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5 Things to Do Once You Pay Off Your Credit Card Debt

June 17, 2014
Credit Card Basics, Credit Cards
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Congratulations, you did it! You paid off your credit card debt and now you’re wondering what to do next. After a quick happy dance and maybe a celebratory night out on the town, here’s what you should do with your freed-up cash and new debt-free lifestyle.

1. Continue to use your credit card … responsibly

As long as you believe you have a handle on responsible credit card usage, you should continue to use your card. Using your card and paying it off in full each month will keep your credit score healthy. This will make it easier for you to obtain credit at favorable terms in the future, as well as get you approved for utilities without deposits, low rates on car insurance, and jobs that require a credit check.

2. Pay off your other debts, especially those with high interest rates

If you have other debts, like a car or student loan, now may be the time to pay them off. Very conservatively, you’ll likely make a return of 4-5% in the stock market, so those with low to moderate risk tolerance should aggressively pay off any debts with interest rates higher than that. If your risk tolerance is high, but you really want to be rid of monthly payments, you should also pay off these other debts.

The exception to this is your mortgage, because we’re experiencing record-low mortgage interest rates. If you’d like to pay extra on your principal, feel free, but don’t forgo investing until your home is paid in full. You’ll lose years of compound interest in the market.

» MORE: How to pay off debt

3. Save for emergencies

If you don’t have an emergency fund yet, start saving now. Most experts suggest saving between three and 12 months of expenses, depending on various life circumstances. For instance, couples with two stable incomes and no pre-existing health conditions can probably save closer to three months of expenses, while a single parent running a business may want to save 12 months.

4. Save for retirement

If you’re in your 20s or 30s, it may feel silly to save for an event that’s decades away. But it’s crucial to start saving for retirement as early as possible. As of January 2014, the average 50-year-old has saved only $43,797 for retirement. Looking at your current annual spending, how long would that last you? Chances are, not long.

If you’re not sure where to start, follow these basic steps:

  • Save up to the match in your employer-sponsored plan. For most, an employer-sponsored plan is a 401(k). If your employer offers a match of 50% on up to 6%, you should be contributing 6%. Your employer will then give you 3%, giving you a 50% return on investment. This is the best return you’ll ever get, so take advantage of it (even when you’re in debt). Your 401(k) is typically funded by paycheck deductions, so you won’t see the money before it’s saved.

  • Max out your IRA. An IRA, or individual retirement arrangement, is opened with a broker and not sponsored by your employer. In 2014, you can contribute up to $5,500 per year to your IRA (or $6,500 if you’re 50+). Here are a few of our favorite IRA account providers.

  • Max out your 401(k). If you still have money left to save, go back to your employer-sponsored 401(k). In 2014, you can contribute up to $17,500 per year (or $23,000 if you’re 50+). Note: After getting the employer match, you max out your IRA before your 401(k) because you have more control over the investments in an IRA.

  • Save in taxable investments. If you still have money left over, save in taxable investments with your favorite broker. These investments aren’t tax-sheltered, so you’ll pay taxes on the income you contribute as well as any gains upon sale.

Of course, there are many alternative investment opportunities — like real estate and collectibles — but these are the basic investments most people make for retirement. If you’re self-employed, your retirement options will be a bit different — though the IRA and taxable investments are still available — so do your research on Solo 401(k)s and SEP accounts.

5. Save up for a large purchase

Whether it’s buying a home, a car or a trip around the world, most people have at least one large purchase they want to make in the future. The best way to pay for this is either in cash or by using very affordable financing (such as a mortgage).

Bottom line: Once your credit card debt is paid off, the sky’s the limit! Pay off your other debts, save up for emergencies, retirement or a large purchase, and continue to use your credit card responsibly.

What’s next? image via Shutterstock