After months, or years, of making faithful debt payments, you can finally see the light at the end of the tunnel. But what should you do with the money you’d typically put toward debt payments? Instead of absorbing the surplus cash back into daily, mindless consumption, here are five savings tips to help your newfound cash improve your financial wellbeing.
Establish an Emergency Fund
If your debt was caused by unexpected costs like a car accident, a serious illness or a sudden job loss, then you might want to protect yourself from a repeat occurrence. The emergency fund is your first line of defense against financial misfortune. Conventionalist wisdom suggests that three to six months’ worth of living expenses should be set aside. Determine how much you’ll need based on your personal circumstances, and start saving. This way, you’ll be better prepared for whatever lies ahead.
Maximize Tax-Sheltered Accounts
If your debt’s been keeping you from contributing the maximum amount to your retirement plan, now’s your chance to start catching up. Contribute as much as you can afford if you have a company-sponsored retirement plan. The same concept applies if you have an IRA, Roth IRA or self-employed plan such as a SEP-IRA or SIMPLE-IRA.
You could also start saving for someone else. Your present or future children will benefit from your financial savvy by having money to put toward their education. A 529 plan allows taxes to grow and be deferred at the federal level, and your contributions may be eligible for state tax deductions.
Plan For A Car Replacement
Despite regular maintenance, your car will eventually need replacing. Whether you buy a brand new car or a gently used one, whether you’ll be able to afford a decent down payment or pay the entire purchase price is primarily based on timing. The longer you can delay the purchase of another vehicle, the more time you’ll have to save up. Once you’re done making car payments, continue to make those payments – to your savings account.
Prepare for a Home Purchase
If homeownership is one of your goals, saving enough for a down payment and closing costs is crucial to a stress-free home buying experience. Your down payment will depend on your home’s price tag, and the percentage of that price your lender asks for upfront.
Instead of focusing on saving a big number, like $30,000, break your savings down into a manageable $625 monthly goal based on a four-year plan. Keep your down payment safe in a high-yield, FDIC-insured bank account until you’re ready to buy.
Redefine Lifestyle Inflation
Once you’re debt free, you might want to relax the reins on your spending. Instead of buying things simply because you can, purchase items that truly align with your goals, priorities and values.
Avoid being negatively influenced by the lifestyles of others. Practicing conscious spending will help you avoid getting back into debt, and it will allow you to focus on growing your financial wealth.
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