Clearing debts requires huge determination and great control over money. It can take months or years of hard work and discipline put into. The debt holder might have also given up on several things, even some important aspects like savings, retirement, etc. with just debt clearance as a focus. Though it can be an exciting factor when you are almost close to the clearance and you will no longer be held by debts, did you think what’s your financial plan after then? Your entire financial future lies in the question, What’s next?
You might have already gained good control over finances and understood how money works so once the debts are cleared it won’t be the right thing to get lazy and make bad use of money. Here’s how you can make a solid plan with your finances post-debt clearance,
Reevaluate your Budget
Previously, you might have included debt instalments in your budget. But now once these debts are cleared, you have to reset your budget with a new plan. As you don’t have the instalments anymore, you can allocate this money to something else. Though it can be tempting to make lavish use of the money as you don’t have any major responsibilities, it can put a bad impact on the finances later especially during inflation. So, list down your incoming and outgoing money and prioritise your expenses accordingly. Add new goals to the list like investments, improvise savings plan, retirement fund, buying a new house, getting a new car, etc.
Of course, you can relax a bit with your finances and spend on fun activities but ensure you are not making unnecessary expenses that can affect you financially later in the future.
Check: How can I budget my salary in Dubai?
Make bigger space for Retirement Funds
Usually, some people don’t consider saving for retirement by giving debts a higher priority while some might have saved little for retirement. But now as the debts are cleared you can start saving for retirement funds as it is the most important part of financial life. Though it can be hard to think about something that’s going to happen after 2-3 decades, it is important as your active income (for salaried individuals) may stop once you retire and you should be financially backed.
Therefore kick start saving for retirement funds by including inflation and ensure you will have enough money to live a financially peaceful life even post-retirement.
Save for Emergency Funds
You might have not considered having emergency funds as few people consider debts as an emergency. But it’s time you understand the importance of emergency funds as it would help you during financial emergencies, job loss, etc.
You must have saved at least 6 months of your monthly income in your emergency fund. Having no debts now, you can plan and start saving for emergency funds. If you already have an emergency fund, then you can add more money to it. Remember the emergency fund should save you for 6 months with basic expenses like rent, groceries, utility bills, credit card bill, etc.
Start Investing
As you have cleared the debts and have the extra money in hand it would be wise to invest it rather than leaving it idle in the wallet or bank account. You can find an investment planner to learn about investments and start investing. You don’t need a lump sum amount to invest, you can start small with various investment options like mutual funds, etc. Learn about investments and know what can be a good fit for you. Determine your financial goal and know your risk appetite which is very important as you just got out of debts you don’t want to get into something bad.
New Financial Goals
Previously, your financial goal might have been to clear the debts and which you have succeeded well. Now with a new budget in progress, it’s time for new financial goals. Plan something for your future like buying your dream house or getting a new car, your kid’s education fund, etc. Once the financial goal is set you can start working your expenses towards that goal without losing control over money.
Any financial goal you set should be working towards the betterment of your life, a financial milestone and that gives a path towards financial independence.
Definitely, clearing debts will be a great sigh of relief and gives a mental peace. But the afterlife is what matters as you have already crossed one big milestone in financial life, there can be various things in store for you. Whatever you do, just make sure you don’t lose control over what you’ve gained and have the same discipline towards money. But again, it doesn’t mean you restrict yourself from having fun. You can pat yourself on the back and start prepping for the next financial milestone of your life.
About the author
Nikitha is a Senior Analyst at MyMoneySouq.com. She has been writing about personal finance, credit cards, mortgage, and other personal finance products in the UAE. Her work on Mortgage loans has been featured by the GulfNews and other popular Financial Blogs in the UAE.
