Debt Free Now What?

The article below was published in Canadian MoneySaver magazine in January 2010

An amazing thing happened to me recently and it has had a huge impact on my life. I paid off my $60,000 student debt. This was no easy task. In order to get to a zero balance, I chose to sacrifice my social life on many occasions, whether it was staying in for the evening instead of going out or not being able to fly to the Caribbean for a good friend’s wedding.

After months of turmoil watching my social life putter to a halt and questioning whether minimizing my fun to maximize my ability to save was really worth it, I received a bank statement which showed my loan balance at $0 – which is now sitting in a frame on my wall- and my answer is yes; it was worth it. The question I’m now faced with is what next? For the first time in years, I have no significant financial commitments. For a brief moment, I am what is called “financially free,” but not for long. So how does one decide what to do next?

In my first article, I talked about thinking about the future. In this article, I’m going to take you through an exercise to quantify your lifestyle goals and how to measure them against your current income. As for me, I’ve started to think about the life I want, and how I’m going to get there financially. By thinking about the big picture and what that entails, I can start to work backwards and create the starting point for a financial plan on how I’m going to get what I want. The purpose of creating a financial plan is to provide you with guidelines that will help shape your decisions.

So how do you think about the future? The first step is to visualize the type of life you want. In my case, I know the following things are important to me:

• Travel abroad once per year (it’s important for me to see the world)
• Live on my own
• Have a car
• Be able to go out for dinner once per week (I’m a foodie and need to try new foods)
• Be able to go out with friends socially once per week (it’s important to stay in touch with friends)
• Start saving to for a down payment on a house (I can’t afford to buy a house today, but I want to work towards buying a house)
• Be physically active (including tennis and golf)
• The ability to buy new technology twice per year (I’m also a techie and want to be able to buy new toys)
• Wardrobe replenishment twice per year (I usually only go shopping twice a year, but each time it’s a big one)

Now that I’ve put my lifestyle goals down on paper, I can quantify what this lifestyle will cost with ballpark dollar values beside each item. If you don’t know how much something will cost, do a preliminary search on the internet or ask friends and family to help flush out the costs.

In my case, for me to achieve my lifestyle goals, I’m going to need to find $48,200 after tax each year, not including other costs like cell phones, food, investing for the future and miscellaneous costs. If my current salary is not at that level, I’m going to have to either find additional money to cover the shortfall or consider cutting back on some of the expenses above. After you calculate what your lifestyle goals will cost, compare them to your current after tax income see if there is a shortfall between how much you make and how much you want to spend.

The final step in this exercise is to put a plan in place to meet your lifestyle goals by figuring out how much you need to save each pay period. The following will show you how to calculate this. In my case, I get paid every two weeks, so I need to take each expense above and divide it by 26 (which represents the number of pay periods each year) to determine how much of each pay check I need to save for that expense.

Now that I’ve demonstrated how to calculate how much to save each month to obtain your lifestyle goals, you need to start putting your money aside. For monthly expenses such as living on your own and having a car, you can setup an automatic withdrawal to make payments from your checking account each month. This will make sure that you’re paying your monthly bills on time. The rest of your expenses happen on a less regular basis, so you can put those into a savings account – in fact, some banks will let you set up a savings account for each item you want to save for. In my case, I would setup a savings account for clothes, owning a house, travel, and technology.

By thinking about your lifestyle goals and putting down all the costs on paper, you’ll have a clear picture of how much money you need to set aside to live that life.

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