Life after Debt: The Steps to Take After Reaching the Light at the End of the Tunnel
Debt, even with the right initial intentions, does need to be paid off. If we have discussed this in my office, you have heard me say: “Debt is a math problem, but it is a math problem with emotions tied to it, because no one likes owing anyone money.” This sometimes causes us to do what feels right instead of what the math says is best. For many of our clients, paying off debt appropriately is a high priority before we reach some of the future planning goals.
How Does Debt Arrive and How Do You Pay It Off?
Debt comes into the equation in many forms. It could be:
Student loans (undergraduate, graduate, or medical school) that have grown to an uncomfortable balance.
Purchasing a business or things for your line of work that need to be paid off in a timely manner.
Financial immaturity from your younger self is finally coming to a head via high-interest-rate credit cards.
The need for certain things (vehicles, a house, furniture, etc.) before you are ready to pay in cash.
Debt itself is not inherently bad, but it can overwhelm many people if not handled appropriately. For many of the financial plans we create for clients, a key part of the plan is producing the most sensible way to pay off balances in order to free up cash flow to complete future goals. We have written blogs in the past on this, or someone from our team would be happy to talk to you about what makes sense in your situation. Sometimes it is as simple as looking at the whole picture to see “the light at the end of the tunnel,” so that the plan is easier to follow on the path that gets you debt-free efficiently.
What Are The Next Steps As Soon As The Debt Is Taken Care Of?
For many of our clients, the real financial planning starts after debt is taken care of. Life after debt looks different for everyone, but we generally follow a common path when deciding what to do with the newfound financial flexibility. While we may have been saving a little along the way, once major debts are paid off, we usually have cash in the budget each month to work with (after all, you were likely putting hundreds of dollars, or more, per month on payments to eliminate the debt above).
Here are the steps we usually take after accomplishing the initial goal of knocking out debt:
Do something or buy something fun. I know that it seems counterintuitive that a financial advisor is telling you to go spend some money, but there are things that happen in life prior to retirement (and we do not want to miss everything along the way because we only had retirement in mind), and it is important to reward yourself for accomplishing goals. This positive reinforcement leads to the desire to accomplish future goals as well.
Use a portion of what was originally going toward monthly payments on your other financial goals. The next step, now that available cash flow has increased, is to apply a portion of the excess funds to other goals. This step could mean:
i. Retirement savings and getting back on track.
ii. Funding the next generation’s college expenses.
iii. Building an account for the next house or other major expenditure.
iv. Building a brokerage account for flexibility in the future.
Use remaining funds, if available, to increase your lifestyle. Once the above is taken care of, if there are any funds left, we have a variety of options. We typically have clients wishing to either increase their monthly spending or use the additional dollars to continue accumulating in a brokerage account.
As always, if you would like to discuss your current situation further or have any questions, please feel free to contact me or a member of our team.