Personal Finance

So You Are Debt Free – Now What?

A friend of mine eliminated his mortgage a couple of years ago at age 35 and planned to save a good portion of the resulting extra cash flow.  So far he has just spent the extra money, even though he knows he should be saving more.

My wife and I had a big goal to pay our mortgage off, something we’d been working on for several years. This was accomplished last year and we have seen the exact same spending pattern as my friend. I had hoped to channel a good portion of the extra cash to savings, but that hasn’t happened at all.

After a major goal is reached – what next?

One theory I have about this situation is that a mortgage or any other debt is a very concrete target and it is both easy and gratifying to measure progress. Financial goals like saving for retirement are far less concrete because there are so many uncertainties around retirement planning. If you increase your debt payments by $3,000 per year, you can measure to the second how much quicker you will be debt free.

If you increase your retirement savings by $3,000 per year – how will that affect your retirement? Obviously it will be better, but how much better? Will the difference be enough to be noticed?  Is the increase in retirement lifestyle due to the $3,000 investment worth more than the decrease in your current lifestyle?  I have no idea.

Pent up consumer demand

One problem with going hard on a debt repayment plan is that it usually means that you are delaying spending that will happen later on.  House renos, consumer items you might want -it’s easy to say no when you are in debt-reduction mode, but it’s hard to keep sacrificing focus when the debt is gone.


Both my friend and I had very young kids during our major debt-reduction phase. For all the talk about how expensive kids are, we both found that young kids don’t cost much and prevent you from doing anything fun that costs money. I also found that having young kids is so tiring and time consuming that I never wanted to buy anything because it was too much work and I didn’t want to think about making choices or doing research.

Now that the kids are a bit older – our spending has changed as well:

  • More time to shop – I can even take the kids with me (although that is still risky).
  • More time to do stuff – I bought a road bike this year and enjoy a nice long ride every Sunday morning. This isn’t something I would have done a few years ago, because it is hard for one person to look after a newborn and a toddler at the same time.
  • More travel – We still tend to base most of our holidays around visiting the babysitters grandparents, but have branched out into camping and possibly the occasional hotel or cabin stay.  I’d love to do another Germany trip in a few years, which will hopefully be more fun than the last one.
  • More eating out – I used to hate dining out with the kids. It was horrible and not worth the money. Now – it’s still not great, but I don’t mind as much so we do it more often.
  • Kids’ activities – Now the kids are getting involved with various activities which cost money and require equipment. It adds up.

Is it worthwhile paying debt off quickly?

The issue of pent up consumer demand leads me to question if it is worthwhile to totally deprive yourself in order to pay down debt very quickly. If all you are doing is delaying spending, then the advantages of paying off debt faster are not necessarily all that significant.

I think there is something to be said for balance. If you are doing a very hardcore debt reduction, then I don’t want to discourage you. However, slowing things down a bit might not be a bad idea.  If you work too hard to pay down debts and then fall off the wagon – you might end up worse than if you had just started off with a more balanced approach to debt reduction and living your life.

I think we made a good choice to pay down our debt quickly, if nothing else we took advantage of the low spending years when the kids were young to attack the debt. But, I can see the argument that if we had taken another year or two to pay it off – the end result would be pretty much the same.

Set financial goals after debt payoff

Our next step will be to establish some financial goals. Hopefully that will get us to increase our savings rate at least a little bit. For now we have to pay for our new garage. Then I think contributing more to our TFSA accounts will be another goal. Lastly, our RESP account is not maxed out, so that will be another area we can put more money.

What do you think?  Is it possible to pay off debts too fast?

11 replies on “So You Are Debt Free – Now What?”

I see what you are saying but delaying paying down debt leaves you with significant interest payments that are also eliminated faster.

Interesting question. I’ve followed a more balanced approach. Ahead on mortgage payments, maxed out on all investments but always left room for fun. When I bought my first home I met someone who focused all money paying off the mortgage early. But to do it they never travelled, never had a new vehicle, did all maintenance & house work themselves & ate as cheaply as possible. I thought it admirable but personnaly wasn’t interested in that much personal sacrifice. It all comes down to what you want in life. And I chose was to keep debt to a set minimum while being able to enjoy life. I may not be able to take it with me but I will always have the memories.

I hear you Mike. We’ve also paid of our mortgage recently and our spending has definitely increased after that was accomplished and some of it is probably pent up demand as you say.

However, I still feel good that we aren’t losing any money to interest payments anymore. We are also definitely saving more than we ever have, but I’m not sure it is enough considering that we are debt free at the moment.

There will be new debts in the not so distant future I’m sure, but for now we’re enjoying it. Good luck with your future money decisions now that you are debt free!

I always carried a mortgage that forced me to watch our money,instead of rivate Schools we took on a large mortgage and moved to an area downtown TO with excellent schools and safe neighbourhood.
Traded down at retirement, twelve years later traded down again.
Very fat bank account, monies have been set up for our Future Estate, we will function on our regular Pension Inflow.
Six months down south, six months in small town, walk to everything.

I think it’s a good strategy to focus on paying down debt aggressively while your kids are young. We’d love to do a big family trip to Disneyland, or to go on a cruise, but I think it will be more enjoyable if we waited until the kids are a bit older.

Then, once you’re debt free and the kids are a bit older, you can do all sorts of fun trips and get them involved in other activities that would be a strain on the budget if you still had debt.

Who says you need to delay spending until you’re retired and too old to enjoy life?

We also paid off our mortgage last year and looked forward to greater cash flow. However, I now have a job that pays less than my previous job so the cash flow isn’t quite there. In spite of this, I ramped up our RRSP and RESP contributions as well as increasing our charitable donations. I’m glad I did this because some of the extra cash is now spoken for each month, which is a good thing.
Yes, there had been some “pent up consumer demand” in prior years (new carpeting) but we’re still pacing ourselves because we made sure that we put some of the extra cash towards savings.

After paying down a chunk of debt it might be a good idea to take a bit of a breather and do some controlled spending. Building up your investments is a good idea rather than just sitting on a bunch of cash. Some modest home upgrades, activities for your kids or paying a baby sitter so you can have some quality time out as a couple are great things to spend on.

We paid off our mortgage about five years ago when I was 38. I’m happy to say that our spending habits have not changed much, but our three kids are still young. I think we came to the realization that material purchases weren’t going to provide us with additional or lasting happiness/contentment, and thus have kept the spending more or less in check. It’d be nice to replace this old computer I’m using with a new MacBook, but it still does what we need it to do, albeit a bit slowly, but that doesn’t bother us much. I’m happy to max out on the kids RESP and stay-at-home wife’s spousal RSP.

If we have increased our spending it is on food–organics cost a lot more.

I doubt many of posters live in downtown TO where a cheap house, a fixer upper is over $700,000.
Mortgage Free is easy if the house cost you $300,000.
Vancouverites and Torontonians must live with a mortgage, but at the same time, one day they can sell that house, buy a smaller place in a smaller city or village and put a ton of cash in the bank.
I still think the best Investment is a house in an area with good schools and minimal commuting,these places always hold their value and the peer influence is positive.

I wouldn’t say I’m obsessed with debt payoff by any means, but I certainly don’t want any more debt. I have a car loan and I just don’t like that I’m throwing away money on interest. It’s not even that much, but would make a difference collecting interest in my retirement account. I have a goal for after debt repayment and that’s to purchase a house; I don’t have that large of payments that it is stopping me, but I would just feel better if it was gone prior to doing so.

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