When you first graduated college with a pile of student loans, you probably thought you'd never manage to shake them. And now, after years of paying down that debt, you're finally student loan–free, and that's certainly something to celebrate. But before you make plans to spend the money you'll be saving by not having a monthly loan payment to fulfill, consider these better uses for that newly freed-up cash.
1. Build an emergency fund
Establishing an emergency fund should trump all other financial goals you have. The idea is to have a minimum of three months of essential living expenses tucked away in a savings account -- and, ideally, more like six months' worth. If you don't, then you should take every single dollar you previously put towards your loan payment and stick it directly into the bank. That way, you'll have a cushion in case unplanned bills arise, or you lose your job and are forced to go without an income for a period of time.
2. Pay off remaining debt
Just because you're no longer bound by student loan payments doesn't mean you're completely debt-free. If you're still grappling with credit card debt, you'd be wise to use your newfound savings to make it go away. The sooner you do, the less money you'll throw away on interest. Paying off unhealthy credit card debt can also improve your credit score so when you want to borrow money responsibly (say, to buy a home), you're more likely to get approved.
3. Start contributing to a retirement account
If you've been putting off retirement savings due to your nagging student debt payments, now's your chance to start building a nest egg. If your employer offers a 401(k), sign up and have the amount you're no longer stuck paying toward your loans land in a retirement account instead. And if you don't have access to a 401(k), open your own IRA and do the same there.
4. Save for a down payment on a home
Qualifying for a mortgage is easier once you're student debt–free, because lenders look at your monthly obligations and compare them to your income to see whether you can afford to take on more debt. The less debt you have, the more desirable a mortgage borrower you become. But getting approved for a mortgage is only part of the battle. If you want to buy a home, you'll need to save up for a down payment, and your newly freed-up cash is a good way to do so.
5. Invest in your career
It's hard to spend money on professional development when much of your income is allocated to student loan payments. But once those payments go away, you'll have the option to invest in yourself. That could mean taking a course to boost key skills, paying for a professional license or certification, or buying better equipment to excel in your field.
Shedding your student debt is a milestone you're no doubt thrilled with. But do yourself a favor and put your freed-up cash to good use -- or at least most of it. The truth is, after spending years paying down that debt, you deserve a little reward for making the effort.