How to avoid debt

Young man working on his laptop.

1. Make a budget

Creating a budget can make it easy to see where each dollar is going, enabling you to identify areas where you can reduce spending and save money. Write down your monthly after-tax income, list your monthly fixed and variable expenses (such as groceries, utilities, entertainment, insurance payments, minimum debt payments, personal care), and sort these expenses into three categories—essentials, nonessentials, and savings/debt repayments. When it comes to your loans, make minimal payments on all of them, but concentrate on paying off the ones with the highest interest rates or the ones with variable rates first. If you’re unemployed, you may be eligible to defer your loans for a period. It’s always better to ask the loan company about your options than to make assumptions or to default.


2. Pay your existing bills on time

Paying your bills on time and in full can help you avoid late fees and high interest rates. If you’re not able to pay the total balance, try to pay more than the minimum payment to lower the amount going to interest and fees. Making consistent payments—full, more than the minimum, or the minimum—is a very important factor in maintaining a good credit score. It is especially crucial if you’re planning to purchase a home, finance a car, or apply for a small-business loan in the future.


3. Create an emergency fund

After organizing your loan repayments, try to put aside a small amount every month for emergencies. If an unexpected financial shock arises, an emergency fund can help you avoid relying on credit cards or loans, which could turn into long-term debt.


4. Enroll in a 401(k) plan

If your company offers a 401(k) savings plan, enroll. Most employers match a percentage of your contribution. It’s a win-win situation. If you are paying off debt, you may have to start with a lower contribution in order to manage paying off what you owe, but try to contribute enough to get the maximum match. As you begin to lower your credit card and loan balances, you can increase your contributions to your 401(k).


5. Start investing early

Student loan and credit card debt can cause you to hold off on investing, but if you can find the budget flexibility to get started, it may pay off in the long run. Investing helps you establish good savings habits. And the sooner you start, the more compounding interest works to your advantage.


6. Purchase life insurance

If you pass away, your loved ones may be responsible for paying off your debts. You can protect them by purchasing life insurance, which is considerably less expensive for younger buyers. And depending on the type of policy you purchase, you may be able to access your policy’s cash value to help with future expenses, such as buying a house or starting a business.1


7. Pay with cash

If you have a large amount of credit card debt, switching to cash can help you reduce and avoid further debt. Paying the minimum balance and avoiding additional charges could help you reduce your balance more quickly.


8. Limit the number of credit cards you own

It’s generally recommended that you limit yourself to two to three credit card accounts at a time. While having multiple credit cards can sometimes benefit your credit score, you run the risk of spending more in credit than you’re able to repay in cash.


Avoiding debt frequently asked questions

The three biggest strategies to pay off debt are:

  • Debt avalanche strategy: Make minimum payments on all debts, but concentrate on paying off the debt with the highest interest rate by using any extra money to pay off that bill first.  When that debt is paid off, move on to the next-highest rate. You’ll lower the total amount of interest you pay.
  • Debt snowball method: Make minimum payments on all debts, but concentrate on paying off the debt with the smallest balance by using any extra money to pay off that bill first. When that debt is paid off, move on to the next-smallest balance. You’ll get a morale boost each time a debt is paid off.
  • Debt consolidation: Consolidate all of your credit card balances, outstanding loans, and other debts into a single personal loan with a lower monthly interest payment.

One of the most highly recommended methods to pay off debt is the debt avalanche method. You pay off the debt with the higher interest rate first, which helps you save money on interest charges and allows you to pay off all your debts faster.

The most common type of debt held by millennials is credit card debt, with more than two-thirds of millennials owing money to a credit card company. The average amount of credit card debt held by millennials is $5,349.2

Avoiding the repayment of debt is not a recommended practice. It can lead to serious financial consequences, such as damage to your credit score, wage garnishment, and legal action. That said, if you cannot possibly make minimum payments on all your debts, contact the lenders and try to arrange alternative payment plans. A nonprofit credit counseling service can help you develop a debt management plan. (The National Foundation for Credit Counseling can provide a referral.) Bankruptcy is a last resort. But be aware: Bankruptcy will not discharge student loans.

Yes, it’s possible. Money management strategies can help you avoid debt and build confidence about your finances. To get started, create a budget. This will help you see exactly how much money you have coming in and what you spend it on. You’ll be able to work out how you are paying monthly expenses and determine if there are areas where you can save. Those savings can go toward your short-term and long-term financial goals. Take care when you use financial products like credit cards and avoid making purchases on installment plans.


Want to learn more about various financial solutions?

A New York Life financial professional can help determine what’s right for you.

1Accessing cash value reduces the death benefit and available cash surrender value.

2 Gabrielle Olya, “The Average Millennial Now Has More Than $100K in Debt: 3 Tips for Paying It Off,”, December 7, 2022.