What To Do With the Extra Cash When the Debt is Paid Off?

Ryan left a question in the comments. It was a great question, so I thought I would write a post to reply to it:

The biggest [question] I have in mind is – What are you going to do with the extra cash flow when all the credit card debt is paid off and youâ€™ve been use to living under your means for the last 3 years?

I’ve been thinking about that lately. After three or so years of paying off debt…what’s next?

First things first, I want to take our very first family vacation. Something that I’ve learned from this experience is that material possessions aren’t all what they are cracked up to be. Experiences are the things that can have a lasting impression. I want to have a wonderful trip with my family. Nothing fancy, since that’s not really my style. Just some nice family time experiencing new things.

Once that is done, then it will be time to save…save…save! I absolutely love having money in the bank. It’s like my security blanket, and I’d like to make it bigger. I’m thinking that we should save up at least 6 months of bare bones living expenses ($12,000). That would be a great buffer just in case.

After that, I’m not sure. We have a lot of catching up to do for our retirement savings. I’d also like to get into a little bit of real estate and buy up some property for future income potential. We’ll also have our mortgage and our student loans to pay off. And by that time we’ll probably have to start saving for a new car.

Of course, in a few years things could be completely different. Right now, though, once our credit card debt is paid off our tentative plan is to have a little bit of fun with a vacation and then it will be time to plump up our savings accounts.

Posted by Tricia on February 18, 2008 at 10:11 PM in General Debt | 18 Comments »
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Mrs. Micah responded:
Posted: February 18th, 2008 at 10:59 pm
I’d probably save up to do things which we couldn’t do otherwise. The occasional fancy dinner. A high-quality winter coat and business suit. Savings specifically for car repairs and such. The occasional bigger quilting project. Not a vacation because we don’t vacation well…

A large amount would go to retirement and some to charity, of course.
Early Retirement Extreme responded:
Posted: February 18th, 2008 at 11:06 pm
Hate to be a spoil sport … but going on vacation without a safety blanket?

I would save $1000. And then I would take the $40 a year I get for free in interest and blow it on used books and CDs.

Then I would save $10000 and use the $400 a year on eating out or on a fancier wardrobe.

Then I’d save $100000 and use the $4000 a year to pay all the rent or all the car expenses or possibly a collection of utility and cable bills, or maybe the entire food budget.

Then I’d save $100000 more and then I’d retire.
DM responded:
Posted: February 18th, 2008 at 11:23 pm
If you’re serious about taking a big vacation, I’d encourage you to wait until you’ve saved enough to pay for it in full without diminishing your emergency savings. As such, it may take some time after you finally retire your debt before you’re able to go where you’d like, but you’ll be continuing your improved financial habits.
Curious George responded:
Posted: February 18th, 2008 at 11:42 pm
The whole goal of being debt-free is to never use debt AGAIN. I’m all for a vacation to celebrate the hard work, but not if it means using credit or tapping an emergency fund. I would also put the emergency fund first and get it up to 6 months income, because what happens if you vacation, and then a job loss or other financial dilemna strike 4 weeks later?

If I’m debt free except the house, here’s my order of goals:

1. 6 month emergency fund.
2. Max out retirement contributions.
3. Some sort of extra mortgage payment, double if possible.
4. College savings for the kiddos, max if possible.
5. Set aside some savings for eventual car replacement (depending on age of car).

If I have not had a vacation in several years like you, then I put it between 1 and 2, as long as I’m paying cash.
debtdieter responded:
Posted: February 19th, 2008 at 2:12 am
A fascinating question for those of us still getting out from under our debts. I rent, so I’d consider saving for a deposit, or a new (to me) car, or a trip to the UK (I’m in Australia), or a fully funded emergency fund.

In fact I think I’d take my previous debt payment & do all of the above! Divide it up equally & enjoy using my money for me, instead of using it all to service debt.
twiggers responded:
Posted: February 19th, 2008 at 7:23 am
It is so great to have a goal after paying down debt. It can be a great motivator when times start getting tough. I would recommend that you and your family start planning it now! Cut out pictures and hang them on the fridge…..this is your reward for struggling so hard to get out of debt!!!!

However, I would recommend a 3 month safety net in your savings before leaving for the vacation (just to be cautious)!!!!

Good luck Tricia! I love reading your blog!

http://www.nicethingsbaddebt.blogspot.com
Tricia responded:
Posted: February 19th, 2008 at 7:52 am
Thanks for the input everyone!

Just to be clear, once the debt is paid off, it will be a matter of saving up the money for a vacation. None of it will be financed with credit.

We are not talking a very expensive one (no Walt Disney World or exotic locations). Most likely it will be us driving to a bigger city for some of the things there (museums, imax theater, zoos, etc) to enjoy a few things we don’t have much of where we live. Along the way, we’ll camp in campgrounds or stay in mom & pop motels. It should take about a month to save up for (using current numbers).

Early Retirement Extreme – We do have over $3,000 in the bank, and all of the above assumes we still have that when we are debt-free. If we don’t, then it’s likely we will get money in our savings before vacationing.

We have only been to one “zoo” (very, small one) once and we’ve only been to the movies with our son once. He has also never been to a dinosaur exhibit (there are none where we live). We want to expose him to more, and we can’t do that unless we venture out and spend some money.

There is a balance.
Matt responded:
Posted: February 19th, 2008 at 7:55 am
Definitely sounds like a good plan – I think I’d be a little perplexed with having extra money at first so I’m likely to keep my frugal ways. Investment is definitely hight on the list as is real estate.
Kim L. responded:
Posted: February 19th, 2008 at 10:30 am
When we finally got out of HELOC and CC debt, it felt weird and uncomfortable at first. I was so set on paying down the debt that it was a hard decision on what to do next (windfall for us had it happen much sooner than expected so we were unprepared for next steps). Finally what we decided was that we would put more aside for irregular expenses, more into savings and vacation funds and a little extra in living expenses. Now we have a fully funded eFund and a car paid off so we are putting money into a new car account and planning a house remodel.
Ryan responded:
Posted: February 19th, 2008 at 11:34 am
For some reason I left out the word question. It should have read “The biggest question I have in mind is….” but not worries!
Tricia responded:
Posted: February 19th, 2008 at 12:51 pm
Ryan – I just fixed it
Kevin responded:
Posted: February 19th, 2008 at 12:58 pm
Definitely the way to go. A good family vacation would be an excellent reward for years of scrimping and saving.

I also love your idea of building up a 6 month emergency fund. I’ve done so and I find it very comforting not having to worry about money like I used to.
Sherri responded:
Posted: February 19th, 2008 at 1:09 pm
Yes it is all a balance. There will always be *something* else you supposedly should be saving towards instead of taking a vacation. I think taking the inexpensive vacation you plan is a great idea.
Mrs. Micah responded:
Posted: February 19th, 2008 at 2:02 pm
I think it’s kind of funny that people assumed you’d be going on a vacation using credit or without a savings fun or anything like that…
chosha responded:
Posted: February 19th, 2008 at 3:15 pm
I think that when you have waited so long to get out of debt that a family trip is worth putting before building up the emergency fund. I agree with Sherri that there will always be financial choices that seem more sensible, but investing in shared experiences is not foolish spending – it can’t always be about the distant future and the ‘what ifs’. I also definitely agree that saving up and paying cash for that trip is the only sensible option.
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sunsail responded:
Posted: February 25th, 2008 at 3:19 pm
I am currently dealing with the same situation posed by your reader, Ryan. I will have all my credit cards paid off in the fall of this year, which will free up around $600 dollars a month. While I KNOW what I should do with the “extra” money, I am a bit weirded out (and apprehensive and nervous) about how I will handle the psychological aspect of having “all this free money” available. It’s like I’m a recovering addict just getting out of rehab and I have to pass by the local beer and wine store on the way to and from work every day. After five years of digging myself out of this hole, I STILL do not trust myself with money. The only reason I’ve come this far is because I automated EVERYTHING, and tracked every minutiae on a spreadsheet. We’ll see… I like your plan!!!
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