The Aftermath of Debt Payoff
I remember a conversation I had with one of my college professors several years ago. It was an exciting night; as a senior in the International Studies department I had been chosen to attend a reception at the college president’s home to honor a guest speaker. On the car ride from the dinner to the auditorium, the professor asked me about my plans after graduating. These were scary times because the transition jitters from college to the “real world” were starting to get to me. I had no job lined up, but I was afraid to tell him this. After all, I was chosen for this special dinner so the professor must have thought I had a great plan together that would make his department proud. Perhaps he saw this fear on my face, because he changed his tone and became very down to earth. He intimated to me that when he had his first job out of college, all he seemed to do was buy clothes. He had been so poor in college that once he got his first few paychecks he just went crazy in the clothes department. He chuckled at remembering this because he now thought that his reaction to a change in his financial situation was so silly.
My husband and I have had a major change in our financial situation. We are past that “first paycheck” stage of post-college (post-military for my husband). And we have (hopefully) passed the debt stage of our lives, though we do still have a low rate mortgage. Instead, we have entered the “non-mortgage, debt-free” stage. It’s been over a year and a half since we accomplished this goal of ours, and yet I am still trying to find our footing. What do I mean by this?
The Aftermath of Debt Payoff
No one really talks about the aftermath of debt payoff. It is touted as a land of milk and honey (and it is pretty sweet), perhaps something that feels out of reach for many and is put on the “one day” list. For months, years, or maybe even decades we work towards a tangible goal with concrete results. And then…the goal is met. We are absolutely thrilled to be out of the $25,000 of debt (student loans, car loan, and engagement ring). But there is a bit of a void on the other end. We are in uncharted territory, and have not quite figured out where to go from here. Our financial situation drastically changed, and we are still trying to find new ground.
There have been noticeable changes to our household since paying off this debt. Since this is hardly talked about on the internet (most blogs discuss paying off debt, while others talk about accumulating wealth), I’d like to take the time to outline what has changed for us and a few things that have remained the same.
What Happens After Your Debt is Paid Off?
- Frugality is King, with Some Changes. Perhaps it is easiest to start with what has stayed (mostly) the same. I am frugal by heart. It is just in my blood and I would not choose another way because it is not who I am. Paul has become semi-frugal from living with me. He gets excited now when he shaves $15 off of groceries with coupons and sales, or finds a practical solution to a problem around the house without having to make a run to the home store. We still use coupons, shop sales, use reward point programs, and stick to a budget. We both have continued and will continue on a frugal path no matter what our financial situation is, though there are some changes that are discussed further below.
- Caring about Other Priorities. When in debt payoff mode, saving money, making extra money, and using all the money we can find to throw towards debt was the top priority. We knew that this time period would not last long (we were “gazelle intense” for about a year and a half), and were willing to make many sacrifices during this time period for a bigger payoff later. Now that we met our goal, we’ve made other priorities (including Paul’s new television!). This includes travel (we honeymooned in Austria for 11 days after the debt was paid off, and just came back from an 11 day trip to Alaska, all paid for upfront of course), time and convenience.
- Saving Up for All New Purchases. Paul hates debt as much as I do. In fact, before he met me he had paid off the remainder of his student loan debt early (that was a good sign!). Now that we dug ourselves out of the $25,000 of non-mortgage debt, we have taken a vow to pay for things up front from here on out. This includes things like vehicles, vacations, and housing emergencies.
- Increased the Food Budget. Before we were debt free our monthly grocery budget was $250 (there are two of us, and two cats). Now that we are free of our non-mortgage debt, we have increased our grocery budget to $300 per month. We both love to cook, and this extra affords ingredients for more exotic fare that are both fun to make and to try. Of course, food prices have also increased since we paid off our debt in 2010, so the extra has helped with just keeping the status quo.
- Accumulating Savings above a Fully Funded Emergency Fund. While paying off debt any money that was in savings was part of our emergency fund. It was not fully funded (8 months of expenses during the recession, 6 months in a good economy), but we did have several thousand dollars stashed away. It should also be noted that we fully maxed out both of our Roth IRAs during this time period, as retirement savings are very important to us. Now that our non-mortgage debt is paid off, we have a fully funded emergency fund, and are accumulating savings above and beyond the emergency fund. This leads to the next few changes.
What Should We Do Next?
We are currently trying to figure out what to do with the extra money, both accumulated savings above the emergency savings amount, and the extra cash flow of approximately $950 per month. This is a great dilemma to have, but is still something we need to figure out. Should we work on paying off our mortgage? Should we invest the extra?
Are you in debt payoff mode, or accumulation mode? Do you think paying off a mortgage early is the best idea, or investing?
How did you only spend $250 a month in groceries? How many did you have to feed with that?
It is just my husband and I (plus two cats). We coupon, shop sales, get our produce from a farmer’s market and the rest from the grocery store.
A grocery bill of $250/mo. for two isn’t hard to do once you’re in the frugality habit, and you don’t have to live like a refugee, either. (Though it really helps to be vegetarian!)
I have a family of 6–my wife and I and children ages 7, 6, 4 and 2. We grocery shop about twice a month and coupon modestly. Our monthly grocery bill for the past 12 months averaged $426.58. All groceries were bought at Aldi’s and Meijer’s.
To really keep yourself honest, grocery spending should be analyzed alongside eating-out costs, which can deceptively lower your grocery bills even as they bankrupt you. Over the same 12-month period, we spent an average of $41.66 per month eating out, so our total family food budget came to $468.24/month.
To get really nerdy, that’s 86 cents per person per meal. 🙂
Most people have had debt of some kind for so long that the concept can’t be grasped of not sending off money for something owed. We have about 14 years left on our mortgage so we’re quite a ways off from entertaining that type of thought 🙂
We’re in accumulation mode. We just paid off my student loans so our only outstanding debt is the mortgage, which we don’t think is worthwhile to pay off early.
Awesome job Rebecca!
May I ask your reasoning for the decision to not pay down your mortgage? We are still debating this issue, and other perspectives would be great.
We think we can get a higher return through buying investments right now than we can by paying off our mortgage. The economy is doing bad enough that there are a lot of really great deals to be had right now. This spring we researched real estate. We live in Texas, so while the housing market didn’t get down as much as a lot of other places, given the strength of the Texas economy relative to other locations, it’s in a position to grow more than most. We are using the cash we’ve accumulated to put 20% down on two rental properties (one we’re buying from an estate; one is a short sale). They’re both phenomenal deals and we’re only able to take advantage of them because of the amount of cash we have on hand. Real estate is appealing in general given that it is both a tangible asset and an income producing business.
Me and husband are in the same boat as you guys and while we love it, we’re not sure where to go either. We are fully funding our IRAs, have emergency fund, etc. We also have paid off our mortgage as well so we have quite a bit of extra change in our pockets. But we are frugal by nature as well so we decided to invest a good sum. Seemed better than doing nothing. To be honest though, this is a great dilemma to have!
I love that you decided to talk about it because most blogs don’t.
Glad to know we’re not alone in wondering where to go next. And yes–fantastic dilemma to have!
The first thought that came to mind was saving up for kids if you plan on having them – or even if you don’t since surprises happen! Also, do you have all your estate planning done – including life insurance, which adds to your expenses? Another thing to consider is charitable donations to causes important to you.
Great ideas (gotta love surprises life throws you;)).
Our estate planning is definitely not done…and truly not much started. Could be a good area to focus on next.
I feel exactly the same way, and have felt that way ever since my wife and I paid off our mortgage over a year ago. We’ve been putting our extra cash into a savings account for most of that time, waiting for the balance to get substantial enough for us to take some off the table and start purchase some income-producing investments. I’ve been following a lot of dividend investing blogs as of late because I personally like the idea of that strategy to generate passive income for life. But it’s definitely much more complicated and uncertain to try to invest for the long term than it is to aggressively pay off debt.
By the way, I would strongly recommend paying off your mortgage as quickly as you can, as long as you plan to remain in your current house for more than a short while. In my opinion it’s best to be free of as many monthly obligations as possible, just in case one or both of you lose your jobs. If you don’t a house payment, it’s a lot easier to make ends meet in lean times. Set a really aggressive goal, like 2-3 years, and see if you can knock it out. Once it’s gone, trust me, you’ll thank yourself.
Yay to paying off your mortgage!!
I also am intrigued by dividend paying investments. We have them in our retirement plans, but outside of retirement could be a great thing as well.
The next question for you is how long are you going to be in your home?
If it is for a considerable amount of time then I would add to paying down some of the principal at beginning at slow pace such as $500 extra per month.
If you have a short horizon (less than 5 years) remaining in your home then I would invest those funds and use them as needed when you go to market with your home.
After I paid off my debt I started the “house fund” Got the house and now we are it has become the “emergency fund” (we had 5 months saved in the emergency fund before we got the house)
Way to go Katie! What’s next for you guys?
Amanda – With regard to saving or paying off the mortgage, I note that you are a person who embraces risk so much that you actually arbitrage credit card 0% offers for a fixed return. That seems to suggest that you have an appetite for risk. Assuming that you have a mortgage of about 4% (and if not, then refinance), would you rather earn a guaranteed 4% return on you money by paying down the mortgage or a higher (though variable, but likely averaging higher over the long term) rate of return by investing, maybe in something simple like the SP500 index or dividend-paying stocks?
Also consider that your 4% mortgage is really only costing you about 2.65% considerig you ability to write off the mortgage interest on your taxes and assumign a 33% tax bracket. You absolutely can do better investing than 2.65% averaged over about 10 years.
On the other hand, if you were a very conservative person, you might feel more comfortable paying down the mortgage. It’s still a positive return and it does give many people peace of mind.
I do not actually do the credit card arbitrage; I am a staff writer here. Sorry for the confusion!
Thank you for calculating some things for me. Our home right now is 3.5% for 15 years.
Whoops, I was thinking of Madison. It’s getting kind of hard to keep everybody straight!
I agree with being frugal and sticking to a budget helps to make ends meet with less stress.
Paying off debt is a challenge for most people. I hate debt myself but because of the times, we all can use a loan or two. Finding the right set of loans to consolidate debt can prove beneficial for some people.
Thanks for the info – love your article!
we’ve been in this camp for a long time. debt free except the mortgage. We don’t really know what to do with our money other than save it. Maybe for a future rental property or down payment on a house (we’re in a townhome now). Who knows?
In my late twenties, married with a child and a home. Our only debt is a quickly-shrinking mortgage. I think I can erase it within 3 years. Then what? I hate risk and “paper” like the stock market—but I like the idea of owning a rental or a vacation home that could become homesteaded….I also need to prepare for private education costs (vs. public schools) possibly eating some of our monthly income in the next few years.
Amanda, I applaud the effort and welcome to the club. There are few things I would say about the article.
1) Invest as much as you can in your future. Getting to the point of looking forward and taking care of your previous debt, makes a major shift in your life and thought processes. It is a new mindset. Make sure you have college funds for kids, your retirement plans are well funded, and you have enough cash around for emergencies. I have been unemployed for a year, and I could not have survived that without significant cash and a frugal lifestyle.
2) The answer as to what to do next is “It Depends on you”. What do you want to do with your lives, what makes you happy? Do you want to travel? Ride a Harley? Visit all the National Parks in the US? Donate your money? These are all things that can be done with more ease. When you get to the point you are able to pay off all your loans and have more money monthly, you have to redetermine your priorities.
3) In the article you state that you “no longer wanting to get into debt, and want to pay cash” but sometimes it makes sense. If you need a new car (your most likely option to go back into debt), you can find deals where you get 0% financing for 3 years. Leaving the money you have in the bank and getting 0.1% interest is better than paying 100% cash for the vehicle. As long as you have the money, placing it strategically in places is not a bad thing.
I have 3 properties. Thus I have 3 mortgages. I recently paid off my car over 5 years with 0% financing. That is my only debt. I have enough in savings that I could have paid off all my debt at any time should I require. However why would I do that when I am making 15% in the stock market this year (as of today). Yes I am paying 4-5% on my mortgages, but I am getting back an additional 10% in the market, so why pay it off. In 12 years (all my mortgages are in year 3 of 15 year loans), I will end up with an addition $300k (including taxes and expenses in the calculations) based on a 10% return in the stock market. Taking strategic debt is not a bad thing, as long as you do it knowingly and have a plan.
Good luck and welcome to the club.