4 Things to Do With Extra Cash When You've Finally Paid Off Debt

So you've paid off your debt. What's the smartest thing to do with the cash you've freed up?

If you're working on paying off credit cards or other high-interest debt, chances are good you devoted most or all of your spare cash to becoming debt-free. And this approach makes a lot of sense -- otherwise, debt can eat up too much of your money. 

But once you've got that debt paid off and your cash is freed up, it can be confusing to figure out your next step.  

So what should you do with the money instead? Consider one or more of these four things. 

1. Start or beef up your emergency fund

Emergencies happen to all of us. If you aren't prepared for them, you could find yourself having to borrow money again after you worked so hard to pay off what you owed before. 

To make sure you're ready for whatever life throws at you, you should have an emergency fund with enough to cover three to six months of living expenses. If you were spending all your extra money on debt repayment, chances are you don't yet have this fund. Now that you've become debt-free, you can get busy saving for emergencies. 

If you redirect the money you were paying to your creditors to a high-yield savings account, you should have your full emergency fund built up in no time. 

2. Increase your retirement saving

Most people are not saving enough for retirement. That’s a big problem -- Social Security cannot usually provide your sole financial support, and most people don't have pensions. 

If you aren't setting aside at least 15% to 20% of your income, including any employer matching funds, you could have too small a nest egg at retirement. But now you've freed up money by repaying your debt, you can get serious about retirement savings.

Increase your 401(k) contributions, or set up automated IRA contributions for the amount you were paying your creditors. When you increase your retirement savings, compound interest will help your account balance grow until you have enough to support yourself as a senior. 

3. Devote the cash to financial goals

Most people have things they want to accomplish, such as purchasing a home or paying for a car in cash instead of taking out a loan. Now that you've accomplished your goal of becoming debt-free, think about what other goals you want to reach with your hard-earned dollars.

Make a list of a few long-term and a few short-term things you want to accomplish; figure out how much money it will take to do it; and redirect the cash you were sending to your creditors to your new goals. 

4. Save for big purchases

Chances are high that you'll eventually need or want to make purchases you can't just pay for with your monthly income. These big purchases -- things like vacations or weddings -- often prompt borrowing. 

If you've recently paid off your debt, you may not be eager to take out new financing. And you may not have to do that if you redirect your debt repayment money to saving for big purchases.

Think about big things you'll likely buy soon, maybe a new refrigerator, or a family vacation. Figure out what they’ll cost, and start saving so you can pay in cash. 

What's the best thing to do with your cash once you’re debt-free?

Ultimately, the best place to put the money you've freed up depends on the specifics of your financial situation. If you don't already have an emergency fund to cover three to six months of expenses, for example, then beefing up your fund is a better bet than saving for a big purchase.

To decide where your money should go, consider which financial objective is the most important for you to accomplish next. And if there's more than one, divvy up your spare cash and work on accomplishing a few new financial goals.