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.