5-Step Plan – Step 5 – Setting Up For The Future
One day, hopefully soon, you’ll reach that magical moment when you pay off the last of the debt and all the money you’ve been putting towards debt repayment no longer needs to go there. What now?
This is a fairly critical moment. The direction you set is likely to define what happens in your financial life going forward. You are faced with both risks and opportunities.
Here is a non-exhaustive list of the different options you face. Which I think are most reasonable will be fairly obvious from how I describe them.
1. Enough with the budgets
You’ve worked hard to get here, you deserve some time off, you need a break from all this financial management and you need to get away from all these constraints.
You’re going to spend a few months living within your means, but without trying to limit how much you spend, and you’ll see what you want to do once you’ve caught your breath.
Ask yourself: What did it take to motivate you to do something about your finances the first time? The answer: Large amounts of debt and the need to deal with them. What will it take to motivate you to run another financial plan similar to this one? Probably a financial crisis of similar proportions.
Don’t kid yourself that you can just jump back into the habit of saving when you drop it. It’s like a smoker to quits, and then starts again because: Hey, I quit before didn’t I?
If you desperately feel the need to celebrate, then do so – set aside a chunk of your budget for the next month or two on celebration. Don’t, whatever you do, drop the habit of controlling your spending. If you do, you won’t pick it up again until some crisis comes along a second time. Something like the need to pay for a kid’s schooling when you haven’t the savings.
2. I’ve been putting off buying this new thing for so long so I’m just going to borrow enough for this purchase.
Terrible idea. Put it off for another few months and buy it once you’ve saved enough. Whatever you do, don’t go negotiate another debt just because you managed to pay off the last ones.
3. I’m going to carry on until I’ve got a little more saved up.
Ok. Good. That’s constructive. You need savings for the future because life doesn’t get cheaper or easier as it progresses.
Think about where you’re going to save that money, take a fresh look at your budget and set some targets.
My suggestion, however, is rather than just continuing for a while you look at the next option.
4. I’ve proven I can manage my finances. Let’s see what the next level is.
What you’ve developed is a mastery of your own finances. That’s a valuable tool, but tools are only useful if you do something with them.
What you’ve learned so far was designed to get you out of debt. That was a nevessary first step. However, mastery of your own finances is capable of so much more than this.
You’ve fixed the errors of your past, and now you are in a position to build your future. Not just in terms of the money you have in the bank, which is a number on a piece of paper, but in terms of the freedom with which you make decisions.
If you choose to go further, another challenge awaits your. This time it’s not about climbing out of a hole, but building something for yourself. Welcome to the starting gate for the journey to financial independence.
Financial independence means different things to different people, but generally speaking it represents the ability to make decisions independently of the need to make money.
An example: Most people work for a salary. Financially independent people have enough savings built up to retire whenever they feel like it. They don’t work for money, they work for any one of a thousand other reasons that are much more satisfying and wholesome than the need to earn a paycheck.
If they don’t like their job, they’ll quit. After all, they don’t need the salary. They can take their time finding another challenge, another role, another journey, because there’s no financial pressure or risk associated with leaving their current employment.
That’s a level of freedom most people can only dream of.
To get there, you need to take what you’ve already learned to a new level.
Not only do you need to continue your work on reducing your expenses and finding ways to live well on a budget, you have to start investigating all sorts of things that relate to financial independence.
- Understanding what your personal financial independence threshold is.
- Develop ways to track the progress of your savings
- Determining how you want to save and/or invest the funds you’re setting aside
- Finding ways to integrate your low-spend habits into a sustainable and enjoyable lifestyle
- Choosing whether to launch side hustles to accelerate your earning potential
It’s an enjoyable project, but you will find it much easier to embark upon it of you use the habits you’ve built up getting out of debt immediately rather than taking a break. There’s a lot in common between saving to pay debt and saving to build up a retirement fund. Stopping now in the hopes of starting again later will be much more difficult than continuing now that you have everything in place.