What do you do when you've finally paid off your credit cards, student loan or other debt? Where does the money you spend on those payments go? If you don't have an answer to that question, get one before you pay it off. Photo by frankieleon.
As business and finance site Daily Worth points out, once your debt is paid off, you'll have a bigger gap in your monthly budget where your payments used to be. That's great news! It's also easy to blow through that money if you don't have a plan for what to do with it. Or worse, you could end up overspending and get right back to your current situation. At the very least, you should save some of that cash for a rainy day:
If you don't have one already, setting up an emergency fund should be your first financial goal, Liz Davidson, founder and CEO of Financial Finesse, says. In her experience working with clients for 17 years, the people who have saved enough money to cover three to six months of expenses are less likely to end up in debt again. "The biggest things that trigger us to go back into debt are those unexpected expenses," she says. "An emergency fund is an automatic failsafe."
After you've paid off your credit cards, you can set aside some money for an emergency fund, start contributing more to your superannuation, or just enjoy a month or two where you're not living at the margin. By having a plan for your debt payments before you pay off your debt, you'll be better prepared to handle the influx of new money after you pay it off.
So You've Paid Off Your Credit Card Debt — Now What? [Daily Worth]