So You Are Out of Debt, Now What?

You’ve been killing it.  You finally said to yourself, I am tired of being swamped in debt and you did something about it.  Congratulations if that is you!  I’d like to hear your success story of how you got out of debt or what kind of stuff you did to help pay off your debts.  Now the question is, what do I do with the new found money that is in my pocket since I’m not paying payments anymore?  The best thing to do is build up a big, fat emergency fund.  The reason for this is to help prevent from getting back into debt.  For those of you who have ever lost a substantial amount of weight, you know how hard it is to keep the weight off.  You have to keep the same diet and exercise habits that you formed to get the weight off, or else the weight will come back with a vengence.  Debt acts the same way.  If you don’t keep the same spending habits that got you out of debt and buiild up a reserve of cash for unexpected expenses, then the debt will come back and could become worse than it was before. 

The standard financial advisor’s suggestion is to build up a case reserve of 3 to 6 months worth of expenses.  So let’s say that you live off of $3,000 a month to pay for housing, utilities, food, clothing, gas, and other household necessities.  Multiply that $3,000 by 6, and you’ll need to save up $18,000 to have a very comfortable emergency fund.  If you are a one income family, I would definitely suggest you consider saving 6 months worth of expenses or maybe even 9 months.  If you and your spouse/girlfriend both work, then you could probably get away with saving 3 to 5 months worth of expenses.  This fund will financially save you if you lose a job, have a car breakdown, have an air conditioner die in the middle of the summer, or any other unexpected expense that may come your way.  You’ll be ready for the worst to happen without having to be bailed out by credit cards. 

Where should I park this money?  Well, you can read my post below about Certificate of Deposits and how I think they stink.  I would park it in an online savings account or a money-market account at your local credit union.  Make sure you put it in a place that is least making enough interest to keep up with inflation and is easily accessible.  Online savings accounts take 2 days to transfer to your checking account, but that’s not too bad if your expenses can wait 2 days. 

Once you have that emergency fund fully funded, start having some fun and saving aggressively for retirement!