So You Are Debt Free – Now What?

by Mike Holman

A friend of mine eliminated his mortgage a couple of years ago at age 35 and planned to save a good portion of the resulting extra cash flow.  So far he has just spent the extra money, even though he knows he should be saving more.

My wife and I had a big goal to pay our mortgage off, something we’d been working on for several years. This was accomplished last year and we have seen the exact same spending pattern as my friend. I had hoped to channel a good portion of the extra cash to savings, but that hasn’t happened at all.

After a major goal is reached – what next?

One theory I have about this situation is that a mortgage or any other debt is a very concrete target and it is both easy and gratifying to measure progress. Financial goals like saving for retirement are far less concrete because there are so many uncertainties around retirement planning. If you increase your debt payments by $3,000 per year, you can measure to the second how much quicker you will be debt free.

If you increase your retirement savings by $3,000 per year – how will that affect your retirement? Obviously it will be better, but how much better? Will the difference be enough to be noticed?  Is the increase in retirement lifestyle due to the $3,000 investment worth more than the decrease in your current lifestyle?  I have no idea.

Pent up consumer demand

One problem with going hard on a debt repayment plan is that it usually means that you are delaying spending that will happen later on.  House renos, consumer items you might want -it’s easy to say no when you are in debt-reduction mode, but it’s hard to keep sacrificing focus when the debt is gone.


Both my friend and I had very young kids during our major debt-reduction phase. For all the talk about how expensive kids are, we both found that young kids don’t cost much and prevent you from doing anything fun that costs money. I also found that having young kids is so tiring and time consuming that I never wanted to buy anything because it was too much work and I didn’t want to think about making choices or doing research.

Now that the kids are a bit older – our spending has changed as well:

  • More time to shop – I can even take the kids with me (although that is still risky).
  • More time to do stuff – I bought a road bike this year and enjoy a nice long ride every Sunday morning. This isn’t something I would have done a few years ago, because it is hard for one person to look after a newborn and a toddler at the same time.
  • More travel – We still tend to base most of our holidays around visiting the babysitters grandparents, but have branched out into camping and possibly the occasional hotel or cabin stay.  I’d love to do another Germany trip in a few years, which will hopefully be more fun than the last one.
  • More eating out – I used to hate dining out with the kids. It was horrible and not worth the money. Now – it’s still not great, but I don’t mind as much so we do it more often.
  • Kids’ activities – Now the kids are getting involved with various activities which cost money and require equipment. It adds up.

Is it worthwhile paying debt off quickly?

The issue of pent up consumer demand leads me to question if it is worthwhile to totally deprive yourself in order to pay down debt very quickly. If all you are doing is delaying spending, then the advantages of paying off debt faster are not necessarily all that significant.

I think there is something to be said for balance. If you are doing a very hardcore debt reduction, then I don’t want to discourage you. However, slowing things down a bit might not be a bad idea.  If you work too hard to pay down debts and then fall off the wagon – you might end up worse than if you had just started off with a more balanced approach to debt reduction and living your life.

I think we made a good choice to pay down our debt quickly, if nothing else we took advantage of the low spending years when the kids were young to attack the debt. But, I can see the argument that if we had taken another year or two to pay it off – the end result would be pretty much the same.

Set financial goals after debt payoff

Our next step will be to establish some financial goals. Hopefully that will get us to increase our savings rate at least a little bit. For now we have to pay for our new garage. Then I think contributing more to our TFSA accounts will be another goal. Lastly, our RESP account is not maxed out, so that will be another area we can put more money.

What do you think?  Is it possible to pay off debts too fast?

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