Debt free – what do you do now?

All your unsecured debt gone? Good news!

Some online forums call this “your happy dance” and you are certainly entitled to have a twirl around and pop into your local coffee shop for that coffee and cake you have been avoiding for so long.

Still no spare money though?

For some people, getting rid of your debt doesn’t dramatically change your life or your options. If you have had a Debt Relief Order or been bankrupt you haven’t been making any payments. Or you may have staggered through to the end of your IVA, with your monthly payments being subsidised by your parents.

Here knowing the debt is gone doesn’t change the fact that you still may be really short of money most of the time.

Your priorities have to be trying to put some money aside. And to find a future source of credit in an emergency. See if there is a credit union that you could join in your area or for your job. If you can save regularly with one, it’s much more likely they will later approve a loan application if you need it.

Also make sure you do what you can to repair your credit record, see the relevant article for your sort of insolvency: DRO, IVA, bankruptcy. It won’t get to “good” until the insolvency marker has gone, six years from when it started, but getting all the debts marked as settled with zero owing still helps.

Spare money but feel a bit flat?

If you have been snowballing your debts or paying a DMP or IVA payment each month, you now suddenly have that cash spare.

But a surprising number of people just feel a bit flat and aren’t sure what to do next. You have been focussed for so long on ditching the debt that it has become your main purpose in life and now that sense of direction has disappeared.

There are plenty more financial goals to aim for. You may know exactly where you are going – after all you have been waiting for today for long enough. But if you aren’t sure what to do, then take a break for two or three months and mull things over.

During this time, why not take the amount you have been paying off your debts so far and put half of it into an easy access account every month. You just need a short-term home for a while, so open whatever is convenient.

Enjoy spending the rest – have a weekend away, buy some new clothes, treat the kids or your other half – whatever you fancy that you can pay for in cash.

Don’t rush out and buy a new car on finance. Not until you are sure that this really is the best option for you. Give yourself a bit of time to think about your long term priorities.

Get a good emergency fund

When you feel ready to get going, your top priority needs to be a good rainy day fund. Not the small amount you managed with whilst you were in debt, but a reliable safety net that is really going to protect you if things go wrong.

As a first target, if you are renting aim to have enough money for a deposit, first month’s rent and agent’s fees. If you have a mortgage, enough to pay it for a few months.

Other top financial priorities

You may have three other urgent goals, things which are really important for you in the long term but which were impossible whilst clearing your debts:

1. overpay your mortgage if it is interest-only (or if it’s repayment but it won’t be cleared by the time you want to retire);
2. start putting money aside for replacing your car and household goods;
3. opt into any pension scheme at work if doing this will mean you also get employer’s contributions – that is free money and it’s rude to not take it! The right time to start making serious pension contributions is in your twenties, but the next best time is NOW.

That gets you onto a sound footing.

From here on it’s up to you and what your budget will stretch to. Save for a house deposit? Overpay your mortgage? Build up a large cash pile so you can take a break from work and go travelling?

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