How To Stay Out of Debt

If you regularly rely on credit because you don't have enough in your account, you know how easy it is to rack up debt. You may be wondering how to stay out of debt — and whether it’s even possible for you.

The truth is, it’s harder to stay out of debt than it is to get into debt, but it is doable. Here's how.

Create and stick to a budget

Though it may sound counterintuitive, creating a budget can bring more freedom — and less stress — to your finances. Because budgeting helps you plan for future expenses, it’s also a valuable tool in helping you stay out of debt — as long as you stick to your budget.

There are many ways to create a budget. The following steps outline the process

1. Set financial goals: Start by considering what you need and want from your money in the short, medium, and long term. Knowing your goals and how much it will cost to reach them is the first step in creating a budget that works.
2. Calculate your income: Add up your income from jobs, side hustles, and any other sources, such as alimony or investment income. Knowing how much money you have coming in each month will help you create a realistic budget.
3. Add up your expenses: Review your bank statements from the last couple of months and list everything you spend money on. This includes expenses like housing, transportation, food, loan payments, and entertainment. Figure out how much you spend on each category per month.
4. Budget for your goals: If you have extra money after accounting for your monthly expenses, divide it between your financial goals based on priority and urgency. If you don’t have extra money to work with, find ways to reduce your expenses (like consolidating high-interest debt) or increase your income.
5. Make adjustments and stick to your budget: As your goals, income, and expenses change, adjust your budget accordingly. A budget only works if you stick to it, so set realistic spending and savings targets that you can feasibly meet.

Build an emergency fund

Emergency savings can alleviate stress during hard times and keep you out of debt. When an emergency threatens to blow up your budget, you can draw from your emergency fund instead of charging your credit card.

An emergency fund is a dedicated pile of savings for emergency use — usually three to six months’ worth of essential living expenses. While your budget should cover most of your regular and irregular spending, your emergency fund can cover those surprise bills and expenses you simply can’t plan for.

If you don’t have an emergency fund, start building one now. Set aside a bit of each paycheck with an automatic transfer, and delegate a portion of any unexpected windfalls to your emergency fund.

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Use credit responsibly

Credit cards are known for high interest rates. If you carry a balance month-to-month, your debt can start to spiral — fast. Credit cards aren’t inherently bad, but using them without safeguards in place can lead to overwhelming debt.

On the other hand, if you use a card responsibly, you can earn perks and rewards that can help you save money. Plus, credit cards tend to be a more secure way to pay online, relative to debit cards, according to the Federal Trade Commission.

To get the most out of a credit card — and stay out of debt — use the following tips:

• Pay off your balance in full each month: Only spend what you can afford to pay off each month. Otherwise, your balance will accrue interest with each passing month.
• Avoid high-interest cards: Do your best to choose credit cards with low annual percentage rates (APRs). If you have existing credit card debt, you may be able to get a balance transfer credit card with a 0% APR introductory rate. Try to pay off the balance before the introductory period ends, or you’ll be charged interest when the higher rate kicks in.
• Consult your budget before swiping your card: When you feel the impulse to buy something that’s not in your budget, pause. If it’s truly an emergency, dip into your emergency fund. If it's not an emergency, consider working the purchase into your budget so you can buy it without going into debt.

Check Out: Credit Card Consolidation Loans

Reduce expenses

If your budget doesn’t allow for much — or any — wiggle room, it can be tough to stay out of debt. But there may be ways to reduce your expenses or save money, and increase the amount of flexibility in your budget:

• Downsize: Moving may sound drastic, but it’s one way to free up a lot of cash. If you have more space than you need (and can afford moving expenses), you might consider moving to a smaller, less expensive home.
• Eliminate subscriptions you don’t use: If you have a forgotten subscription eating into your budget each month, find it and unsubscribe. Take a look at bank, credit card, and payment service statements (like PayPal) and cut any subscriptions you don’t use or value.
• Cook at home: Eating out is fun and convenient, but it comes at a cost — more than $3,500 per household in 2022, according to data from the Bureau of Labor Statistics. You could save a significant amount of money by cooking at home, even if it’s just making a few more home-cooked meals per month.

Increase your income

Reducing expenses is great, but it’s not the only way to pad your budget and stay out of debt. While there’s only so much you can cut from your budget, there may be no limit to how much you can earn.

It’s certainly easier said than done, but there are several ways you may be able to boost your income:

• Start a side hustle: If you have a product or service you can sell, you can earn some extra income by selling on Mercari or eBay. If you’re not the entrepreneurial type, that’s OK, too. You could take on some gig work by delivering food or driving for Uber. You could also look for a part-time job if you can fit it into your schedule.
• Earn passive income with your existing savings: With the power of compounding, your money can earn more money. Certificates of deposit (CDs), money market accounts, and even high-yield savings accounts are generally safe options that could net you 5% or more annually.
• Negotiate a raise: Sometimes, making a little more money may be as simple as asking for a raise. But before you ask, do your research. Prepare evidence as to why you should earn more, and come with a specific dollar amount in mind.

Avoid high-interest debt

If you’ve ever been in a scary amount of debt, you may want to avoid borrowing at all costs. But there are times when taking on some debt might be the best — or only — option. If you do borrow, avoid high-interest debt whenever possible.

Payday loans and credit card cash advantages are two types of high-interest debt to avoid. You may be tempted by these types of loans because they’re easy to qualify for, but they’re almost never worth it. The APRs on payday loans can be as high as nearly 400%, according to the Consumer Financial Protection Bureau.

If you’re in a financial pinch, consider these alternatives instead of taking on high-interest debt:

• Borrow from friends or family: If you have a strong financial support network, a friend or family member willing to help out during a financial emergency — for little or no interest. Creating a written contract can help you both establish clear expectations of repayment and terms to protect your relationship.
• Use low-interest personal loans: If you have good credit (a FICO score of 670 and above), consistent income, and a healthy debt-to-income ratio (DTI), you may be able to qualify for a low-interest personal loan. Compared to payday loans and other high-interest debt, personal loans can be a much more affordable way to borrow.
• Seek financial assistance: Depending on your situation, there may be government assistance programs and local charities that can provide financial resources. Consider contacting 211, a comprehensive resource for local information and services. You can call or go online to connect with someone who can help.

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Consolidate credit card debt

If you have high-interest debt, it may be difficult to reduce expenses or build an emergency fund. But you can consider consolidating your existing high-interest debt with a debt consolidation loan. Debt consolidation combines multiple high-interest debts, including credit cards, into one loan with a lower interest rate. With a lower rate, you can pay off your debt faster, and allow you to move forward with your other financial goals.

For example, let’s say you have two credit cards with a combined balance of $10,000 and an APR of 25.00%. Your monthly payment is $155 for each, and by the time your debt is paid in about five years, you will have spent $16,762.

But if you were to take out a five-year personal loan with a 14.00% APR, your monthly payment would be $233, and you would pay $13,960 overall. That’s a savings of $2,802 in interest.

Note that the average credit card interest rate as of February 2024 was 21.59%, according to the Federal Reserve. The average rate for a two-year personal loan from a bank was 12.49%.

FAQ

How can I pay off existing debt and stay debt-free?

Increasing your savings, reducing expenses, and finding an additional income stream are just a few ways you can pay off your existing debt. While paying off debt, work on building an emergency fund you can draw from to pay for unplanned expenses. And if you must borrow, avoid high-interest debt.

Can debt counseling help me stay out of debt?

Debt counseling, or credit counseling, may help you get out of debt — or at least get on a path to repaying your debt. Generally, you only work with a debt counseling agency if you have existing debt. A credit or debt counselor’s job is usually done once you’ve paid off your debt. However, it’s possible working with a debt counselor can teach you valuable skills to help you stay out of debt in the future.

How can I stay out of debt while saving for my future?

If you want to stay out of debt while saving for your future, build an adequate emergency fund. It can provide a financial buffer when the unexpected happens, so you don’t need to borrow. At the same time, use a realistic budget to plan for monthly expenses and save for big goals — like taking vacations or buying a house.

Related: Should I Pay Off Debt or Save?