It doesn’t matter whether its student loans, medical debt or a car loan — it’s not fun to be in debt. So, it’s a huge relief and feeling of accomplishment when you’ve worked your way out of debt.
Once you’ve paid off your loans, there are so many ways you can use the extra money. But where should you start? How can you be sure that you are using that extra income wisely?
Here are several ways you can make the most of your newfound financial freedom:
While it’s not exactly a financial goal, your first step should be to celebrate. Getting out of debt is far less common than you might think. U.S. consumers owe $784 billion in credit card debt, and a whopping $1.19 trillion in auto loans. Clearly, it’s easy to get in debt, but it’s difficult to escape its clutches. You made it out, and it’s time to reward yourself for the sacrifices you made along the way.
Take that trip you’ve been putting off, go to the fancy restaurant you’ve wanted to try, make that frivolous purchase you’ve resisted — you deserve to live a little. Just don’t go overboard; after all, the last thing you want to do is go back into debt.
2. Create an emergency fund
Unexpected expenses have a tendency of popping up. Whether your car needs a costly repair or an appliance needs replaced, putting some of your extra cash toward an emergency fund gives you the cash to cover unexpected expenses.
3. Save for Retirement
Once you’ve enjoyed your moment in the sun, it’s time to refocus your financial goals. The first goal is saving for retirement.
If you’ve been underfunding your retirement while getting out of debt, now is the time to get serious.
4. Protect your future
In the past, you may have purchased less insurance than you would have liked. Maybe you got life insurance that equaled three times your annual income, instead of the recommended 10 to 12 times. It’s possible that you decided not to add comprehensive to your auto insurance, even though you would have liked the extra protection.
5. Save for a Home
If you haven’t yet purchased a home, you’ll want to start saving up for a down payment. If you can, it’s best to save a 20 percent down payment so you can avoid private mortgage insurance. Another benefit is you’re likely to get better interest rates and spend less on the home in the long run.
Buying a home isn’t just about moving on from renting. A home purchase has many financial benefits. First, you’ll control your housing costs. That means no more rent increases. Second, you’ll get a tax deduction for home ownership. And finally, once you’ve paid off your mortgage, you’ll have secured housing. If the market takes a turn, your housing situation will be mostly insulated, unlike those who rent or still hold a mortgage. For these reasons, and so many more, you should focus on saving a down payment and getting a home.
If you already have a home, you’re not out of the woods yet. Your next goal is to get completely debt-free — pay off the home! It may be easy to wait out a 15- or 30-year loan, but if you put extra money toward your principal each year, you’ll be amazed at how much quicker you can pay off your mortgage.
6. Save for Your Child’s College Education
Securing your financial future is most important. That’s why retirement savings and home purchases should be your primary focus. However, if you have the additional resources, you should consider saving for your child’s education.
The cost of attending a four-year public university has increased 36 percent over the last 10 years. That cost is only expected to grow. You can help your student by saving money in a 529 Plan or an ESA. If you can cover even a portion of the cost of college, you’ll be helping your children avoid having unnecessary debt when they graduate.
We can help!
This is a major financial turning point, so it’s time to re-evaluate your coverage. Talk to your Farm Bureau agent and see where you might need more protection. You’ve reduced your financial risk by eliminating debt. Purchasing additional insurance can further reduce your risk and help you protect the debt-free life you’ve worked so hard to achieve.