May, 2024 - Millionaire on the Prairie

The Debt Is Gone. Now what?

I spend a lot of time talking about paying off debt. Why? For the simple reason that debt impedes you from spending your money on the things that you really want.

Once the debt is gone, what should you do with your former debt payments?

This post isn’t for those of you who already have a plan for your money.

If, however, you’re a person who doesn’t have a good plan for your money, then you should stick around while I drop some pearls of wisdom. Feel free to pick them up as you see fit.

Whatever your former payment amount, I want to divide it by three. One third will go to your emergency fund. The next third will go to your retirement and/or investment account. The last third will go into your chequing account so that you can spend it on upgrading your life.

Build Up Your Emergency Fund

Emergencies can strike at any time. They’re inconvenient that way. And while I don’t know what kind of emergency will land in your lap, I can pretty much guarantee that it will have a financial component. You need to have an emergency fund to handle it.

Some people advise having 3 months’ worth of expenses in the bank. I’m a lot more conservative than that. I think everyone should be aiming for atleast 6 months’ worth of expenses in their emergency fund. Let’s say you lose your job. That’s definitely when you will need your emergency fund to carry you until you can persuade someone else to pay you for your skills and expertise at whatever it is that you do.

It will take a long time to build up 6 months’ worth of expenses. (For those of you who are really, really conservative, aim to build up 6 months’ worth of income!) Debt is a barrier to building a sizeable emergency fund. That’s why I dedicating one third of former debt payments to the task of weaving your financial safety net.

Give Your Retirement & Investment Accounts Some Love

The next third of your former debt payment should go to maxing out your Tax Free Savings Account and your Registered Retirement Savings Plan. These are the two registered accounts where you should be investing money for your retirement. Future You will thank you for doing so.

In the fortunate event that you’ve already contribute the maximum allowable amounts to both your TFSA and your RRSP, you should open a non-registered brokerage account and invest one third of your former debt payment. Your investments will grow tax-free, so it’s to your advantage to invest your money sooner rather than later.

Unlike the TFSA and the RRSP, there is no limit on how much you can invest in your non-registered account.

When your debt is gone, set up an automatic transfer from your chequing account to one of these accounts – TFSA, RRSP, or non-registered brokerage account. Max out the first 2 before you start investing in the last one.

Inflate Your Lifestyle With the Last Third

That’s right. I’m encouraging you to spend your money. After all, you worked hard for it. Now, instead of sending it to someone else, you get to keep it. You can spend it on whatever you want. That’s the beauty of being debt-free!

Maybe you’ve been dying to take a trip? Or maybe there’s something new you want for your home? Perhaps it’s finally time to join that wine club you’ve found? Whatever it is, I want you to buy it. You now have the cash and your purchase won’t impact your ability to invest for the future, nor your ability to save for emergencies.

Maybe there’s nothing you want to buy right now. That’s fine too. You don’t have to spend money if you don’t want to. Keep the money in a sinking fund labeled “Whatever I Want”. When you figure out what you want to buy, if anything, the money will be there waiting for you.

And if there truly isn’t anything want to purchase, then you may want to fill up your emergency fund even faster. No one has ever complained about having too much money during an emergency. You could also send more money to your retirement and investment accounts.

I’m not encouraging you to squirrel away every penny for the future, or for emergencies. However, if you don’t see a need to increase your day-to-day spending, then those are two great options for the final third of your former debt payment.

Another fantastic option is making a charitable donation to causes that you hold dear to your heart. It’s good karma to help others and money is very helpful for those who need it.

So there you have it – Blue Lobster’s suggested use of your former debt payment. Again, take what you need and leave the rest. You earned the money so you get to decide how best to use it to make your dreams and goals your reality.

Debt is the Enemy of Financial Security.

It never ceases to amaze me how easy it is to get into debt.

I haven’t been a child since the last millennium, but I do still remember that people had to apply for credit by filing out a paper form. Today, offers for credit come directly to my email address. The financial institutions pushing credit no longer need a signature. Somehow, tapping a screen has become an acceptable way for people to start the journey into debt. They don’t even need to verify that I’m the one tapping the screen on my phone! Anyone can tap that screen and – poof! – I’m the one who’s responsible for repaying a new credit card. ***

Just this week, a financial institution offered me a credit card with a $25,000 limit!!! Are they crazy? Exactly what algorithm are they using to think that my income could pay off that kind of limit every month? To be clear, I don’t earn enough money to pay off that kind of limit in one month. And since I always pay my credit card bill in full each month, I make sure that I don’t charge more than I can repay.

Debt is a cancer to wealth.

You build less wealth while you have debt payments.

Let’s get one thing straight. Personally, I’ve come to believe to that people should be investing while they’re paying off their debt. I don’t care if it’s $10 per week or $50 per month. A little something needs to be invested for the future until the debts are paid. It may take years to repay your debt. During that time, people should still be building their wealth through investing. Small amounts invested over long periods of time do have a way of growing into very large sums. Time is too precious to waste, so invest while paying off debt.

Try not to think about how much further ahead you’d be if you were able to send your debt payments to your investment account. Obviously, investing more sooner is better. At the same time, investing something is better than investing nothing.

Once the debts are gone, atleast 70% of those former debt payments ought to be re-directed towards investing. The other 30% should be spent on whatever frivolities a person wants.

Don’t go back into debt!

Do what you want with your own money. I’m just here to tell you that going into debt over and over again will prevent you from building any kind of wealth for yourself. Debt is not getting cheaper. When was the last time the interest rate on your credit card came down?

Secondly, if you’re forever going into debt for one thing or another, when are you going to have the monthly 3-figure or 4-figure amount to invest for your future? Do you really want to spend your entire life working just so you can send most of your paycheque to someone else?

I’ve had debt before, but I got out of it.

I used a loan to buy my second vehicle. It was a 5-year loan, and I don’t remember the interest rate. The payment was $325 per month, so a little more than $10/day. I was tickled to death when that car loan was finally done. I’d hated making those payments!

So imagine my shock and horror when the financing company offered me another loan to buy a new car.

WTF?!?!!

At the time, a friend of mine explained that I was the exception. She said that most people would go and buy another vehicle. My mind was blown! I simply couldn’t fathom the idea of going into debt for another vehicle simply because I had repaid my loan. The vehicle I had just paid for was only 5 years old. There was nothing wrong with it, mechanically or cosmetically. Best of all, that car no longer siphoned $325 out of my wallet every month. Why on Earth would I want to go back into debt for another car?

Debt is easy to acquire, yet hard to eradicate.

Read that heading again. The truth is that I’ve never had an easy time getting out of debt, when I’ve had it. It took me years to pay off my mortgage, and I did it rather quickly. As I’ve noted, it took me 5 years to pay off a vehicle loan. I seem to recall that it took me several years to repay my student loans too, and those were relatively small at an amount of $15,000. Thankfully, I’ve never had credit card debt.

Yet, if I could remember how long it took me to acquire the debt, I would have to say that each loan application required less than 30 minutes of my time. My mortgage might have taken a bit longer but it was still less than an hour to be approved.

Mere minutes to acquire over $100,000 of debt… sigh… it’s almost breathtaking, isn’t it?

In very sharp contrast, it took me years and years to pay it all back. And I managed to repay those loans early! There were tax refunds and retro-cheques to help me do so. Most of the early repayments came from delayed gratification and extra payments. According to my memory, I accelerated my mortgage payment every year on the anniversary so I could pay off my principle residence’s mortgage super-early. I started at $304 bi-weekly and had bumped it up to $750 bi-weekly by the time it was done.

I have to wonder why the length of payback is never, ever advertised when creditors are extending debt to customers. Never ever forget this truth – it takes a long time to repay debt.

Debt is an impediment to the life you want.

Sending most of your paycheque to creditors sucks. You work hard, and someone else benefits from your efforts. I’m not at all convinced that most of us want the results of our life’s energy and precious time going to our creditors. We should be in a position to determine where our money goes. After all, we’re the ones who used our blood, sweat, and tears to earn it.

Get rid of your debt. There are many websites offering good suggestions about how to do so. I don’t claim to be an expert. My path to debt freedom included living well below my means and practicing delayed gratification for years. It worked for me because I earned a decent income and was able to keep my expenses low as a Single Person. I didn’t take on many subscription services. I went to the grocery store and cooked my own meals. As I rid myself of debt (student loans, car loans, and a mortgage), a significant chunk of those former payments went into my retirement and investment accounts.

Today, I’m very content with my financial situation and Past Me’s choices about money. Eliminating debt from my life, sooner rather than later, means that I have better options and that I’ve secured a spot in the Double-Comma Club. Creditors are not part of my life and I think that’s great.

*** I minimize the risk of this ever happening by deleting these email offers immediately. Then I go into my trash folder and delete the email permanently. I also never let anyone else touch my phone outside of my presence. If there’s another way to stop unsolicited credit card offers coming to my email, please let me know.

And now, I Replenish the Sinking Fund!

Last month, I went on my first post-pandemic overseas trip. It wasn’t cheap. However, travel is one of my spending priorities so I have a sinking fund to pay for it.

It was my first trip to the Netherlands, with a very short stop in Belgium. I traveled with a dear friend of long acquaintance, who had suggested this trip the fall of last year. After months of blue-sky ideas, we settled on a river cruise since we’d both wanted to do one. And that river cruise was followed by 3 days in Amsterdam. The trip was amazing: canal tours, chocolate-making, stroopwafels, the Red Light District, Keukenhof Gardens! There simply wasn’t enough time to do everything that was on offer in the amazing city that is Amsterdam. Trust me when I say that we made the most of our available time.

First things first. You should know is that I spent every nickel of my travel sinking account:

I used some of the money to upgrade my airline seat, and those extra 4 inches of room were well worth the splurge. (Shout-out to another dear friend who’d made the suggestion to upgrade!)
Purchasing an all-inclusive tourist app prior to leaving home was a fabulous use of funds! That app allowed for free transportation on buses, trams, and the metro within the city. It also gave us free entry to many cool museums and various other tourist spots.
I also had the funds to book a more expensive hotel very close to all the things we wanted to see and do. Had we stayed elsewhere, precious time would’ve been wasted on commuting from one location to another. As it was, we were able to walk to almost all the places on our itinerary. The spectacular Vondelpark was a stone’s throw from our accommocations and the stunning Rijkmuseum was only a 10-minute walk away.
During our river cruise, we realized that the Hague was only an hour away from Amsterdam by train so, without any consideration as to cost, we made a last minute decision to visit the city of Peace and Justice too.
My souvenir knapsack came back stuffed with chocolates, magnets, tulip bulbs, cheese, stroopwafels, and books.

My travel sinking fund allowed me to say “Yes!” to everything I wanted to do, eat, taste, see, and buy. Again, I spent every single nickel of that fund on this trip… And I felt absolutely no guilt in doing so! The money was earmarked for this purpose. I spend freely when I travel because there’s no guarantee that I will ever pass that way again. I don’t want to come home with any regrets or thinking “I should have <insert missed opportunity here to do what I wanted> while I was there.”

Looking back, I can say that this was one of the very best trips that I’ve ever taken.

So, now that I’m home, it’s time to replenish the travel sinking fund. I want to go somewhere new in 2025, and I don’t want to come home with debt. Where I want to go hasn’t yet been decided, but I’m thinking that I’d like to travel in April or May of next year. Destination is very important, but there’s a high chance that I’ll change my mind about what I want to do next year. Scotland had been on the list for 2020, but those plans were destroyed when the world shut down. I haven’t been to Asia yet so it might be nice to go there. Japan has always intrigued me, and I’ve heard many wonderful things about Vietnam. There’s also this culinary course combined with local tours that’s also available in regions of Italy that I haven’t visited yet… So many options!

Determining where I want to go isn’t the main driver here. There’s a good chance that the destination will change a few times. Nope, my first task is to figure out how much to save from each paycheque going forward. If I save too little, then I can’t do my 2025 trip the way I want to without incurring credit card debt. That’s a no-go for me. Literally! I’d rather stay home that pay interest to a credit card company for my trip.

And if I save too much for travel, then my other financial priorities will be short-changed. I don’t want to do that either.

First things first, I’ve considered the size of my paycheque and I’ve figured out how it has to be allocated amongst all of my financial priorities. Long-time readers will know that I have sinking funds for property taxes and insurance premiums – the unsexy, necessary expenses of adulthood. Sadly, they take priority over travel so they have to be funded first. There are also some landscaping projects around my house that are slated for 2024. Gardening has become a hobby of mine and I want more perennials around my home. The kind of plants I want to buy are not particularly cheap, so I need to budget for them. I’m also still a fan of live theatre and those subscriptions don’t pay for themselves.

Thankfully, I’m debt-free. I managed to pay cash for my latest vehicle. Student loans and mortgage debt have been in my rearview mirror for a very long time. As such, I don’t have to have send money to creditors every month. While I use credit cards, the balances are paid in full every single month. A good portion of my former debt payments is put towards travel every time I get paid. (The rest of those payments has already been re-directed towards building my emergency fund and investing for my retirement.)

Even though I spend a lot of time talking about the future, I recognize that money is also meant to be spent to bring us some joy today. The Care and Feeding of Future You is incredibly important. That’s why you should be investing a good portion of every paycheque for long-term growth. When your paycheque stops, your investment portfolio should be ready to take over.

However, taking care of Present Day You is also a serious responsibility. You should be able to do some of the things that you really, really, really want to do now without going into monstrously expensive credit card debt to do so. And that’s why I advocate for sinking funds. Setting aside the money first means that you don’t burden yourself with debt while still getting to do what you want.

Figure out your priorities, then create sinking funds for each of them. When the money is in the fund, spend it as intended without any guilt whatsoever. When you get home, replenish your fund so that you can get down to the business of turning your next dream into a reality.