Effective Ways to Stay Out of Debt and Maintain Financial Stability

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 you’ll slide back into bad habits.

After all, now that you have the extra money, what’s the harm in ordering a well-deserved Uber Eats and treating yourself to those shoes you totally deserve?

You get the idea.

Unfortunately, breaking the cycle of debt is tough, especially if you regularly rely on credit cards to cover expenses. According to a Forbes survey in 2024, 28% of Americans use credit cards to cover expenses they cannot afford. 

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.

Understanding the Importance of Staying Debt-Free

If you’ve been hustling to get out of debt, you know that the way back to financial freedom is not a path easily taken. While credit cards, student loans and car loans all have their place, it’s vital that you don’t forget the value of having zero debt to your name. 

Being debt-free allows you to have more financial freedom to make strides toward your big ticket financial goals. You can save cash for a big trip, a down payment on a new home or commit to investing more into your retirement accounts. 

There are mental benefits, too. A healthy relationship with money gives you more confidence and decreases stress about regular, everyday purchases. You can confidently find balance and live a lifestyle that is both within your means and brings you regular joy. If you can shift your goals from debt repayment to building your savings account, you won’t have to worry about leaning on credit cards when unexpected expenses pop up. 

“Being in debt — and especially if you are poor on top of that — it’s so grinding,” Somers said. “To have some of these beautiful little breaks in life that money can give us, there’s absolutely nothing wrong with that.”

Let the pride you experience paying down your debt influence your next steps.

Creating a Budget to Manage Your Finances

Budgeting was likely a large part of your debt repayment plan. Now, it’s time to adjust your budget for new goals. 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 good use. For example, you could:

• Start an emergency fund.
• Contribute to a 401(k) or Individual Retirement Account.
• Set up a 529 college savings plan for your children.

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.

“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.”

Building an Emergency Fund to Avoid Debt Traps

Incorporating emergency funds 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.

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.

Avoiding Common Debt Pitfalls

Getting a robust savings plan in place can be one of the best things you can do to protect your finances. Unfortunately, we are imperfect human beings, and mistakes happen. Avoid these debt traps to stay debt-free. 

• Overspending on credit cards. If you can’t pay it off in one month, don’t put it on your credit card. High interest rates can quickly pull you back into debt. 
• Financing high-cost purchases. You’ve mastered the art of patience by paying down your debt successfully. Apply that same mentality to high-cost purchases. Save for a few months to buy it outright in cash. Even if it’s on sale, you’ll end up paying the difference in interest if you put it on your credit card. Wait. Pay cash. 
• Changing your lifestyle. Freeing up money in your monthly budget is going to feel liberating, but you still need to maintain a manageable lifestyle. Avoid the urge to suddenly upgrade cars, homes and more, and stick to your budget. 

If you really want to avoid falling back into debt, make sure you practice understanding the difference between wants and needs. This can help you evaluate purchases before making a commitment. Get specific about your savings plan and assign specific responsibilities to your money rather than letting it sit. 

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.”

Managing Credit Wisely to Stay Out of Debt

Credit cards have their perks — mainly rewards points — but improving your credit score is a huge component of smart credit card use. Particularly if you are working to repair your credit score, you want to avoid racking up more debt, which will make repayment more difficult. 

To protect yourself from further debt accumulation, pay off your credit card in full each month and avoid any other high-interest debt that could potentially put you in a precarious financial situation. Credit card use should be carefully monitored to be truly successful. 

Tips for Maintaining Financial Discipline

If you need extra help staying debt-free, consider the impact of having a “money buddy” to help you stay on top of your goals. 

“There’s evidence that people reach their goals way faster when they’ve got that kind of support and accountability,” Somers 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.”

And you should celebrate, just maybe not in the way you’re used to. 

Celebrate by creating new habits and plans that will ensure your continued success. 

• Open a new savings account
• Make long-term financial goals that are fun (a trip or car)
• Automate a portion of your income to be deposited into your savings account
• Review your expenses and adjust your budget regularly

Your financial wellness is a constantly changing process that requires that you stay attentive and practice good habits. As you strengthen your financial know-how and explore strategies that work for your lifestyle, you can create a positive relationship with money that can bring joy, not stress, to your life.

 

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.