money into Vanguard Index Funds. Beyond that, my wife and I invest in rental properties that we pay cash for.

Related: Can Your Mutual Funds Beat the Stock Market?

5) Save Up That Down-Payment For a House

Don’t have a house yet? At the same time you get your investments going, start putting some money aside for your 20% down-payment. If you need $30,000 and can put away $1,000 extra dollars a month, it’s going to take you 2.5 years to save up the cash you need.

Like many, you’re probably itching to buy a house and can’t stand renting any longer. I get it. I’m okay with you putting less money down, but just be sure that:

  1. The loan is for no more than 15 years, and
  2. The mortgage is no more than 2X your yearly income.

In other words, if you make $75,000 a year, don’t borrow more than $150,000.

Why?

Because I want you to pay off your house in 10 years or less and owe absolutely nothing to anyone. A big house will not make you wealthy. Excess cash flow each month will.

Related: How Much House Can I Afford?

6) Start Saving For Your Kid’s College

Do you have kids? Have you thought about investing for their future? Of course you have, but be sure to invest in your own retirement first. I mean c’mon – ask any teenager out there, “Hey kiddo, would you rather I pay for your $80,000 education now? Or you take care of all my medical bills and have me live with you for 8 years when you’re 50?”

…I’m thinking they’d rather figure out their school bills than deal with your broke, worthless butt when they’re older.

So what should you do when you get out of debt? Invest in your future retirement, and then start investing in their future education. You can definitely do both. Just be sure not to only invest in your kids and ignore yourself.

Related: Free College Investment Calculator: It Costs More Than You Think

7) Pay Extra On Your House and Pay It Off Early

Once you’re out of consumer debt and buy a house, this option should start showing up on your radar. Don’t become obsessed with it like I was (it’s really not good for anyone…), but if you have money left after the 15% investment and the appropriate monthly draw for your kids’ college fund (the calculator above will tell you how much you need to save each month), then put the extra $500 or so a month at the home mortgage.

Don’t think that’ll do much? Think again.

Things you must do when you get out of debt - pay off the mortgage

Even on a 15 year mortgage, if you put an extra $500 a month toward the principle, you’ll save yourself $19,000 in interest, and you’ll pay off the mortgage completely in just over 9 years!! Now that’s definitely worth doing!

Just think, 10 years from now, you could be completely debt free and not owe a cent to anyone. Speaking from experience here, there are few greater feelings than this one.

Related: Free Mortgage Payoff Calculator

8) Continue Planning For Your Distant Future

Have you ever known anyone that struggles with their weight? When you met them, they were 130 pounds, then they spiked up to 160, then back down to 130, then up again. What’s going on? Why can’t they keep it under control? Well of course, there could be many reasons, but often times it’s just a matter of goal planning and focus.

They obviously have the ability to set the goal and achieve their desired weight of 130 pounds, but then they totally miss the next step – the long-term goal that keeps them at 130 pounds for life…

Finances are the same way. You’ll see people win with money and then do something stupid like head to the casino and lose $5,000 or head out to the bar and drop $1,000 on their friends.

What must you do when you get out of debt? Set goals, achieve them, then set more goals!

  • When you’re out of consumer debt, set a target to pay off the house.
  • Once you get the house paid off, start investing some money in other passive income ventures, like rental properties.
  • When you have a few properties, you may even consider an early retirement, or going into business for yourself

Always keep thinking about the future and about what success means for you. If you ever get lazy and lose track of your future targets, your bad financial habits will start creeping in again. DO NOT let that happen!

So there you have it. All the things you must do when you get out of debt. How are you tracking??

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