After debt freedom

When I started researching All the Money in the World, one of the first things I noticed about the shelves of personal finance books out there is that most seem concerned with getting out of debt. Dave Ramsey, in particular, has a whole program for doing a “debt snowball” to attack the smallest debts first, with “gazelle-like intensity.” The general mantra is that you pay off all your non-mortgage debts, then invest the money that would be going to debt payments in various investment vehicles. The hope is that you get double digit returns. Then, through the miracle of compound interest, you retire with $5.7 million in the bank after 40 years.

It’s all very motivational. But here’s the thing: there’s a lot of life between your last debt payment and having $5.7 million in your brokerage account. What should you do in the meantime? What other kinds of financial goals should you have? What should you do with your money to have a good life? What if you know that, finally, you do have enough? Then what?

I wrote my book to give people a framework to think about these questions. Indeed, the introduction opens with just such a scenario: a couple that had always been very frugal had suddenly become rich. What should they do with their money? So I was interested to see that, over at The Simple Dollar, Trent Hamm was blogging about this exact same subject. He came to the world of personal finance by trying to get rid of his debts. Earlier this week he posted that he and his wife had finally achieved debt freedom. They were in a good place financially. But now what? It’s easy to lose focus when you don’t have goals. But if you don’t have debts, are on track to save a lot, and own your house outright, what should those goals be?

I personally think a good goal should be having the assets — most notably, the income from said assets — to not have to work. I still think you should work, but wouldn’t it feel great to do so only because you wanted to? Another fun thought experiment is to figure out what you’d change about your life if you had all the money in the world, and then figure out how you can achieve something similar with earthbound resources. Then you can make getting those resources a top priority. For instance, if you want to travel more, you’d want to work to get to a place where you could take more time off from work — maybe something more seasonal or entrepreneurial — and then have the money for fabulous vacations.

What kinds of goals do you think people should have once they’ve paid off their debts? What if they’re already saving and giving to charity? What else should they do? A lucky problem to have, to be sure. But a fascinating one to think about, nonetheless.

(photo courtesy flickr user ajari)

10 thoughts on “After debt freedom

  1. I think Ramsey’s assumptions of significant returns after inflation are unrealistic. I believe my generation (I was born in 1975) will be lucky to break even after inflation because we are part of a global birthrate peak and the elimination of smallpox. (Small pox infected almost everyone in undeveloped countries and killed ~30%.)

    If I didn’t need to work for money, I would like to start a payday-loan business for the poor where I would require visits and accountability instead of interest. I believe this (free loans if you showed you were being responsible) would be a cost-effective way to assist the working poor.

    I figure I’ll need $2-3k/month in today’s dollars to live comfortably in retirement, depending on medical expenses and location.

    1. @Twin Mom- fascinating idea. Microfinance of a sort right here at home! I, too, think Ramsey’s assumptions are too high. After inflation, the market has returned 6-7% over the long term. That’s obviously better than Treasuries or a bank CD, but it isn’t 12%. And the difference between 12% and 6% is huge. In one world, your money doubles in 6 years. In the other, it doubles in 12. And “long term” can mean very long term. We’ve been saving and investing for quite a while but the vast majority of what we’ve put away has come from our paychecks… and not from our paychecks earning a paycheck. That doesn’t mean people shouldn’t save and invest. It just means you’ve got to be careful about assumptions.

  2. The US market has returned ~6-7% after inflation for a period of years (60-70 yr) but look around the world- most countries haven’t been stable or productive enough to do so. I think a significant factor in US success was our role in helping the rest of the world reindustrialize after WW II. Since Europe and Japan had been bombed out, our manufacturing capacity was much more valuable than it would have been, contributing significantly to returns on investment.

  3. I really like this post! It dovetails with some of my recent thoughts on what my retirement is likely to be like, and how thinking about that changed some of my thoughts about how I want to work. I keep meaning to write that all up into a blog post, but keep getting distracted by other things. If I ever do, I’ll link to this post, too!

  4. My husband and I are debt-free aside from our mortgage, but I do still feel very goal-oriented. Aside from wanting to pay off the mortgage, I’m working hard to save up for future expenses. Basically, I guess I’m trying to avoid incurring future debt by saving for a new car, Christmas, auto repairs, medical expenses, and so on. If I already had met all of those goals, I guess I might be slightly more lost, but I don’t see me being that financially solvent for a long time!

    If I were, though, I’d love to give more and also support more local businesses than I can afford to right now.

    1. @Kristen- supporting local businesses sounds like a great goal. I’m really pondering what mine should be. I would like to up my income this year, but do it only through taking on the kinds of projects I enjoy. Actually, come to think of it, that’s quite a good goal. Your blog is beautiful, by the way.

      1. Aww, thank you!

        So far, I’m supporting some local farmers, a local organic market, and a local hardware store. Of course, I’m not buying all of my groceries from local stores, but I’m determined not to let the perfect be the enemy of the good. A little is better than nothing!

        1. @Kristen – very true. I wrote over at CBS MoneyWatch about the perils of trying to do too much local business support when it’s just going to make you unhappy. Diapers can be bought online (or at Wal-Mart). Frozen pizza from a big box store. I tried to order from a local pizzeria one Sunday when I was very tired and they canceled my order 20 minutes later because they decided I was too far away. Why couldn’t they have decided that before? So it was off to Dominoes. The pizza wasn’t gourmet, but it was definitely there in 30 minutes.

  5. I am trying to figure out what “financial independence” means to me, and how I can achieve that. Sometimes, to be frank, it’s discouraging to think about how much experts tell me I need and I am saving what I think it’s a pretty good amount, but it doesn’t seem enough.

    1. @Well-heeled: I think for most of us, it’s not going to work to build up enough assets to live off the interest forever. Returns are no where near what Ramsey claims you’ll get, and people pulling 4% out of their portfolios right now to live on are seeing their capital disappear. That’s what happens in a low-interest rate environment. But as a young person, having enough assets to pay your basic bills for, say, 2 years, gives you incredible freedom. In two years you will definitely find some sort of work, which means that with 2 years of expenses in the bank, you can take or leave your job if you want. A free woman! I think most of us will need to work part-time or in some flexible fashion in our senior years, but there’s nothing wrong with that. There are plenty of ways to work that aren’t drudgery…

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