What's next after a $0 balance?

 Paying off a large debt is a huge achievement. For years, you have may have thrown your tax refund, vacation money and all other extra cash at your balance. Making that final payment may be such a relief, you feel like going on a prolonged spending spree.

While a celebration may be order, you don't want to end up right back where you started. So, once your debt is paid off, what are you going to do with the extra cash you now have on hand?

"While you're paying off all of this debt, create a plan as to what you're going to do when you're out of debt," says Judith Cane, an Ottawa-based financial coach. "You don't want it to be a surprise." Start planning about a year before you're debt-free, she says.now-what

For most people, debt repayment consumes around 5 to 15 per cent
of net income, says Nadia Graham, a Calgary-based credit counsellor with the national Credit Counselling Society. It could clock in at as
little as a couple hundred dollars, or up to a couple thousand dollars a month.

Either way, you're going to have extra padding in your account once
the debt is gone. If you don't know what you're going to do with it, try these guidelines.

1. Build an emergency savings.
If you don't already have an emergency savings, or it's pretty sparse, start throwing some extra money toward it. While other priorities may differ according to age and life stage, experts recommend everyone have an emergency fund. Financial planners and credit counsellors
say it should be big enough to cover about six months of living expenses, such as rent, food and transportation.

This suggestion may hit especially close to home if an emergency triggered your debt buildup in the first place. This time around, you want to be prepared for whatever Murphy's Law throws your way.

2. Shield the money from reactive spending.
You may not yet know what you're going to do with the extra income. If you're nearing retirement age, the obvious route is to put it all toward retirement or your mortgage.

However, if you're, say, a 20- or 30-something paying off your last student loan, you may not have a mortgage yet, or retirement might not be your most important goal. Maybe you need a new car, or want to plan a wedding and save up for your first home. While you're deciding, filter the cash somewhere out of reach, Cane says.

"Whatever your goals are, put that money away so you don't have any leakage," she says. "You don't want to do just anything with that money."

Create a separate bank account for that cash until you decide what to do with it. That will stop you from spending the free income on shopping, dinners and other extravagances.

3. Create a balance between big and small goals.
Ideally, you're able to attack multiple goals now, Graham says. For older Canadians, it could be an emergency fund and retirement; for middle-aged Canadians, it could be tackling their mortgage while helping their kids through school; for young adults, it could be juggling a down payment for a home with savings for a wedding or higher education.

Or you may be ready for a big life change, such as a bigger house to accommodate a growing family, or a less strenuous work schedule. Although you could barely whittle away at these priorities while you were in debt, you could be funnelling bigger chunks of money into these endeavours now.

However, you may have some smaller goals, too, such as a post-debt luxurious night out or (finally!) a summer vacation. That's OK, just plan for the splurge. Earmark the expense in your budget and make sure it doesn't exceed the amount you would've contributed toward your debt.

4. Review your budget.
Now that you have more wiggle room in your budget, you no longer have to live like a pauper. "[Budgets] are not stagnant," Graham says.

You may want to increase your budget for clothes so you aren't shopping at second-hand stores, or your budget for entertainment so you don't have to miss nights out with friends. Just be sure to revisit your budget about every six months to make sure it's in line with how you're actually spending.

5. Take it slow with new credit.
If you kissed your credit cards goodbye because your spending got you in trouble, you have to tread carefully when you're back in your creditors' good graces.

"Anyone who has had a problem with debt should not hurry into getting all kinds of credit back," Graham says. But unless you have a real spending addiction, you'll likely want a credit card to rebuild credit. While you may be tempted to live without plastic, if you do have more milestones to reach, such as buying a home, you'll need to have strong credit to meet them.

Start small, with a single credit card with a limit you can manage. A secured credit card may be another option if you're worried about temptation.

"That way, you won't have the ability to rack up debt all over again," Graham says.

See related: What to do if you fail your debt consolidation plan, How to choose the right credit counsellor
Published October 28, 2015

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