After You Pay Off Your Debt, Then What?


This might hurt a bit…

There’s a virus spreading around Personal Finance sites (and yes, at least 30% of the time, we’re one) – a virus which infects both blogs and writers alike.  I’m talking, of course, about the obsession with debt-pay-down to the exclusion of all other notable personal finance topics.

What?  A Debt Payoff Virus?

Is it realistic for a virus or a parasite to change mental processes?  Well, yes, there is some prior art.

The obvious example is, of course, rabies – which alters even passive hosts into aggressive biters in an attempt to get them to spread the virus before they themselves die.

Hilariously, on the “not usually fatal as rabies” side of the coin are cats.  Cats spread a disease called toxoplasmosis which causes increased risk taking behavior in rodents (easier meals) and, it is theorized, makes humans like cats more.  Up to a third of the world might be infected.  Crazy cat ladies, indeed.

Perhaps I’m being overwrought.  The actual most likely reason that debt becomes anathema can possibly be explained by the “zeal of the convert”.

When someone engaged in a certain lifestyle- such as a lifestyle founded solely on credit – flipping 180 degrees and reversing lavish ways is, in fact, a pretty drastic conversion.  The zeal phenomenon comes from those huge conversions – usually after hitting ‘rock bottom’ (think: round number of debt, hitting limits, being denied a new loan or job, etc.)

What’s The Problem?  It’s Better than Spending…

Yes, true, flipping the script is actually a huge improvement… even if it took hitting rock bottom for someone to recognize the error of his or her ways.  The problem in this instance isn’t the new drive to pay off debt… it’s the complete denial that there are any other ways to improve one’s financial situation.  If you read our article about the four pillars of personal finance, you’ll note that a debt zealot is only concentrating on one of those pillars – the debt.

That’s an issue.

Look, a good defense can only get you so far.  At some point you’ll need to strengthen your offense: earning more is a decent start, but the ‘scoreboard’ shows assets versus debt.  Net worth is the name of the game here – just because you’ve got $0 in debt and a $10,000 emergency fund doesn’t mean you’re financially independent.

Opportunity Costs

It boils down, as always, to opportunity costs.  Your money is a limited resource.  If you were previously in debt you know (better than anyone!) that’s the case… most people find themselves searching personal finance blogs because their profligate spending meant they were buying a lifestyle which couldn’t be supported by their cash flows.  That’s why you need to treat your money a the precious tool that it is and use it to its highest utility.

What do I mean by that?  Well, the go-to example would be investing while paying down your mortgage, especially if you work for a company that matches funds into a 401(k).  Your mortgage probably costs you, what, 4.5% annually?  A 401(k) match can give you 100% or 50% right out of the gate, plus the long term returns of the market.  What are they?  I built a couple calculators you can use to figure that out.

Some debts are a no-brainer – pay off your loan shark and gambling debts, your payday loans, and your high interest credit card debt.  Each person has a different risk tolerance so I’m not going to say “12.99% APR” or something is the limit, but high is high – and there is no tax break.

There are other debts that aren’t too bad, even without tax advantages – cheap car loans and 0% interest rate financing (or credit cards) shouldn’t be at the top of your payoff list if you hold the above debt.  Obviously, don’t acquire new debt, but you aren’t accumulating much (if any) interest on those.

A few types of debt are tax advantaged in the US, because our betters have decreed this financing worth it.  The two common forms for an individual filer?  Mortgage interest and student loan interest.  You might still have a high rate – but the way to compare your rate is using your tax equivalent yield, not with the stated APR.  Also, note, you might not get any tax breaks depending on your situation – if that’s the case, then you can take them at face value.

Don’t Catch The Fever…

… because the only solution is more debt payoff.  There comes a point where you can’t payoff anymore debt – you’ve even paid off all of your low interest debt!  When it comes to that point, the typical person with the debt virus thinks like this:

  1. Pay off debt fanatically
  2. Acquire emergency fund (usually “X months living expenses” or “$some round number”)
  3. ???

The problem with #3?  Once you reach there you have no assets, other than maybe a house, an old car, and $10,000 in a savings account earmarked for emergencies.  (If you aren’t lucky it’s just $10,000 in the bank while you’re renting).  Look, debt isn’t evil if you use it the correct way, and keep your outflows well below your expected inflows.  However, strong aversion to debt can set you back years.

And the other issue?  Even if you do complete steps 1 & 2, you’re not yet at financial independence.

Stopping and celebrating at step 2 after first driving yourself to rock bottom is pretty much like stopping and celebrating after the first mile of the marathon.

Or, worse… running backwards and celebrating after turning around and making it back to the start.

So, inoculate yourself against the debt virus – marathons make for a great image, but this is your life.


  1. says

    I don’t think all debt is bad. But some are avoidable like a credit card debt. Debt of this kind is bad.

    An affordable mortgage isn’t necessarily a bad thing. The key is cash flow – have sufficient cash flow and balance your assets and liabilities.

    Nice coverage of this important aspect!

    • says

      At this point, most people have taken advantage of the refinance wave and the insanely low costs (I like to look at inflation expectations vs. mortgage cost). No brainer.

  2. says

    But I pass out from needles!!

    We like to think we achieved a decent balance during our pay-off sprint, still maxing out 401Ks and IRAs, and throwing the remainder at debt with interest rates 5% and above.

    As for “tax equivalent” rates, it’s helpful to remember that those don’t apply to everyone – and i would go so far as to say that there are probably more people who should ignore them than should pay attention. With the Median home price in the us still < $250K, even at a 4.5% interest rate there is only $6.6k for interest in year 1 of a 30 year note. A married couple still has quite a way to go before passing the standard deduction…

  3. debtfreeoneday says

    As someone who is in debt (the bad kind and the reasonable kind), it’s quite refreshing to read this perspective. At the moment, we’re paying off our bad debt aggressively and I’m already looking ahead to what we’ll do after it’s gone. My first thought was to tackle the mortgage but after reading this and a few other posts lately, I’m thinking we might be better off trying to invest as well as put more money into the mortgage. And do much more to save for retirement.

    • says

      It’s tough to say with 100% confidence what your best move is after the high interest debt. 401(k)s, at least to the match, are no brainerss, and discounted employer stock is usually the right call too (even though in hindsight it may not look like it – you can always sell immediately when it vests).

      The confusion now is whether those mid-range yields – 3% – 8%, say – should siappear before investing. Personally, right now I’m leaning towards getting rid of everything above 5%, but that’s, of course, a decision that you’d have to make for yourself with all the proper people.

  4. Alicia says

    Oh I really enjoy this post. It is nice to hear someone say this about debt. I know it’s important to get rid of, but not at the expense of everything else. I am trying to balance things a but in this area – we shall see.

    • says

      Yeah – especially the 401(k) match. You’re talking 50% or 100% returns…. in one day. I also think 3% mortgage debt is probably a keep, and opinions will vary about everything in between. Definitely check out some of our investing pieces to determine your risk tolerance on that side!

  5. Six Figures Under says

    Right now we are focusing on debt repayment ($100,000 of student loans at about 6.8%), but after that, we will be thrilled to get some more debt in the form of a mortgage! We should also be eligible for a 401(k) match this year which we will take advantage of.

    • says

      The 401(k) match (and, possibly, some stock purchase plans) are about the only places in the world you’ll see huge guaranteed returns. But, yes, I’d personally look at the 6.8%s this year as well, especially if you aren’t able to write that interest paid off.

  6. says

    We tend to follow closely with a plan. We just bought a house, so kept the student loan around to put more on the house (lower interest rate and if I die, so does the student loan but not the house). I’m a bit of an investment junkie, so I’d put the payments into the market when they expire.

    • says

      The other weird thing is the interest rate on the student loans – I’ve seen everything from sub-1% to private loans approaching 10%, so even that’s a category where I can’t give my own opinion (well, keep the sub 1%s!). Sounds like you’ve got a good handle on it, though – good luck!

  7. 101Centavos says

    Endorsing your risk hierarchy of debt. Paying off the loan shark *first* is undoubtedly the most prudent approach.

    • says

      And, hopefully, visiting the loan shark last when you’re looking for a loan?

      It’s great to see you again, Mr. Centavos!

      • 101Centavos says

        Hope none of is ever get to the point of dealing with blinged-out guys in velour jogging suits. Good to be back.