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I Paid Off All My Debt. What Do I Do Next?

Paying off your debt takes a huge financial weight off your shoulders. After you've made your final debt payment, you suddenly have some free cash and a world of opportunity for using it. Without the pressure of making debt payments each month, you have a lot more freedom to accomplish goals you've been putting off.

Keep Your Good Financial Habits

Paying off debt is no easy task. No doubt, it required you to kick some bad spending habits to the curb and replace them with better ones. Now that you're done paying off your debt keeping those good financial habits will help you stay out of debt and reach your other financial goals. You can avoid future financial stress by borrowing only what you can afford, sticking to a budget, and making smart spending decisions.

Be careful that you don't increase your monthly bills or raise your cost of living too soon, especially if you have more goals to conquer. Reward and treat yourself, but with limits and reason.

Credit Cards: Keep or Close?

If you've watched your credit score while paying off debt, you may have noticed a lift as your balances came down. From a credit score perspective, there's some benefit to keeping your credit cards open and having a small balance versus not using credit cards at all. It demonstrates that you have active credit and are using it responsibly.

You may have to use your credit cards periodically to keep them open and active. You can do this by small purchases every few months and then paying the balance in full to avoid getting back into debt.

Now that your full credit limits are available to you, you'll have to be diligent about not racking up credit card debt again. If you're too tempted to use your credit cards, you may need to close some accounts to protect yourself against the risk of debt.

Don't assume your current credit cards are the best your card issuers have to offer. And now that you've paid your debt, you may qualify for a credit card with better perks. Shop around to see if there's something better suited for your current spending habits.

Fund Your Emergency Savings

Having at least six months of living expenses in a rainy-day fund can give you some much-needed financial security. An emergency fund gives you a source of funds to tap into whenever you have an unexpected expense or temporary loss of income. Going directly from paying off debt to aggressively building your savings can help you build a sizable cushion faster.

Max Out Your Retirement Savings

If you cut back or stopped your retirement contributions to focus on paying off your debt, it's a great time to pick back up. Or, if you're not maxing out your 401(k) contributions each year, you're in a much better position to do so now. Putting more money into retirement early gives your savings more time to grow—thanks to compounding interest—allowing you to reach your retirement savings goal sooner.

You can invest even outside your regular retirement contributions through a financial advisor or on your own through an online or mobile-based brokerage.

Save up for a Down Payment

Being able to make a large down payment on your home means you can take out a smaller mortgage, have a lower monthly payment, and have more equity in your home. And, once you're out of debt, your debt-to-income ratio will help you qualify for better loan terms. Stashing your down payment savings in a high yield savings account will allow you to earn more interest.

Focusing on the Future

Taking care of your debt gives you more flexibility to focus on your financial future. You can save up for large purchasing instead of financing them while balancing your long-term saving and investing goals.

LaToya Irby

LaToya Irby is a financial writer with over 14 years of experience. She's been quoted and published as a credit expert in several major publications including USA Today, U.S. News and World Report,, and The Chicago Tribune.