Step 7: You’re Debt Free!
Now it’s time to celebrate! Go out to eat, buy a special something, or do whatever you want! Just don’t go back into debt to do it!
Now you can really get on the path to true wealth-building. But you might wonder, what do I do next?
What to do after you get out of debt
Believe it or not, your journey doesn’t stop here. Getting out of debt is A goal, but it’s not THE goal. It’s a means to an end rather than the end itself.
Remember earlier when we talked about knowing your “why” and creating vision? This is where you get to put those plans into place!
Here are some things you can do as you continue your journey:
Build up a 3-6 month emergency fund
Going forward, you’ll need 3-6 months of expenses saved up in an emergency fund.
No, your emergency fund is not an investment. It’s a shield to protect you whenever life happens. And yes, something bad will happen to you eventually.
This serves as your shield to protect you from the worst. Keep it in an accessible money market account and use it only when absolutely necessary.
To give you an idea of how much you need to save, just take a look at your budget.
Let’s say the amount you need for your basic living expenses comes out to $3,000 per month. That means a 3-month emergency fund would come out to $9,000 and a 6-month would be $18,000. If you like, you can round those up to $10,000 or $20,000.
Just make sure your emergency fund is enough to cover your basic necessities like food, housing, utilities, and transportation.
Start investing 15% of your household income into retirement.
Now is the time you really want to take advantage of the 8th wonder of the world: compound interest.
Most experts agree that putting 15% of your gross income into retirement is a great place to start. That way you don’t break the bank and you end up retiring with a pretty nice nest egg.
This is especially true if you start young. Let’s run a few numbers as an example:
Currently, the average household income in the United States is around $60,000. Now, let’s figure out how much you should invest on that income. Take $60,000 and multiply it by .15 and you end up with $9,000. Therefore, your goal is to invest $9,000 per year, or $750 per month, into retirement.
Now we can make some estimates! Let’s say you start investing at age 25 and plan to retire at age 67. Assuming you invest $750 per month and receive a 7% yearly return on average, you’ll end up with $2,282,779.
Wow! And here’s the good news: if you make smart investments you’ll likely end up with an even higher return! If you managed to get 10%, you’ll end up with $5,808,221! And a 12% return would get you $11,223,836. And this assumes that your income doesn’t change!
So you see now the importance of starting early. And even if you didn’t start early, you still have a world of opportunity before you!
Where should I put my investments?
To begin with, you should invest in your work 401(k) or retirement plan. If they have a Roth option, I encourage you to take it. You can invest your entire 15% in your company’s Roth 401(k) or 403(b) if you like.
Roth means you put the money in after they take the taxes out of your paycheck. Therefore, you don’t have to pay the taxes later.
In all likelihood, your company may also offer a match. For example, you put in 3% and they match you up to 3%. This is free money! Take advantage of it! However, I still believe you should put in 15% regardless of your company’s match. The reason is that companies may discontinue a match when they run into hard times. Investing 15% regardless of the company match sets you up for success.
If your company doesn’t offer a Roth option, invest up to the match and then open up a Roth IRA. A Roth IRA allows you to contribute up to $6,000 per year (as of 2020). You can put in whatever gets you to 15%.
If you max out a Roth IRA and still have more you can invest, go back to your company’s retirement plan.
Also, both you AND your spouse can open up a Roth IRA! So that’s up to $12,000 per year you can stash there!
What investments should I choose?
I personally invest mostly in mutual funds that have a strong track record.
True, past performance doesn’t necessarily guarantee future performance. However, past performance is usually a pretty good indicator of how well they manage the fund.
There are four types of mutual funds I recommend: growth, growth and income, aggressive growth, and international. You could also call this large-cap, mid-cap, small-cap, and international. Put about 25% in each of these and you’re all set!
But I will say that I strongly recommend working with an investment professional. There’s a lot to learn when it comes to this stuff, and you want to make sure you put your money in the right place.
Just make sure you choose someone who actually educates you about your investments. Tell them to explain it to you in plain English. If they can’t, then find someone else.
I personally use one of Dave Ramsey’s SmartVestor Pros and I’m beyond satisfied. Click the link above and find one in your area.
Start saving for your child’s education (if applicable)
Everyone wants their children to start life on the right foot. Now that you’re out of debt, you have a golden opportunity.
First of all, I want to say that college is not for everyone. That’s right! I do not believe that everyone needs a college education to succeed in life. In fact, college would be a total waste of money for some.
For example, I have friends who are linemen, machinists, mechanics or other tradesmen that make $50,000, $70,000, or even more than $100,000 per year! And none of them have a college education.
However, they do have some form of trade school. And trade school does cost money, which means you need to plan for it.
Now that I’m off my soapbox, I still believe there is value in college education if you actually use your degree. For example, obtaining degrees in engineering, marketing, business, education, and many others provide excellent opportunities.
That said, you can decide how much to invest in your child’s education. There’s not necessarily a recommend percentage, but $1-2,000 per year might be a great place to start.
Also, check out my article on the best way to pay for college without student loans.
Work towards paying off your home
What’s another thing you can do with all that extra cash flow? Start working towards paying off your house!
Think of how much goes into that mortgage. Maybe it’s $1,000 a month, $1,500 a month, or more. How awesome would it be to do what you want with that money?
Consider putting any money that doesn’t go towards your other goals into your mortgage. If you plan carefully, you’ll end up paying off your mortgage early!
If you don’t have a house yet, take a look at my article on buying versus renting. Or even if you do, check it out for best practices when it comes to paying off your home early.
Enjoy some of your money!
Finally, I encourage you to actually enjoy some of the fruits of your labor! Go out to eat, save up for a vacation, and don’t be a stick in the mud! The time for intensity is over.
Therefore, slow down and enjoy your life! Take your spouse out for a date, give generously, and do something fun!
The joy of giving
I mentioned earlier that you should still give even when you have debt. Now is the time to show generosity on an even deeper level.
Why? Because now you have the money to do some real good! Tip extra when you go out to eat, pay for someone’s electricity bill, or give regularly to something that advances God’s kingdom.
And here’s another tip: don’t go around and flaunt it.
I’ll let Jesus teach us about this one:
“Thus, when you give to the needy, sound no trumpet before you, as the hypocrites do in the synagogues and in the streets, that they may be praised by others. Truly, I say to you, they have received their reward. But when you give to the needy, do not let your left hand know what your right hand is doing, so that your giving may be in secret. And your Father who sees in secret will reward you.”Matthew 6:2-4 ESV
Ultimately, whatever you give to others is between you and God. Who cares what others think of you? They don’t have to know the extent of your generosity. But God will know.
And that’s where the true joy lives! You see, giving to others isn’t just about them. It’s about honoring and glorifying Christ our Savior.
Our God is a generous giver. He made this known to us most when he gave up his only Son for our salvation. That is indeed the ultimate gift and the ultimate sacrifice.
But God made us in his image. We reflect the image of God when we give generously. Therefore, I encourage you to use your newfound financial freedom for good. Give.
Resources to Help You Get Out of Debt and Build Wealth
I’ve already mentioned this, but Dave Ramsey’s book The Total Money Makeover is one of the best resources out there. His methodologies are the ones I personally use. Therefore, I can’t recommend his book enough!
Do you want to learn what it takes to becomes an everyday millionaire? This book is the biggest study ever done on millionaires. Some of the results may surprise you. Check out Everyday Millionaires by Chris Hogan and be inspired!