Paying off debt takes a lot of discipline, so you deserve to celebrate when the outstanding balance is settled. Now, what will you do with the extra money in your account? You’re not going to overestimate the savings, overspend, and go back to your debt resolution company.
What to Do After Debt is Paid Off?
You’re not going to run up debt on the basis that you beat it once, so you can do it again. Instead, you’re going to create a monthly budget that allows for a little fun and a lot of savings.
For example, you can open an emergency account and make monthly payments to the fund so you aren’t blind-sided by emergency medical bills. Note that emergency savings ought to be enough to cover your living expenses for three to six months.
Other options include:
- Building up your Individual Retirement Account (IRA) or your 401(k).
- Saving for new financial goals, like a holiday overseas or college costs.
- Growing your investment portfolio – with professional help so you’re less likely to lose a fortune and fall back into debt.
- Increasing mortgage payments so you settle the biggest outstanding debt of all ahead of time.
- Avoiding the lure of credit cards. Try a debit card instead.
Make Staying Out of Debt a Priority
It’s difficult to stay completely debt free. Besides some debt is necessary to keep your credit score healthy. To stay out of bad debt, aim for an amount that is up to 20% of your annual income—excluding rent and mortgage loans.
Consider the reasons for your debt and be honest. If you overspend on items you don’t need, even when you know you’re in financial trouble, it’s a good idea to get help, either through debt consolidation programs or from a credit counseling agency, such as Consumer Credit Counseling Service (CCCS).
If it was the cost of living, look at where you spend your discretionary income. You may need to tighten your belt but with the extra money available now that you’re debt-free, you should have some breathing room.
Continue to Budget
A budget is the most important tool to keep you out of a bad debt situation. Structuring your income and spending will help keep you on track and out of financial hardship. There are online budget planning tools and apps for you to use, some of which are free. You can consult a financial service provider that offers debt settlement programs and a credit counseling service.
The simplest way to budget is to use the 50/30/20 rule.
- 50% of your income to cover your needs.
- 30% for wants.
- 20% for savings and debt repayment.
Budgets aren’t cast in stone, so go back regularly to adjust them for things like a wage increase or insurance premium hike. You’ll have to restructure your expenditure to accommodate the changes, but credit counselors will help you maintain a healthy balance.
Invest in Your Future
Investing in your future ensures your future financial needs are met, typically during retirement. The easiest way to save is to start a retirement fund. You can get an idea of how much you need to save to maintain your standard of living by using an online retirement calculator.
There are different types of funds:
- Roth IRA
- Traditional IRA
There are many other ways in which you can ensure a steady income.
Grow Your Savings
This includes your emergency account and a savings account. A regular savings account doesn’t pay enough interest to significantly contribute to your balance. Other options include:
- High-yield savings account
- Money market account
- Certificate of deposit
Each has pros and cons, which you must weigh carefully.
Advance Your Career
Increase your savings by advancing your career through work promotions, changing jobs, or starting a side business. You can bolster them with continuing education, on-the-job experience, and skills tests.
Learn Something New
Learning something new can increase your earning power. For example, learning Mandarin will make you indispensable during meetings with Chinese business people. A certification course in project management proves to your boss that you are proactive and capable.
Build Your Credit
Find out what factors determine credit scores and compare them with your credit report. You’ll see what areas need work, including credit utilization, types of credit accounts, and debt balances.
One solution is to become an authorized user on someone else’s card. Just ensure you keep up your end so you don’t land someone else in credit card debt.
Consider a credit-builder loan. You borrow money from a lender, who puts it in an account where it is held until you pay off the outstanding loan balance. Credit bureaus are notified of your payments, so it makes a difference to your credit quickly.
How Long Does it Take for Your Credit Score to Improve After Debt Settlement?
In short, it could take six to 24 months for your credit score to improve. The primary reason debt settlement drops your score is that your loan payments only covered a portion of the loan.
The creditor’s loan records show the matter is closed, but technically, you failed to meet the terms of the credit agreement. That puts a black mark on your credit score that stays for seven years—that’s how long debt settlement will affect your credit score.
However, payment history is important to lenders so all the payments you made to your creditors, even if they only covered a percentage of the loan, will have a partially positive impact on your ability to obtain credit.
Often, the time it takes your credit score to improve depends on the lender. Some lenders view debt settlement as a proactive measure and they may approve credit in fewer than six months. Others might be stricter and refuse credit for years after the creditors have been paid.
The fact is, debt settlement does more good than harm and you can recover from a poor credit score.
Know Where to Get Help – Contact Alleviate Financial Solutions Today!
Alleviate Financial Solutions offers debt settlement programs that are tailored to your needs. We take pains to ensure we understand your financial situation inside and out. In this way, we deliver the best possible services to help you live debt free.
For a risk-free debt relief assessment, let our team of financial experts help you in creating a sound debt management plan. Fill out our online form at Alleviate Financial Solutions today!