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Whether it is a credit card, car loan or the holy grail of all debts — your mortgage, paying off debt and eliminating monthly payments is a really big deal.When you pay off a debt, it is a huge opportunity to rethink your financial situation. Your cashflow will have suddenly improved. What are you going to do with that extra money every month?
What should you do after you have finished paying off debt? Here are a few ideas:
Paying off debt is actually a big deal. Pour yourself a glass of wine or go out to dinner to commemorate this occasion.
By acknowledging this accomplishment, you are more likely to take money matters seriously and make good financial decisions in the future.
Don’t Just Fritter Away the Money
Most people, when they have paid off a debt, do not do anything special. They simply let that money get frittered away on other monthly expenses. This is a huge missed opportunity.
You are used to putting that money toward debt, this is an ideal opportunity to consciously allocate the money toward another cause. If you just start spending that money, it will be very hard to start saving it.
Add Debt Payment Amount to Existing Savings — Retirement or Emergency Accounts
The most obvious thing to do with the money you were spending on debt payments is to start adding it to your retirement savings or another important cause like an emergency account.
Another option would be to accelerate payments on another debt.
If it is Your Mortgage You Have Paid Off, Special Considerations Apply
Owning your home — free and clear — is an amazing accomplishment. You have probably spent 15-30 years making these payments. While you will no longer make mortgage payments, there are some other responsibilities:
- If you paid insurance and property taxes as part of your mortgage, you will want to make new arrangements for these important expenses.
- Check in with your insurer to see if your coverage should be updated.
- Talk with your lender about getting the “satisfaction of mortgage” statement.
- If you paid into an escrow account, check to make sure that you don’t have a remaining balance due back to you.
Check on Automatic Deductions
If you have been paying off your debt with automatic deductions, it is important to contact your bank to make sure that these payments are no longer being made.
Make a Big Plan
If you really think that your overall finances and retirement savings are on track… really truly on track… maybe you could go ahead and make a big plan for the money — save it for a dream trip or some other special bucket list item.
Check in on Your Credit Score
You might think that paying off a debt would automatically improve your credit score. However, that is not always the case. A number of factors go into your credit score including your credit utilization — how much of your available credit you are using.
Update Your Retirement Plans
If you need a little motivation, you might want to check in on your overall retirement plan to see how paying off the debt impacts your future and how much you need for retirement. A good online planner will also let you try different what if scenarios to help you figure out how to best allocate the money you were spending on debt payments.
The NewRetirement retirement calculator — named a best retirement calculator by the American Association of Individual Investor’s (AAII) — is a detailed and easy to use retirement planning system.
See how eliminating debt impacts your retirement plan
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