Now What? Life After Debt

You did it! You paid off your debt. Perhaps you used debt consolidation or debt settlementcompany. You may have used a debt management or a do-it-yourself program. No matter the route, the success is equally noteworthy.

Now what?

Naturally, one of your major goals is to stay out of debt. Creating and sticking to a firm budget and building your savings will help prevent future financial mishaps. Once a solid base is established you can also improve your credit score, start investing, and set new financial goals.

Create a Budget

A monthly budget is essential for remaining debt free. Unfortunately, 59 percent of Americans do not use a budget. With a few simple steps you can gain control of your spending and prevent future debt. There are a variety of ways to create a budget. You can use a pencil and paper, spreadsheet, or a variety of free or inexpensive online tools. Regardless of your preferred method, you will follow the following basic steps:

  1. Record your monthly income
  2. Make a list of your set monthly expenses- fees that do not change (i.e. rent)
  3. Make a list of necessary monthly expenses starting with the most critical (i.e. groceries)
  4. Make a list of non-necessity monthly expenses (i.e. travel)
  5. Assign a limit to each projected monthly expense

It’s now easier than ever to track and stick to a budget. A variety of free and inexpensive apps allow you to track your spending. You can often create envelopes for different categories and deduct spending throughout the month. It is easy to monitor how much you have spent and how much you have left for a given category.

Another popular method is the all cash envelope method. You pull out cash for each category and put it in an envelope (i.e. $300 for groceries). When the cash runs out you can no longer spend in that category. This may be a good fit if you struggle to pay off your credit cards.

Finally, some people track their spending with a checkbook register. Treat your credit card like a checking count. Subtract every expense, as if you had just used your debit card or written a check, and see how much you have left for the month. When your balance is zero, you can no longer spend for that month.

Build Your Savings

Building your savings is easy when it is automatic. Luckily, most financial institutions allow you to set up automatic transfers. Include savings in your budget. Transferring money as soon as you get your paycheck is the easiest way to quickly build your savings.

Some banks such as Capital One allow you to set up multiple savings accounts. This allows you to save for different needs all in the same place. You can save for emergencies, your dream vacation, and wedding all in one place. Set up each account to receive a set amount each month. You can include this in your monthly expense budget.

Improve your Credit Score

Depending on your type of debt and your debt recovery strategy your credit score could be damaged. Improving your score will help you prepare for future financial purchases. Now that you have paid off your debt you might be thinking about buying a house or a car.

Critical steps to improve your credit score include the following:

  • Make on-time payment on all your accounts
  • Keep your credit utilization ratio under 30 percent
  • Be careful about inquiries and opening new accounts
  • Do not close old accounts

Continually monitor your credit. Many banks and credit cards provide your FICO credit score for free. Make sure to get your free annual credit report. You are entitled to three free reports a year, from Equifax, Experian, and TransUnion. Many people spread these out over the year; check one in January, May, and September. Keep an eye out for fraudulent activity; you may even consider identity theft protection services.

Start Investing

If you do not currently have a retirement account set up, now is the time. See if your employer offers a retirement package. Many experts advise allocating 10 to 15 percent of your income to retirement savings.

Again, set up automatic transfers. If your company offers matching start there. If they do not, there are a variety of other options. Consider opening a 401K, IRA or ROTH IRA. Many investment companies, such as Vanguard, diversify your assets for you.

In addition, you can start investing. Many companies provide simple, hands-off investing. You can start with small amounts. As you feel comfortable you can invest more aggressively.

Set Financial Goals

Now that your budget is under control, it’s time to think about the future. Consider buying a house or traveling. Perhaps you want to start a business. Figure out what is important to you. Create a 5-year and 10-year financial plan to help you achieve your goals.

Congratulations on paying off your debt. Continue to make healthy financial goals. A budget, automatic savings plan, and improved credit score will help you achieve your future financial goals.

This article by Amber Westover first appeared on Best Company and was distributed by the Personal Finance Syndication Network.

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