I’m Finally Debt Free — Now What Should I Do?

Being in debt can be incredibly stressful, especially if you have a family or other loved ones to support. Living paycheck to paycheck while a significant portion of your income is being used to cover credit card interest and other debt repayment severely limits your financial flexibility. It’s difficult to plan family trips and make sporadic impulse purchases, let alone save for the future.

Fortunately, there are several creative options for those looking to eliminate their debt and start with a clean slate. Beyond sticking to a strict budget and gradually paying off creditors, you can explore debt management options like debt consolidation, balance transfer offers and, as a last resort, bankruptcy. There’s no reason to feel shame about having to take any of these routes, as more than 430,000 Americans filed for bankruptcy in 2023. But it’s imperative to be proactive with your money to ensure you don’t end up in a similar situation in the future.

Here are six things you should do after clearing your debt.

Open an Emergency Savings Account

Opening an emergency savings account is one of the first things you should do after clearing your debt. Unexpected expenses, like automobile repairs and medical debt, may have been among the leading contributors to your prior messy financial situation, particularly considering 3 million Americans have more than $10,000 in medical debt. With extra income from not having to pay interest on debt, you should be able to set aside money in an emergency fund to cover these expenses without having to worry about missing bill payments.

Having an emergency fund can also provide peace of mind if you lose your job or pursue other career opportunities. Ideally, you should aim to have at least three months’ worth of expenses in a high-yield savings account. The money should be accessible, meaning not tied up in the stock market, but not connected to a checking account (so as to avoid the temptation to spend it).

Start Saving for Retirement

You should also allocate income to a retirement savings account, whether it’s an IRA or employer-sponsored 401(k) with matching deposits. Contributions to these accounts offer compounding interest and tax benefits, allowing you to catch up on retirement planning while also easing the financial burden come tax-filing season. There is no one-size-fits-all approach for retirement, but many experts suggest saving at least 10 times your salary in your final working year.

There are many different factors to consider when saving for retirement, including lifestyle expectation, inflation, and potential medical expenses. It’s best to speak with a qualified financial advisor to decide how much you should and can afford to set aside for retirement.

Stop Using Credit Cards

In 2024, credit card and auto loan delinquency rates were at their highest levels since 2008. Until you have shown you can consistently and effectively manage your income and make bill payments, it’s best to avoid using credit cards. It can be intimidating to not have a fall-back option if bills/expenses pile up, but this is why it’s necessary to have an emergency savings account. Using a debit card in lieu of a credit card is a safer way to give yourself a fall-back or convenience or emergency option, as the funds must be available in the account before use.

Ideally, you should close your credit accounts and cut up and throw out all cards. If you need to keep your credit account open as an extra safeguard, be sure to at least remove card information from online shopping accounts such as Amazon.

Keep Other Credit Accounts Open

While you should stop using credit cards, you don’t need to — and shouldn’t — close your credit accounts. Keeping these accounts open and debt-free is beneficial to your credit score, which is important to maintain if you intend on making major financial decisions in the future, such as buying a home.

In some cases, lenders close consumer credit accounts for extended periods of inactivity. You can avoid this by using your card to cover one or two small recurring payments, like streaming subscription services, and paying them off immediately to avoid late fees and interest.

Revisit Your Budget

Once you’ve figured out your credit accounts and started planning for the future, you should establish a strict budget to keep yourself from accruing more debt. Take account of all of your monthly expenses — including mortgage/rent, car payments and gas, utilities, and groceries — and your monthly income. It is important to be realistic about non-recurring expenses such as holiday and birthday spending , or other occasional or future planned expenditures. Make sure that, once your bills are covered, you have enough left over to fund emergency savings and retirement accounts. Revisit your budget every few months and adjust according to any changes in your income or expenses.

Keep Setting Goals

Goal setting can be a helpful strategy for keeping your finances under control. When you were in debt, the goal of one day being debt-free likely kept you motivated to cut costs and find creative ways to improve your financial well-being. In order to avoid the temptation of needless spending, keep setting financial goals. These can include saving for a new home, retirement, or your children’s college tuition.