The best way to determine this is to take a serious look at your family budget. If you don't have one, this is a good time to start. Going into debt means making a serious commitment to monthly payments. This makes it urgent that you can stick to a spending plan month after month.
The Sanity Cheque: Paying off a debt is easy to ignore because it is "out of sight and out of mind." To see how it will feel to actually make the payments, try this simple exercise. Assume you are considering a loan that will require payments of $1000 per month. Take a cheque from your chequebook, and write out a cheque for a loan payment, with a date and month in the future. Pin the cheque on your bulletin board for a few days. How does it feel to look at that cheque? If it makes you feel uncomfortable, maybe you should think twice about taking out that loan.
Here are some typical steps for putting a plan together:
- Calculate your total monthly after-tax or "net" income.
- Establish a reasonable monthly amount that you'd like to save for the future.
- Tally up all your fixed expenses. This includes mortgage, hydro, car payments, transportation, home maintenance, etc.
- Estimate regular weekly expenses, such as groceries. Multiply by 4.3 to convert to a monthly figure.
- Add annual requirements such as clothes, equipment, etc., and divide by 12 to get a monthly amount.
- Allocate money for vacations, holidays, kids' summer camp, or other seasonal requirements, and divide by 12 so you can save for them.
- Add in health club memberships, concert subscriptions, and other regular expenses.
- Come up with a reasonable number for discretionary spending.
Finally, add up all your monthly expenses. The total needs to be less than your monthly income, with a big enough margin to pay off your loan. You may need to consult an amortization table or online tool to see what kind of payments you are looking at, but here are some examples, calculated at a 10% interest rate:
|Purpose of Loan||Loan Amount||Monthly Payment||Time to Pay
If your monthly expenses are too high to allow for loan payments based on your monthly income, proceed with caution! If you can't show where the money is going to come from on paper, it's probably not going to work out in reality. Be ruthless in cutting your expenses, but don't kid yourself that the money is going to come out of nowhere. Re-work your budget until you are really comfortable, or reconsider your plan.
Get more tips!
Use our calculator to determine how you can pay off your debts faster.
Web site content is for informational or illustrative purposes only and is not be considered or used as a substitute for professional financial advice from an accountant, lawyer or certified financial planner. Click here to view our full legal disclaimer.