Congratulations! You are debt-free now!
No matter how relaxing this sounds, the fear of losing track of finances always lurks there.
Many people feel lost after getting debt-free and paying every debt, including loans for the unemployed from a direct lender. However, the fact is, this is the time to manage your finances well rather than getting lazy about it.
The debt-free stage is a crucial moment where you make active decisions regarding staying out of debt and avoiding getting into debt all over again.
It is imperative to have a concrete financial plan to achieve your goals and control your finances.
Here is what you should do after gaining a debt-free stage:
What To Do Once You’re Debt-Free
1) Create an emergency fund
After you have finished celebrating your victory over debts, take charge of things and plan from scratch.
If you don’t want to engage in debt again and wish to bid goodbye to it forever, you need a futuristic plan.
Considering this, you can set up an emergency fund and save for 3 months for it. For this, calculate your monthly expenses and multiply the number by 3.
Yes, you need 3 times the money in the emergency fund.
For example, your monthly expenses are £5000. You need to ensure a whopping savings of £15000 for the emergency fund.
Though it may sound exhaustive in the beginning, once you save enough for meeting emergencies, you will reduce debt trouble and establish financial balance.
2) Revise your budgeting strategy
After one becomes debt-free, revising the budget becomes the most important part of ensuring a healthy lifestyle. Debt-induced lifestyle makes budget hit rock bottom. Thus, sit with a pen and a paper, revise your expenditure goals, and re-frame the budget.
- Figure out pending payments (if any)
- Re-incline your income to pay another debt (if any)
- Seek sources for increasing income
- Decide your needs and wants; prioritize needs
- Decide on urgent expenses- school fees, bills and make a separate budget for unavoidable expenses
This is how you can segregate your money and save accordingly. Spending more may be tempting, but aligning your finances with your savings goal will be more rewarding.
3) Future Planning
Once you have your finances sorted and enough savings with you, you can plan your career or any future event sagaciously. Think about your goals- short-term and long-term.
For example, if you wish to extend your studies or buy a house, you may save enough for the down payment or the course in advance.
Design a saving plan in line with the goal and the time it will take to achieve the financial goal. It will help you manage finances well and save enough for your goals. To set a reminder, you can just automate savings. It will help resist the urge to spend more.
4) Keep your credit cards functional
Having paid off your debt doesn’t mean you should stop using credit cards altogether. The length of credit history and credit score holds the utmost importance when it’s about applying for loans. Your credit score is the prime factor that decides whether you will qualify for a future loan.
Therefore, even if you have stopped using credit cards altogether or use them rarely, keep your accounts open.
Suppose you are worried about the credit card company closing your card, setting up another payment. It may be like paying for OTT (Over the Top) platforms, like Netflix, and keeping your credit cards functional.
It is one of the best ways to keep your credit cards functional without using them regularly.
5) Start Investing
No, it’s not a joke!
You can start investing once you are debt-free!
Investing carefully and futuristically in stocks and equities can help you save enough for the future.
Apart from that, if you are seeking other investment options, you can try real estate investing. Though riskier, it gives good returns.
Whatever way and mode you choose to invest, the right time to build wealth is now!
6) Save for retirement
You can look beyond 401(k) or 403 (b) for saving for your retirement.
Check your eligibility for an IRA. This post-taxation option allows one to diversify the tax portfolio. It helps you withdraw funds in case of emergency- like medical expenses or loss of business due to natural causes.
Another option is HSA (Housing Savings Account). Apart from ensuring good savings, it allows you the benefit of gaining compound interest in your contribution to the market.
If you don’t use it for health or retirement, you can use them penalty-free after 65 years of age. You just need to pay off your taxes on time.
7) Keep track of your credit card payments
Now that you have paid off your credit card debt, it is high time to use credit cards wisely. Because after paying off a credit card debt, it may trouble you again. If you have gone through piled-up credit card debt earlier, the wise thing to do will be – don’t use credit cards more often.
Set up a budget according to the income and use cash only if possible. It will help you protect yourself from debt and keep your finances stand clear of debt.
For restricting the use of credit cards, delete the information from online shopping portals altogether.
8) Search for passive income sources
Regardless of your current income, wouldn’t it be nice waking up to dollars with little legwork? You can rationalize it by exploring passive income sources like online teaching, renting a room or house, or investing in mutual funds or equities.
Passive income sources will help you support your life goals and rationalize financial freedom down the lane.
Besides these, what would you have done after ensuring a debt clearance?
Before taking loans without a guarantor in the UK, explore your finances and make a strict plan to re-pay it within the deadline and enjoy financial freedom.
And by the way, don’t forget to enjoy the newfound freedom!
Description: How to manage finances when you are debt-free? Here is how to avoid falling into one again!