Ask Money

Out of Debt. Now What?

Chris Farrell Jul 31, 2008

Question: I just paid off the last of all my debts! After getting into some serious spending problems in my 20s, I’ve poured everything extra over the last three years to pay off nearly $25,000 in personal debt. I’ve been so focused on that goal that I haven’t considered much else. So, my question for you is: What do I do now?

A few extra pieces of information: I’m 30 years old. I’m currently putting 8% of my pre-tax income to retirement, and my job as a public school teacher includes a pension. I’m not married, have no kids, and rent my apartment in New York City, though I’d like kids and a house at some point.

I’m building an emergency fund. (Right now, it’s about one paycheck. I’m working for three months’ salary.) After that, what else should I be doing now that the debt is gone? Thanks for your insight, Kara. Astoria, NY

Answer: Congratulations. In the current environment I think you should continue what you’re doing: Build up your cash savings in a mix of FDIC insured savings accounts and conservatively run money market mutual funds. Your savings will hold its value, although it might lag inflation a bit.

This approach also gives you time to see how you manage your money now that your out of debt. I’m sure you have some delayed purchases–clothes, vacation, maybe a bike. I would slowly buy some stuff and see how you do. You might also use this time to research the real estate market, see what you like, how buying would affect your income, and whether it makes financial sense or not.

Last, I’m a big believer in investing in long-term savings in a taxable account. That could mean regularly putting some money into a broad-based equity index fund. The advantage of this approach is that money compounds over the long haul, but if you do need it you can sell some stock and pay capital taxes on it. But unlike money held in a tax-deferred retirement savings account, you won’t pay the 10% penalty if you take the money out when you’re under age 59 ½.

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