1. Home
  2. Blog
  3. Money Matters
  4. What to Do with Your Money When You’re Debt-Free
A photo of cheerful family sitting on sofa at brightly lit home. Happy parents are playing with son in living room. They are in casuals.

When you’re working on paying off your debt, it can feel like the process lasts forever. Years go by as you slowly chip away at your debt load.

Eventually though, you see yourself nearing the finish line. Your small payments turn into bigger payments as you work your way out. Your thoughts of interest rates and monthly payments start to fade, and a new thought begins in your mind …

“What do I do with my money when I’m debt-free?”

This is when the conversation turns from surviving today to thriving tomorrow. You’re not thinking about paying off debt anymore, but instead, you’re thinking of creating a life full of happiness and wealth.

Here are some ideas to consider for when you’ve finally broken free from the shackles of debt.

Celebrate Your Victory

You’re about to do something amazing. The average American has $38,000 of debt, and you will soon have $0. You are above average!

Don’t let this moment pass you by without recognizing your accomplishment.

Decide in advance how you’re going to commemorate this momentous occasion. If you want to be surrounded by the people you love, invite them over to celebrate. Perhaps you’d enjoy a fancy dinner and a fine glass of champagne to mark your win. Cheers to you!

Once you’ve selected your celebratory path, set aside money in your debt pay-down plan to truly enjoy your moment. The last thing you want to do is pay off your debt and then go right back into it.

Create a Solid Emergency Fund

Once you’re finished with your celebration, it’ll be  time to truly say goodbye to debt forever. The best way to do this is by building a solid emergency fund.

With an emergency fund consisting of at least 3 months of expenses, you’ll be able to keep yourself from using a credit card the next time your car breaks down or your furnace needs repair.

First, calculate your monthly expenses and then multiply them by 3. For example, let’s say your monthly expenses (housing, transportation, utilities, food, etc.) are $3,000. You’ll need at least $9,000 in an easily accessible savings account.  Once you’re fully funded, your emergencies won’t feel so hectic anymore.

Increase Your Retirement Savings

With a healthy savings account and no debt, your situation will be looking very comfortable. It would be a good time to focus on the future.

You may have been contributing to your retirement account(s) during the debt pay-down process, or maybe you weren’t contributing to them at all. Either way, increasing your retirement savings would be a smart next step.

Automate the process by increasing your monthly 401(k) contributions at work. This way, you’ll be contributing pretax dollars and eventually, you won’t even realize you had access to the money. If you don’t see it, you won’t spend it!

Over time, this increase in retirement investment will pay dividends (literally and figuratively).

Diversify Your Way to Retirement

There are other avenues for retirement savings outside of the workplace 401(k) or 403(b).

Check into your eligibility for a Roth IRA. This post-tax retirement savings option allows you to diversify your future tax obligations, and you can withdraw your contributions in case of an emergency. If you’re not eligible for the Roth IRA, look into the Traditional IRA that carries similar investing benefits.

Another lesser-known investing option is the Health Savings Account (HSA). This savings vehicle allows you to put away pretax money for future qualified medical expenses as long as you’re a part of a High Deductible Health Plan (HDHP). The beauty of the HSA is that you can invest your contribution in the market and take advantage of compound interest. If you’re lucky enough to not need these funds for health-related expenses after age 65, you can use them without penalty for your retirement (after you pay your taxes, of course).

Save for College

Now that you are student-debt free, give your kids (or other kids you know) the same chance at a bright future. Start saving for their college education today.

Investigate options like a 529 college savings account that allows you to invest in the market for future college needs. A 529 account can be used for qualified expenses like tuition, books and even laptops.

The future costs of college can be quite intimidating, but if you start early, you’ll have compound interest working in your favor. And the child will thank you in the future for your diligence as she’s watching her peers struggle with massive debt and trying to make ends meet.

Give More

It may seem counterintuitive, but giving away your money may just be one of the best ways to use your newfound cash. Generosity and helping others in need can give us a sense of fulfillment and contentment that purchasing the newest clothing or electronics just can’t match.

Investigate charities, causes or missions that you feel passionate about. Through your research, you’ll find organizations that inspire you. Charities that support children, the environment, animals or even your local community are plentiful, and they need support from people like you.

Isn’t it amazing that your enhanced financial status could make an impact on your community or even the world? Now, that’s powerful.

Develop Passive Income Sources

You’ve been very active at earning your income up to this point. Wouldn’t it be nice to have your assets create income for you while you sleep? Welcome to the world of Passive Income!

Consider saving your money for your first rental property. As a landlord, you can collect monthly rent from tenants that supplements your personal expenses or even that relaxing annual vacation you’ve always dreamed of.

You can also look at investing your additional dollars in the stock market through a taxable brokerage account. Since this money is a non-retirement investment, the dividends produced can be used much earlier in your life.

What would do with your money if you achieved freedom from debt? Please let us know in the comments below!

This Post Has 4 Comments

  1. I started buying dividend stocks to increase retirement income and cash flow that is only taxed at 15% vs an annuity that us taxed at ordinary income tax rates.

Leave a Reply

Your email address will not be published. Required fields are marked *