3 ways to use your money after you pay off debt

Paying off your debt is a major milestone worth celebrating. Getting rid of your debt is huge. Knocking out loan balances and paying off credit cards means you can use your money to get closer to your other goals. 

But how exactly should you use that money once you’ve become debt-free? We have three suggestions. 

1. Build your emergency fund

Life is full of uncertainties, and an emergency fund is a way to prepare for those surprises. If you lose your job or are hit with an unexpected medical bill, having savings set aside could help keep you afloat. 

Financial advisors recommend saving enough to cover at least three to six months of expenses. The exact approach will vary, depending on your situation. 

If you’re single and you have backup options, like the ability to move in with family if you get sick or injured, you might need less money set aside. Likewise, if you have a partner and you both earn a good income, you might be able to get by with a smaller emergency fund because each of you could rely on the other to keep bringing in money. If you’re in a one-earner household with kids, however, your fund may need more padding in case the breadwinner is unable to bring in money for a time. 

The key question to ask is, “What would I do if you had zero money coming in for three to six months?”

Make a budget. Add up how much money you typically spend in a month, including housing costs and bills. Multiply that by three to see the minimum amount you should have for emergencies, and by six for the high end. Now that you’ve paid off your debt, you can use the income that was covering payments to boost that emergency fund. 

Keep your emergency cash where it’s easily accessible but also earns interest. A high-yield savings account, which tends to pay more interest than a traditional savings account, can be a good option. Not only will you be able to dip into the account immediately for an unexpected expense, you could also see your money grow over time. 

2. Save for short-term goals 

When you no longer have to pay off debt and you’ve got cash set aside for emergencies, you can focus on saving for short-term goals. The possibilities are nearly endless. Here are a few popular ideas:

• New car

• Down payment on a home

• Home improvements

• New appliances

• Wedding

• Exercise equipment

• Bucket list vacation

• Education or degree 

A general rule of thumb is if you think you will want access to the money within five years, save it instead of investing. Investments can be volatile, and you don’t want to risk having to sell during a downturn. In other words, you don’t want to be in the position of needing to sell an investment at a time when its value is low. 

Budget like a boss and set aside money to stash in a high-yield savings account for short-term goals. Money market accounts are great options too, since they have the flexibility of checking accounts with the interest rates of savings accounts. A Certificate of Deposit is a type of savings account that often earns a good interest rate if you’re willing to leave the money untouched for a period of time. CD terms typically range from one month to five years. 

All of these account options are easy to open online.

3. Invest for the future 

Paying off debt can make dreams of a comfortable retirement closer to reality. Do you want to travel, lounge on the beach, or spend more time with friends and family in your golden years? Whatever your answer, the key to reaching that goal is investing. 

Over the past 20 years, the stock market has averaged an annual return of around 10%. Some years are higher, some years are lower. By setting aside some money each month for investing, you can build wealth over time. If you no longer need to make debt payments, you already have a bit of money to do that. 

If you have an employer-sponsored retirement savings account like a 401(k), contribute at least enough to get an employer match if you’re offered one. 

An employer match means your employer will contribute as much as you do, but only if you contribute. For instance, if you put in 2% of your salary, your employer will put in another 2%. The match is free money that goes into your retirement account to grow over time. You can contribute more, but the employer will likely cap the amount they will contribute. 

An individual retirement account (IRA) is another way to save for retirement. 

Other ways to use the money you used to spend on debt payments

Besides retirement, you likely have other milestones you want to hit. 

If you have a young child’s future college tuition in mind, a 529 plan is a tax-advantaged way to save for that. If you spend a lot on health, a health savings account (HSA) has a triple benefit. You can contribute pre-tax money (up to a limit), the growth is tax-free, and withdrawals are tax-free as long as you use the money for qualified medical expenses. 

If you’ve got goals that aren’t retirement-related, investing via a taxable brokerage account is another good way to save for long-term goals. 

Your future self will thank you.