Big Announcement: We’re debt free!!!!! After 14 months of marriage and making payments for 8 of those months, we are officially debt free. That means we were able to pay off $23,500 in 8 months. Praise the Lord! Happy Dance!
Although we are so excited to be debt free, the idea that we are no longer united against our loans is almost kind of sad. We are deciding now to continue to stay united and focused on meeting financial goals to prepare us for our future. While many of you may be in the battle against debt still, a lot of you may be debt free already. You might be asking, “I’m debt free, now what?” What are the best steps to take after getting out of debt. Let me tell you what NOT to do. Do not decide that now you can immediately buy a car, a house, a pool, or any other large purchase you have been telling yourself you cannot make. Little steps, my friend. You’ve probably sacrificed a lot to get to this huge moment where you’re finally paying that last payment. Woohoo!
I recommend that you celebrate (in a small, go out to dinner kind of way) and then begin to evaluate your next financial goals. I’m going to share a few answers to the question, “I’m debt free, now what?” I’m attempting to put these answers in a somewhat step-by-step order. However, everyone is different. Needs and circumstances may adjust which of these obstacles you tackle first. Just be sure that you think through your decisions carefully.
- Build up your emergency fund to 3-6 months of living expenses.
For my husband and I, this would be anywhere from $4,500-$9,000. It may be more for you depending on your stage of life, cost of living in your area, and whether or not you have children.
Building up an emergency fund is a smart way to avoid going into debt again due to unexpected circumstances like a home repair or a car problem. You should never rest in money as your security, but you should realize that there is comfort in knowing that if your car blows a tire, you have money in the bank to buy a new one.
My husband and I are choosing to make this our next step. We’re planning to build up an emergency fund that would allow us to pay our current bills and living expenses for 3-6 months even if one or both of us were unable to work. Although the likelihood of losing our jobs seems slim right now, you never know what might happen. We feel that saving up emergency money is making wise use of the extra God is allowing us to save now that we aren’t paying back debts.
- Save for your next vehicle.
While Ryan and I have been paying off debt, we have been driving two well-used, well-loved cars that are each about ten years old. These cars were hand-me-downs, and we couldn’t thank the Lord enough for the blessing it has been to not have car payments this first year of marriage. It is our goal to never have a car payment.
If you’re like us, you might be driving old cars in an effort to focus money on debt payments. Good for you! Eventually though, old cars need repairs or need to retire. Our first goal after paying off our debt will be to save for our next car which will most likely not be a brand new car, but a relatively new used car. Because cars depreciate so much in value, I highly recommend not buying a new car off the lot.
- Save for a down payment on a house.
So many couples today buy a house with little or no money down and end up paying a TON in interest. If you don’t believe me, check out The Truth about Mortgages on Dave Ramsey’s website. Within that article is a mortgage/interest calculator. Let me share with you some simple math…
Let’s say you want to buy a $150,000 home. Let’s say you decide to put 10% down and have a 30-year mortgage for the other $135,000 (we’re even ignoring closing costs and home upgrades). If your interest rate is 3.44% (average this week according to my research), and you do not make any more than your minimum payment. You will end up paying $601.70 per month for 30 years. Your total repayment on that loan will be $216,610.58. That’s $81,610.58 in interest! Holy cow!
The bottom line is, planning ahead, making sacrifices, and paying extra can save you serious money in the long run. I don’t know about you, but I could certainly think of other ways I would prefer to spend $81,610.58. Don’t underestimate the importance of saving before buying a home.
- You should start saving for retirement, yesterday.
If you aren’t saving for retirement now, you need to be. My husband made the choice to start investing in his retirement account when he was 18. We are now invested in multiple programs both independently and through his work. While we don’t have a ton now, we are definitely on track to comfortably retire someday. Although I can’t imagine Ryan getting tired of his technology work.
Check this out, using this Millionaire Calculator from money-zine.com, I calculated how much a 25-year-old could invest in order to retire on $1 million by age 65 if he had a current net worth of $10k and if he was getting a 7% annual return. The result? $4,259. A 25-year-old would need to be saving $4,259 yearly for those 40 years before retirement.
If that person didn’t start saving until they were 35 years old, they would need to save $9,781 yearly to achieve the same goal of $1 million by 65. That’s double the investment per year! If the same person didn’t start saving until they were 45, they would need to save $23,449 per year! 45-year-olds typically have children in college and homes to finish paying off. That certainly doesn’t seem like the time to try to put away $23.5k a year!
I hope this basic illustration is enough to motivate you to start saving now. A consistent small amount saved little by little means less of an investment and more of a return. Set up automatic withholding. Look into your Roth/401k options and consider doing both. Don’t wait! Honestly, social security is not enough to meet your needs, if it’s even still around in the future. (Sorry, not trying to be political.)
- Consider saving for the college education of your children.
Personally, my parents helped me minimally in college due to their financial circumstances. Honestly, I was okay with that because it taught me to work hard and value the classes that I was paying good money to take.
If you are burdened to help your children with their college education expenses, start saving! Setting aside a little each month could be a great gift to them in their future. I still hope that someday my kids will be motivated to work hard to pay for college and value what they learn more because they had to earn the privilege.
Because of that, I appreciate one parent who told me that they faithfully saved $10k for each child in their family, then they matched each dollar that their child raised for school. Another parent I know had a child go to local community college, but the child lived at home. This parent charged the child rent (minimal), and returned the total sum that the child had paid in rent as a graduation present.
- Make it your goal to increase your giving yearly.
I am a firm believer in giving, even while paying off debt. In fact, I wrote a whole post about giving while in debt. But once you are debt free, giving can and should increase. I want to make it my personal goal to give more and more money away each year. Charities, missions work, church needs, college students, and family could all be encouraged by a generous gift, large or small.
When you give, you invest in the lives of others. Some people will say, “I can’t afford to give money away.” I’ll argue that you can’t afford not to give money away. Invest a little in the lives of people. You’ll be amazed at how it can affect them.
- Consider saving for major life events like the weddings of your children, family vacations, or anniversary trips.
The more you’ve saved ahead, the less you feel stressed concerning major events. Knowing that you don’t have to worry about how you’re going to pay for trips or weddings can take the pressure off of you and your family and allow you to enjoy the events. Although not nearly the priority that some of the above suggestions are, this suggestion could be something to plan for when you feel confident that your major financial affairs are in order.
Saving can become so exciting as you see needs met and others blessed. I hope this post motivates you to save and plan ahead for the big expenses in life. I am so excited to be debt free and on track to saving for the “big moments” in life!