You’ve been looking forward to this day for months, years or maybe even decades: It’s the day you make the final payment that pulls you out of debt.
As much as you want to celebrate, there’s also that nagging fear that you’ll slide back into debt.
After all, now that you have the extra money, what’s the harm in ordering a well-deserved Uber Eats… and replacing the car transmission… and treating yourself to those shoes you totally deserve.
You get the idea.
Unfortunately, breaking the cycle of debt recidivism is tough, especially if you regularly rely on credit cards to cover expenses. Fifteen percent of American families reported spending more than they earned, and 43% of them said they made up for the shortfall by borrowing, including using credit cards, according to a 2016 Federal Reserve report.
That’s why mentally preparing yourself is important as you near the end of your debt repayment, according to Moira Somers, a wealth psychologist based in Winnipeg, Canada, and the author of “Advice That Sticks: How to Give Financial Advice That People Will Follow.”
“Not viewing the money you were throwing against the debt as suddenly being ‘free money,’ but as being money to really be living debt free for the rest of your life — that is the mindset we want people to adopt,” she said.
So whether you’re recently debt free or can simply see that light at the end of the tunnel, we’re here with ways to help you stay out of debt for good.
How to Stay Out of Debt
Zero debt does not equal “rich,” but your brain might believe otherwise, especially if you’ve spent years telling yourself you’re “poor” because any extra money was going toward debt payments.
Becoming aware of your tendency to return to bad habits — or giving into the temptations of lifestyle inflation — can help you avoid pitfalls throughout your financial journey, according to Somers.
Don’t cancel all your credit cards immediately, but safely store them out of view. The unused credit lines lower your credit utilization ratio, which can help improve your credit score.
“At various stages of debt repayment, you have to watch out for the little tricks that your mind can play on you,” she said.
Fortunately, we have six mindset strategies to help you maintain — and enjoy — a debt-free life.
1. Take Pride in Your Debt-Free Status
First, congratulate yourself. Seriously, you’re kinda special.
Maintaining the discipline to pay off debt and have even a little disposable income is very much reason to celebrate.
“Being in debt — and especially if you are poor on top of that — it’s so grinding,” she said. “To have some of these beautiful little breaks in life that money can give us, there’s absolutely nothing wrong with that.”
Rather than indulging in an extravagant purchase, let your reward honor your accomplishment. If you worked extra side gigs, for instance, a picnic in the park celebrates the time you’re getting back.
Let the pride you experience paying down your debt influence your next steps.
Think of your most brag-worthy habit — like tracking every dollar with a cash envelope method, for instance. If you continue to associate that budgeting method with a sense of accomplishment, it will become less of a restriction in your mind and more of a source of satisfaction, according to Somers.
2. Never ‘See’ the Money
Before your brain has a chance to start thinking of all the things you’ve been putting off buying, consider where that previous debt payment money could be put to better use. For example, you could:
Deciding where the money should go next even before you’re out of debt allows you to set up direct deposits and automatic withdrawals so the money never shows up in your checking account balance.
Otherwise, you risk “forgetting” about the sum and just perceiving it as extra spending money in your account, according to Somers.
If you’re having trouble figuring out what your monthly expenses are, track them by paying for everything with a single method (cash, debit card, a credit card) for one month.
“It’s sort of not letting yourself go unconscious,” she said. “It’s staying conscious about how much your life costs… and what matters to you.”
3. Practice Mental Accounting
If you got a refund this year, did you dutifully deposit half into your IRA and the other half toward energy-efficient lightbulbs?
Or did you blow it on a big dinner or weekend getaway — after all, it’s free money, right?
That brain trick — classifying your tax return as “free money” — is known as mental accounting, according to Somers. But we can use the same phenomenon to help us save money.
By maintaining designated accounts for specific goals — and naming them — we force our brains to pause before spending the cash on something else.
“We say, ‘This is earmarked for my child’s college fund, and I don’t want to touch that,’ and so I will call that ‘College Fund,’” Somers said. “And when I’m tempted to raid it for a shoe sale, I think long and hard about it.”
4. Think Beyond This Month: Budget for Periodic Savings
As you get close to paying off your debt, it’s a good time to review your budget, particularly if you’ve had a strict repayment plan that only accommodated barebones costs like your rent, gas and groceries.
Incorporating emergency fund and long-term saving contributions is important, according to Somers, but budgets that account for only monthly bills are missing an essential component: periodic savings.
Periodic savings cover expenses that occur regularly and reliably, although not monthly — think a homeowner’s insurance annual payment or Christmas presents.
“You can’t be surprised by your water and sewer bill — that’s not an emergency, that’s a predictable expense,” Somers said. “When these irregular but predictable expenses come up, [and you] have no alternative but to immediately incur more debt, that is tremendously dispiriting.”
By evaluating your total expenses for a year — your Amazon Prime subscription renews every November and you know you’ll need to buy new tires in six months, for instance — you can incorporate coverage for them through periodic savings. Add up the total expenses, then divide by 12. That number becomes the periodic savings entry in your monthly budget.
You can’t be surprised by your water and sewer bill — that’s not an emergency, that’s a predictable expense.
Focusing on saving for regular expenses rather than letting them catch you unaware and falling back on lines or credit or credit cards is essential for staying debt free long term.
“You have to use savings as the vehicle to sustain your life,” Somers said.
5. Find a Money Buddy
If you’ve been working with a program that helped you structure your debt repayment, you know what it’s like to have someone holding you accountable for your financial decisions.
Now that you’re out of debt, you might find yourself missing the reminder that you needed to stick to your financial goals, according to Somers, so find a partner, or money buddy, who can hold you to your new goals.
“There’s evidence that people reach their goals way faster when they’ve got that kind of support and accountability,” she said. “You set mutual goals and tell each other how you’re doing so you can continue to build on the financial success practices that you’ve developed while you’ve been paying off debt.”
Need a partner? The Penny Hoarder just so happens to have an online community where you can match up with a money buddy with whom you can share financial goals and celebrate your successes.
6. Exercise Self Compassion
Even the best financial planning can’t always prepare you for an unexpected surgery or car repair.
And while it’s important to establish that emergency fund to cover the costs, you shouldn’t beat yourself up for a momentary relapse into debt — even if the “emergency” was concert tickets.
Instead, identifying what led to the new debt and figuring out how to avoid it can help you view the relapse as less of a failure than a learning experience.
“Analyze on a go-forward basis what would help you be less vulnerable to that circumstance,” she said. “Is it that every time I watch home-and-garden TV, I end up being dissatisfied with my life and deciding that I need to go shopping? Would it better for me in the long run to just cancel my subscription to that?”
By forgiving yourself and reminding yourself that one relapse does not ruin all the good work you’ve accomplished so far, you can regroup and get back to debt-free living.
Tiffany Wendeln Connors is a staff writer at The Penny Hoarder. Read her bio and other work here, then say hi to her on Twitter @TiffanyWendeln.