Life After Debt: What Comes Next Once You’re Debt-Free?

Think about what your life after debt looks like. Without a plan, it can be easy to fall back into whatever got you into debt in the first place.

Contributing Writer at Tally

It’s hard to imagine life after debt when you’re in the thick of it. Debt can consume so much of our time and energy that it’s hard to focus on anything else.

But there’s light at the end of the tunnel: You’ll pay if off eventually. So, what comes next?

It’s important to think about life after debt. It’s even more important to think about what comes next before you pay off your debt. Because if you don’t have a plan, it can be easy to fall back into what got you into debt in the first place.

Thinking about your plans for life after debt before they’re a reality can help you prepare for when that big day comes. Here are four aspects of your finances to consider once you pay off your debt:

1. Get serious about an emergency fund.

An emergency fund is a savings account you open with a certain amount of money set aside specifically to cover emergencies.

Having an emergency fund is crucial. It can prevent you from relying on things like credit cards and personal loans to cover unexpected expenses — the type of things that often cause us to go into debt in the first place.

In fact, 4 out of 10 American adults said they wouldn’t be able to cover an unexpected cost of $400. These expenses are things like when your car breaks down or you get stuck with a hefty medical bill. What’s worse: 1 in 4 adults also said they’ve skipped necessary medical care because they couldn’t afford it.

When setting up an emergency fund, it’s a good idea to use a separate bank account. That will help block any temptations to use that money on anything other than an emergency.

Having an emergency fund is crucial. It can prevent you from relying on things like credit cards and personal loans to cover unexpected expenses — the type of things that often cause us to go into debt in the first place.

And as for how much you should save, most experts recommend setting aside enough to cover at least three months’ worth of expenses. That can feel like a lot of money when you’re starting out. Once you find yourself in life after debt, a painless way to set up an emergency fund is to set aside what you would have put toward your debt each month.

2. Save up for large, anticipated purchases.

Maybe your car is on its last leg. Maybe you want to celebrate overcoming your debt by taking your family on a small vacation.

Whatever it is, you can use this opportunity to pay for it in cash instead of sticking putting it on a credit card and hoping for the best. Paying for major purchases with money you already have can not only prevent you from going back into debt, but it can boost your confidence in your financial abilities.

Paying with cash can also keep your spending in check, as people who pay with credit cards are willing to spend 83% more on a purchase.

When saving up for a large, anticipated purchase, try to set an exact amount of money you’re willing to spend and a realistic timeline to make the purchase. That will allow you to break down the amount into more manageable chunks.

Just like saving for an emergency fund, it can be helpful to think about the money that you’re setting aside for a major purchase as the money that was previously going toward your debt every month.

3. Keep building (or rebuilding) your credit.

When you take on a lot of debt, it can have a harmful effect on your credit score. But once you’re debt-free, it’s in your best interest to concentrate on building or rebuilding your credit.

You might be thinking, “I’m not taking out more loans any time soon.” But a healthy credit score is an important safety net for your financial future. You also can’t fix your credit overnight, which means it’s always a good idea to start now.

Your credit score can affect a number of things, ranging from how much you pay for utilities to your approval on a rental application — it can even be a factor on job applications.

Needless to say, the higher your score, the better chance you have for lower interest rates and getting approved for new accounts. One of the best things you can do to build your credit is to make on-time payments on all loans and to not take on too much debt at once.

You might be thinking, “I’m not taking out more loans any time soon.” But a healthy credit score is an important safety net for your financial future.

Even after you reach that magical place of life after debt, it makes sense to use your credit card for smaller purchases that you’re confident you can pay off on time every month. That way, you’re showing that you can be responsible with your credit card usage. Most experts recommend limiting your credit utilization rate to 30% or less.

One helpful way to get the benefits of a credit card without the temptation to overspend is to only use it on recurring expenses, like bills or membership dues. If you set up those expenses for automatic payments, you can keep your credit card out of sight and cut down on impulsive spending.

4. Start investing in your future.

Retirement may seem like it’s in the distant future, but it can creep up on you sooner than you think. So, would you rather be surprised with a large sum of money when you’re ready to settle down for good, or not have enough to do what you want?

Investing doesn’t have to be difficult or intimidating. Many employers provide what’s called a 401k, which is a type of retirement account. How it generally works is that you elect to set aside a certain amount of money from your paycheck. That money goes into your 401k account before it’s taxed. In some cases, employers will actually match a portion or all of the money your contribute to your 401k account. Even an amount as small as $25 a week can really add up.

If your employer offers a 401k, it’s worth considering it as an option for your future. But if your employer offers a matching contribution, most experts recommend taking full advantage of it — after all, it’s free money.

There are limits to how much you can contribute to your 401k plan each year, but if you’re eligible for employer match, strive to contribute as much as you can to get your full employer’s match.

There are other types of retirement or brokerage accounts you can open to set aside even more money or retirement. How much you want to set aside, as well as the types of account you want to open, will depend entirely on your situation.

If you’re unsure about what options are best for you, speak to a financial professional who can walk you through the options that work within your budget and lifestyle.

Your debt-free future is waiting.

Whether you’re at the beginning or middle of your debt-repayment journey, remember that your debt-free future waiting. Not only is it possible to pay off all the money you owe, but it’s also possible to stay debt-free once you make that final payment.

With some careful planning and strategic thinking, you can keep advancing in your financial life. Life after debt is about learning from past missteps and becoming confident in your ability to change things for the better.