It doesn’t matter whether its student loans, medical debt or a car loan — it’s not fun to owe money. So, it’s a huge relief and a satisfying feeling of accomplishment when you’ve worked your way out of debt. Once you’ve paid off your loans, there are many ways to use the extra money. But where should you start? And how can you be sure that you are using that extra income wisely?
While it’s not exactly a financial goal, your first step should be to celebrate. Getting out of debt is far less common than you might think. U.S. consumers owe $357 billion in credit card debt, and a whopping $1.44 trillion in auto loans. Clearly, it’s easy to get in debt, but it’s difficult to escape its clutches. You did it though, and now it’s time to reward yourself for the sacrifices you made along the way.
Take that trip you’ve been putting off, go to a fancy restaurant you’ve wanted to try, make that frivolous purchase you’ve resisted — you deserve to live a little. Just don’t go overboard; after all, the last thing you want to do is go back into debt.
2. Create an Emergency Fund
Unexpected expenses have a tendency to pop up when you, well, least expect it. Put some of your extra cash toward a savings fund allocated for emergencies so that you don’t have to tap into a credit card to cover a surprise expense. Not sure how much to stash away for a rainy day? A good rule of thumb is to set aside the same amount you were once spending each month to pay down your debt.
3. Save for Retirement
On the surface, building your retirement fund may not be the flashiest or most fun way to spend your money, but it is arguably one of the most important. And the sooner the better since you’ll want to take as much advantage as possible of compounding interest — when interest accumulates based on your principal investment plus the interest you have already accumulated. Get started investing in your future by speaking with a Farm Bureau wealth management advisor.
4. Protect Your Future
In the past, you may have purchased less insurance than you would have preferred, simply because you were paying down debt. Maybe you got life insurance that equaled three times your annual income, instead of the recommended 10 to 12 times. Or it’s possible you decided not to add comprehensive to your auto insurance, even though you would have liked the extra coverage. Now that your debt responsibility is nil, consider putting those extra funds toward better protection for your home and family.
5. Save for a Home
Buying a home isn’t just about moving on from renting. A home purchase has many financial benefits. First, you’ll control your housing costs. That means no more rent increases. Second, you’ll get a tax deduction for home ownership. And finally, once you’ve paid off your mortgage, you’ll have secured housing. That means, if the market takes a turn, your housing situation will be mostly insulated, unlike those who rent. For these reasons alone, you should focus on saving a down payment for a home.
If you already own your home, you’re not out of the woods yet. Your next goal is to get completely debt-free by paying it off. It may be easy to wait out a 15- or 30-year loan, but if you put a little extra money toward your principal each year, you’ll be amazed at how much quicker you can pay off your mortgage.
6. Save for Your Child’s College Education
Securing your financial future is important. That’s why retirement savings and home purchases should be your primary focus. However, if you have the additional resources, consider saving for your child’s education.
From 1980 to 2019, the cost of attending a four-year public university increased 169%. While the rising cost of higher education has slowed considerably in the last year, it’s still on an upswing. You can help your student by saving money in a 529 Plan or an ESA. If you can cover even a portion of the cost of college, you’ll be helping your children avoid having unnecessary debt when they graduate.
We Can Help!
This is a major financial turning point, so it’s time to re-evaluate your coverage and protect your future. Speak with a Farm Bureau agent and a Farm wealth management advisor about the next steps on the road to your financial health.