Budgeting Tips for the Newly Debt-Free

Budgeting Tips for the Newly Debt-Free

You’re debt-free: Congratulations! This is a tremendous milestone, and one to celebrate. – But once you’ve celebrated, take a step back and pause. Becoming debt-free presumably took a tremendous amount of effort. So, too, does remaining debt-free. You likely didn’t go from being wealthy to suddenly being steeped in debt. Consumers get into debt from a series of small, bad habits and decisions that compound over time. Similarly, getting out of debt and back onto solid ground financially takes a series of small, good decisions and baby steps.

In other words, staying debt-free will take a lot of hard work. But with the right mindset and the power of good habits, you can do it. Continuing these habits day to day, week to week, month to month, and year to year will help you stay out of debt and build wealth. 

Here are our top tips for budgeting to stay debt-free for the rest of your life. 

Identify your “why”

In other words, why are you trying to set a budget in the first place? Presumably, it’s so you can stay out of debt, build wealth, and experience the joy of financial freedom. By setting reasonable restrictions on your spending, you are giving yourself much more freedom to steward your funds well and build wealth. Keep this in mind when making decisions about how to save and spend. Your why should be the linchpin of every financial decision you make. 

Create a 0-based budget

This is a budgeting strategy that assigns a place to every single dollar you earn and as such, your income minus your expenses equals 0. This strategy can not only give you a clearer sense of where your money goes, but also encourage you to dedicate the money that comes in each money toward very specific financial goals. There are ample apps available to help you do this.

Get your partner and your family onboard

Make sure there is a meeting of the minds if you share finances with a spouse or partner. It is far easier to budget and use your spending power well if you and the person with whom you share finances are on the same page with your financial challenges and goals.

Plan for variance each month

Not every month will look the same, especially if there is any variation in your income and expenses (which is true for most people). Make sure you create a flexible budget with categories to accommodate variances, taking into account which line items are fixed and which are variable. Tweak your discretionary spending categories accordingly to ensure that in any given month, you have enough funds coming in to cover both.

Prioritize building up the emergency fund

Aim to accumulate six months of living expenses in a separate account. You should create your budget to ensure that you are contributing to this fund every month. Keep in mind that this account is just for emergencies. A discretionary home renovation or vacation is not an emergency. Neither is a new car (in fact, you should have a separate “car fund” to cover yourself when your vehicles inevitably need to be replaced). 

Automate your recurring bills

Expenses that recur at the same time each month – like a mortgage, insurance premium payments, or homeowners association dues – should never come as a surprise to you. Set them to auto-draft from your account each month so that you essentially never see (or miss) that money. Consider doing the same for your emergency fund contributions and your retirement accounts.

Create separate accounts for your savings goals

Create an account for fun or discretionary expenses, like home improvement projects, vacations, or gifts. This will help you track your progress month to month. Not to mention, it is motivating and exciting to see those numbers creep up – knowing that you are intentionally saving for something that you and your family prioritize can help you avoid random discretionary purchases that don’t serve you.

Track your progress

Regularly check in on your accounts so you know how you are doing. You can do so monthly, quarterly, or on any schedule that works for you, but do it. This will help you stay honest when it comes to how you are saving and spending. Also, continue to revisit your budget as life changes occur, for instance, job changes, raises, and new expenses for education and housing, etc. For instance, you may have kids in school now, but eventually, they will graduate and you will have more breathing room in your budget. How will you use those funds? Prepare to be flexible and savvy. 

Build in some fun

Don’t be too frugal with your budget, or you likely won’t stick with it. Make sure you allocate some funds for enjoyable activities. Just be sure they are commensurate with what you earn. For instance, your “fun” money likely shouldn’t be 50% of your family budget. Keep it modest, but make sure that you build it into your monthly spending so you don’t burn out and wind up making bad decisions down the road.

Remember why you started

In the end, routinely circle back to your “why” and remember why you started. This will set you up for long-term success and will help you STAY debt-free so you don’t undo your hard work. It takes a conscious, consistent effort to stay debt-free and build wealth. In time, you will grow so accustomed to your new healthy financial habits that they will become second-nature. But in the meantime, work hard to build that foundation that will serve you and your family for years to come.