The feeling of submitting a final payment for a big debt or expense is amazing.
Whether it’s the last student loan, mortgage or daycare payment, you now have some freed up income and might wonder what to do with it. Having a plan for those extra funds will help you stay on track to meet your financial goals and milestones.
The Psychology of a Deal
Think twice before you spend those extra funds
It’s only natural that when you find yourself with some extra money, you want to spend it right away. However, it’s important to be intentional about spending so that you can really attack some short- and long-term goals. Here are a few options that “future you” will appreciate:
- Emergency fund
- An emergency fund will keep you out of the debt cycle — you don’t want to have to rely on credit cards or personal loans in the event of an emergency, especially after working so diligently to become debt-free
- There are two main strategies to paying down debt: the “snowball” and “avalanche” methods. With the snowball method, you pay down your smallest debts first. With the avalanche method, you take a top-down approach, focusing first on loans with the highest interest rates.
- If you haven’t saved enough yet to retire, now’s your chance to accelerate your progress. If you’re 50 or older, you can take advantage of catch-up contributions. Besides contributing more to tax-advantaged retirement accounts, you may also want to pad your emergency fund for retirement.
- Set investment goals
- When your retirement accounts are set, investing in the stock market could make your extra funds work harder for you in the long run.
- Insurance coverage
- There are so many different types of insurance, so now’s the time to make sure your bases are covered with auto, home, health, life, disability, long-term care or other insurance coverage plans.
- Sometimes when you pay off a large debt like a student loan, you lower your debt-to-income ratio, which makes it easier to qualify for new loans such as a home mortgage.
- Home improvements
- It can be hard to afford something like a kitchen remodel when you’ve got a big payment bogging you down — especially if you don’t want to borrow more with a home equity loan or line of credit. Those improvements might be within reach now. If you’re living in your “forever home,” accessibility upgrades, like wheelchair ramps or shower bars, are also worth looking into.
- Interested in moving? If your family has outgrown its current home or apartment, or if you’ve been interested in relocating across the U.S. or moving abroad, now can be the ideal time to make plans to do so.
- Career change
- Perhaps you’ve dreamed of trying something new by changing careers or starting your own business. Once your student loan and other debts are gone, you can pour your disposable income and spare time into making these dreams come true.
- One of the frustrating things about having a lot of debt is that it can interfere with your educational goals. Maybe you want to get a certificate, bachelor’s degree, master’s degree, or even a Ph.D., but were hesitant to do so because you had so much debt. Now’s your chance to start saving for the education that will transform your career and life. Or consider helping to fund the education of a loved one!
Forecasting your future expenses and planning ahead for where you might need to reallocate this money is a great place to start.
Resist the urge to spend with abandon
Depending on exactly how much money you’ve freed up, think through your short-term needs and long-term financial goals before splurging on that item, trip or other lavish expense you’ve had your eyes on. If you’ve considered all your options and still have some money left over, then by all means go for it!
The freedom of being able to set some financial goals can feel both empowering and overwhelming. If you are struggling on where to start, our team of relationship bankers are available to help, in person and online.