by Tricia
J.D. from Get Rich Slowly recently launched a forum at his site. I was looking through it when one thread caught my eye Life After Debt…now what?. It’s a thought provoking question and touches upon something I have been thinking about lately.
On this blog, my main focus is our credit card debt. We do have mortgage and student loan debt, but the credit card debt is the most damaging. What are we going to do once the credit card debt is paid off?
Of course, we will celebrate and probably do a happy dance. After that’s done, then we’ll probably pay some extra towards our student loans and really beef up a savings account. We have some catch-up to do in terms of getting away from living a paycheck-to-paycheck lifestyle. I’d like to feel secure knowing that a job loss wouldn’t result in us getting into credit card debt again. Once the savings account is in place, we’ll still keep sending some extra towards our student loans, but then we will start really concentrating on saving for retirement with IRAs and the like.
Oh, and I can’t forget that we will be going on our first family vacation once the credit card debt is paid off 😉
Your turn. Your debt is paid off…then what?
I like Dave Ramsey’s approach to life after debt:
First you get totally out of debt except the mortgage (and you go crazy making this happen as soon as possible).
Then you save up an emergency fund of 3-6 months of living expenses. (Living a debt free life means having enough money saved so that you never have to rely on debt for necessities or indulgences.)
Then you put extra toward the mortgage while also starting to annually fund things like retirement (at 15% of your income) and kid’s college.
At this point you can also start saving to indulge in luxuries with your discretionary income, such as family vacations or a car that you pay for in CASH. fun!
For me, the “then what” of being out of debt means:
Having a general peace of mind regarding finances, financial security, and life in general.
Being proud of myself for having the self-control to live within my means, to separate my needs from my wants, and to be able to give money to charity.
Being able to make purchases with the confidence that I can afford them and that I will not be paying for them later with debt.
Having the financial ability to really enjoy life (without the hanging cloud of debt), like international travel, outings with friends, etc.
At this point our plan is to pay off credit cards, then the car and after that we just aren’t sure. Student loans vs mortgages, and I’ll probably have to do lots of math to figure which is the best to pay off first! LOL
Just a couple months ago we were able to pay off our credit cards and were faced with this exact question. I truly felt confused. When we had cc debt it was so easy to focus on that. I knew exactly who to send money to every week. Once it was gone, I honestly felt a little lost. After just letting it sink in for a few weeks (payoff was due to a large sum coming our way so it was unexpected), we decided to stick with the Dave Ramsey approach for the most part. We beefed up some of the money we were putting in to our Freedom Account (Mary Hunt’s approach) but then the rest went in to our emergency fund. We will keep hammering that until we have at least 6 months worth of expenses. We are a family of four so that is what will make me feel more comfortable. After that we will max out 401(k)s, then hit the kids college accounts hard. By this time, it will 10-15 years from now so I’m not thinking past that! LOL
I’ve been debt free for about 6-7 years. What did I do after I paid off my credit cards? I started saving for an emergency fund and a down payment.
I now own a condo, with a plain vanilla fixed rate mortgage. After seeing what kind of tax situation I have now that I can deduct the mortgage interest I adjusted my withholding to get more cash flow. I’m now saving to rebuild my emergency fund which got depleted buying big ticket items for the new home, and I’m building up a housing reserve to handle assessments for major repairs. My condo is brand new so we shouldn’t have any major repairs for years, but it’s easier to save a little at a time now rather than try to cough up a large chunk of money later.
I’m also going to take another look at my retirement savings and I might adjust my 401(k) contributions. I’m not saving enough, but I keep going back and forth on whether to put all the extra cash towards the emergency fund/housing reserve and beef up the retirement savings afterwards, or if I should beef up my 401(k) contribution now. On the one hand I can build up my short-term savings faster if I don’t put extra towards retirement, but then I lose valuable time in saving for retirement. The earlier you put money into a retirement account the better.
After you’re debt free you get new problems, but they’re good problems to have!
I am dreaming of the day that we dont send so much money to our credit cards. I dont know exactly what we will do. But I like it that way, we will have choices we have not had before 🙂
I eliminated all my credit card debt in March of 2005 and I promptly saved $1000 to put into a Roth IRA. Since then, I’ve managed to increase my retirement account balances to $44,000 and I’m back in credit card debt! lol but the credit card debt is a 0% transfer to earn some interest in my ING account. Time to make the credit card companies pay me.
I’ve definitely been behind on my emergency fund, but I have about 2 1/2 – 3 months worth.
My first goal is to pay off the credit cards. I’ll still have student loans left over but I’m ok with that. Once that’s done I’ll beef up my savings account to cover 16 weeks of no work. I’ll then see if I can get a job as a cook at a summer camp I used to work at and then talk to my current employer about taking a leave of absence for about 8 weeks. The cook job wouldn’t pay very much, so I’d need to cover expenses while I’m gone but it would also give me an opportunity to get away, do something different (for me since I do a desk job), and possibly be able to mentor youth. When I used to work at the camp it was jr highers that helped out in the kitchens.
Once I come ‘back to reality’ I’ll focus on the student loans. 🙂 At least that’s the plan right now.
I have no balances on my cards but I am still working towards my savings. Here is what I am doing currently:
10% of our paychecks into an emergency savings fund, I have $2000 in a short term fund and am continuing to put money in a separate 6 month emergency fund (estimate $25k, so this will take a while to build up).
5% into my retirement investments, a small amount right now because I’m still paying down some debt (a personal loan and a car loan) but with an employee match & base this ends up being 14% of my gross.
5% into debt repayments, right now going into the personal loan.
11% into readjusted bills, things like car insurance, my wife’s hair cuts, things that come up periodically all get put into a pool of money that I fund weekly.
Future goals: By the end of 2007 I plan on starting a fun spending fund for my wife and I with around 1.5% of our income. By the end of 2009, when all the debts will be paid off except the mortgage, what I was paying into the personal loan will go to the mortgage to pay it off early and what I was paying for the car will go into yet another savings account for our next vehicle purchase. Then I can take that 5% extra we were putting as debt repayment into our Roths.
Let’s see….we should be debt free, except the house, in August, after two years of nonstop intensity, so I’ve been thinking a lot about this. I guess I should start by saying the hopes of starting our family our on the right foot is what has really kept us focused on paying off debt since the beginning, so we hope there’s a baby in our near future, which would be a huge reward for all our hard work! After that, an emergency fund of 3-6 mos. of expenses; then a newer car to replace whichever of our two 11-year-old cars dies first; a water softener; new matress; a new mountain bike for my husband so we can ride together; dishwasher; entertainment center…in that order ; )
I recently paid off all my credit cards and only debt remaining is mortgage. Since credit card debt is all gone and as I have enough cash aside for emergency fund, I have decided to put excess cash into builing wealth by buying index funds. According to my calculation, if I put away $10K a year at 10%/year return, after 20 years, I would have $445K. Obviously this is not guaranteed number but I want to have compound interest work in my favor, reverse of what was happening when I was paying credit card companies. I am also putting $10K a year into 529 plan which is maximum state tax deduction given in NY state.
First thing I will do is to beef up my emergency savings fund. Then start saving for my next house down payment. I currently own a home and would love to have the choice to either rent it out or sell it. I do not want to be forced into selling it to have a down payment for another home. My girlfriend and I are saving for the house down payment as if we do not have any current home equity.
I will focus on living life before the debt tried to take control of it. There’s so much focus on using money to pay the debt back that it becomes the norm to live as though a fraction of income is already dedicated for a particular purpose. Granted I think saving money is important, and once debts are paid why not save for long and short term goals. I think saving for a vehicle or vacation would be decent short term goals. Home down payment or saving for college are long term goals. Credit cards are not an enemy, carrying a balance is what made them negative in the first place, so paying it off every month forward is the only way to stay debt free.
“Those who cannot learn from history are doomed to repeat it.” – George Santayana