Whenever Liz Schieck sees people make the final payment on their debt, she’s reminded of a viral video from 2009 called David After Dentist. In the video, which has been viewed more than 138 million times, seven-year-old David is, well, riding high on some strong pain medication after having a tooth pulled at the dentist. “Is this real life?” he loopily asks his dad from the backseat of the car.
The reason that video comes to mind for Schieck, a certified financial planner at the New School of Finance in Toronto, is that when she sees her clients finally released from the grips of debt, they don’t really believe it.
“People are kind of incredulous,” she says. “They’re like, ‘Is it real? Am I dreaming?’”
Having discretionary income again can certainly take some getting used to — as can having a positive net worth for once. And you’d be hard-pressed to find anyone who wouldn’t want to keep it that way.
But when you manage to kick any bad habit, there’s always the potential for relapse. So how do you make sure you don’t fall back into debt once you’ve finally gotten out of it?
Celebrate achieving debt freedom
The very first thing you should do upon making that final debt payment is celebrate.
“There’s going to be someone out there who’s like ‘Why are you saying this? You’re part of the problem!” says Schieck, “but I think the answer is, actually, celebrate — in a financially responsible manner — and that can be treating yourself to something.”
Maybe that’s taking the $300 a month you were putting toward your debt and buying yourself a pair of new shoes or indulging on a fancy dinner out with a friend. The point is: if you don’t, in some way, commemorate the event of kicking your debt’s ass, there’s a good chance it could come back to kick yours a second time.
“If you worked for literally years to pay something off, I absolutely think that the first month you don’t have to make those payments, do something with that money that is exciting,” says Schieck. “It’s important to celebrate the victories because if you just roll right into the next slog, then it’s really hard to stay motivated.”
Make a new financial plan
The “next slog,” Schieck’s referring to is making a brand new shiny budget (even though she hates that word because of its restrictive connotations) and figuring out how to best reallocate the money you were putting toward your debt.
“If something big changes, that means it’s time to tweak the plan,” says Schieck. “You need to know what to do next. How do you change how much money goes to which account, how do you know how much you’re saving now that you’re not paying this much to debt anymore?
“Having that flexibility is often very jarring,” she says. So, if you feel comfortable tackling those questions by yourself, great. But if not, you can get help from a professional in reassessing what you can do with the extra money and what goals you’re planning for next.
For some people, the ongoing debt payments may have not made too much of a dent in their monthly spending and saving. For them, says Schieck, “Maybe that money really does just roll right over to a savings goal. But for a lot of people there’s going to be something else that that money needs to go to” like maybe a new laptop, a major vehicle repair, or even an outright replacement.
Start building emergency and other savings
That’s why part of your new financial plan should include building up an emergency fund that you can start making regular contributions to. This is your best defense against a debt relapse. If you didn’t already have a fund created while you were paying your debt back (so that you wouldn’t relapse during repayment mode), you should create one once the debt is gone.
“Sometimes people put themselves on a debt repayment plan that’s maybe too aggressive,” says Schieck, “where they’re putting every last dollar they think they can spare towards that debt. It comes from the best intentions, but they’re also not leaving themselves any kind of safety net. Then life happens, and they don’t have enough of a buffer to see them through without relying on credit.”
An emergency fund will help keep you from sliding back into debt. You might also want to consider a spikes-in-spending account. The spikes account, as personal finance guru and author Shannon Lee Simmons (who also happens to be the New School of Finance’s founder), writes in her book Living Debt Free, is for “predictable spikes in spending” such as vacations, weddings, and furniture purchases.
“Those spikes tend to shift in terms of what they are throughout people’s lives,” says Schieck, “but they're always present.”
“Everybody needs that kind of slush fund savings account,” says Schieck. “Because then you have somewhere to pull from before a credit card.”
And then you’re one step further along in staving off the dreaded debt relapse.