You paid off all your debt! Now what? If you have recently become debt free, congratulations! You may be wondering what steps to take next and what is the best way to make it happen. Debt freedom definitely creates a shift in your budget and in your financial mindset. It’s easy to start spending money more frivolously because you are out from under the burden of those debt payments. While it is important to celebrate and reward yourself for all of your hard work and sacrifice, keep in mind that debt freedom is still far from financial freedom. There are other goals you must meet in order to have true financial security and wealth. The best place to start is your emergency savings account.
Emergency fund savings
Once you are done paying off debt the next thing to focus on is building up savings. Being debt free is only half the battle. True financial freedom means having peace of mind no matter what happens. How much should you save? 3-6 months expenses. The purpose of building up this savings is so that if something unexpected happens, such as you find yourself suddenly unemployed and without income, you can take a few months to job hunt and figure out a game plan without panicking. Many people found themselves in this situation when COVID-19 forced businesses to shut down. These people did not have any money in savings and were living paycheck to paycheck. It also took a while for them to get unemployment funds which meant some were going to food banks to keep their families fed.
You do not want to ever find yourself in this situation. So your first goal should be to save up 3 months of expenses. Then once this goal is met you can decide if you want to keep going and save another 3 months or if you’d like to move on to your other financial goals.
Calculating how much to save in your emergency fund
If you ever found yourself unemployed you would most likely cut a lot of expenses out of your budget. You would stick to a bare bones budget that includes only your necessities. For more information on how to do this, check out my blog post about how to prioritize expenses during a financial crisis. The first step to calculating the total amount is to look at your monthly budget and figure out which expenses would be absolutely necessary. Of course there are the 4 walls (food, shelter and utilities, transportation, and clothing). Beyond this, what other expenses would you need to keep? Once you have this number calculated, that will be considered one month of expenses. Multiply this by 3 and that is your first savings goal. If it’s not a nice round number you may want to round up. Once you’ve met this goal, you can decide if you want to double it and give yourself extra financial security.
This money is not for any other purpose than to be there for you when all else fails. Click To TweetWhere should this money be saved?
You will want to put these funds in a savings account so that you’re not tempted to spend them. I recommend doing this through an online bank or credit union because their interest rates are significantly higher than at a standard bank. The most important thing is to treat this savings account as an emergency fund. This means the money is not to be touched unless it’s absolutely necessary for survival. To some it may seem like a waste to have this nice pile of cash sitting in a bank account not doing anything. However, this money is your safety net. Later on there will be time to save money for investments and wealth building, or for expensive items you wish to purchase that you’ve been putting off while pursuing debt freedom. But this money is not for any other purpose than to be there for you when all else fails. Once you have it saved, it will be a huge weight off your shoulders and you will at last have financial peace.