Many of you read this blog regularly and because I’ve taught you that debt is hardly ever a tool for wealth, you are doing your very best to pay down your short term loans and credit cards. This is all well and good, but I want to make sure that you understand that getting out of debt does not make you rich.
The Typical Response to Ditching Debt
I know that getting out of debt typically takes quite a long time (most likely a couple of years at the minimum), but the average person thinks that this is the end goal. “Hooray, I’m out of debt! Now I can use this extra cash flow to have some fun! After all, I deserve it…”
At this point, vacations are booked and generous gifts are dispersed to your close relatives for birthdays, anniversaries, and Christmas. But, you should be generous, right? After all, you are debt free, and that puts you into a more wealthy category than most.
The Next Steps
While I do agree that you could loosen the reigns a little on that budget of yours, it’s certainly not time to ditch it completely. My wife and I are currently having a tough time with this. We have been debt free since February, 2011 (outside of our house mortgage that is), and since then, we have grown our savings, but at a much slower rate than what we could have if we would have stuck with our budget a little better.
Think about this for a minute. Yes, you’re out of debt, but if you continue to spend all that you earn until your retirement years, how much money will you have to retire on? That’s right! Absolutely nothing, because you never saved a dime after you ditched that debt!
According to the plan that I’m living by, after the debts are paid, you should save about 6 months worth of expenses into your emergency fund. Yes, I know, this is not super exciting and your money will earn next to nothing in that savings account, but this money is for emergencies and should be kept in a place that’s incredibly liquid (meaning, it’s easy to get at when you need it).
After your emergency account is properly funded, it’s time to invest! While getting out of debt will not make you rich all by itself, this step certainly can. Imagine if you were able to put $1,000 into your investments each month. Over the course of 40 years, your contributions will only add up to $480,000, but guess how much your account will be worth (assuming a 10% interest)?! $6.4 million! I would say that with that money, you are ready for retirement, and you’re now officially rich. 🙂
Please don’t stop at debt freedom, invest for your future! Are you currenly on your way to a hefty retirement fund?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.