Four Questions to Ask Before Taking on More Debt

| February 8, 2017 | 25 Comments
Four questions to ask yourself before taking on more debt

Words DEBT

 

Before taking on more debt it’s a good idea to evaluate your current financial standing. Here are four questions to ask yourself that will help you determine if more is a good idea:

1. How much outstanding debt do you currently have?

Many people never take time to add up the balances of all their debt, but it is an extremely important step. To responsibly take more, you really need to know what shape your finances are in before accepting another line of credit. Without knowing where you stand, another loan could be disastrous to your disposable income and future.

2. Is being debt-free at retirement a possibility?

You should really aim to be debt free at retirement. That means no credit card, car, or mortgage debt. Although no mortgage may not be possible, credit card and car loan should without a doubt be paid off. To find out if you’re on track, take your total outstanding debt as of today and divide by the number of years to your projected retirement. For example: $200,000 in debt with ten years until retirement. That adds up to 25,000 in principal alone that you’ll have to repay each year. Finally, take the 25k and compare it to your total family income. How does it look?

3. What is your debt to income ratio?

To find your debt to income ratio, take your total debt and divide it by your annual, post tax income. If your ratio is in the 20-30 percent range you’re typically considered to be in good shape. Obviously, the lower the percentage, the better financial state you are in.

If your percentage is hover over 50 percent, many financial consultants would consider that disastrous.  That being said, if you debt to income ratio is over 50 it’s probably not a wise idea to take on more. 

4. What interest rate will your new line of credit pay?

One attribute of bad debt is a high interest rate. Credit cards are usually bad since the interest rate can run as high as 10 to 20 percent. Naturally, if you are going to take on more debt, even if you are in great financial standing, it makes sense to ensure you can get the lowest interest rate possible. A high interest rate can mean the majority of your payments go to the interest, which makes it hard to ever pay down the actual principal.

If you need some help getting financially organized visit my site AndrewWBradley.ca for all kinds of free tools and downloadable worksheets. 

 

Photo credit: familytreasures via Foter.com / CC BY-NC

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Category: Finance, Living, Tips, Weekly Themes

About the Author ()

Andrew is a licensed Life Insurance Broker and Registered Retirement Consultant-RRC® helping Ottawa families since 2011. Awards : 2017 ThreeBestRated.ca -Handpicked Top 3 Financial Services in Ottawa, 2017 Faces Magazine Awards – Ottawa’s Favorite Financial Advisor, 2017 Feedspot Top 40 Life Insurance Blogs on the web and 2016 Insurance Business Magazine – Life & Health Advisor of the Year Finalist.

Comments (25)

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  1. Elizabeth Matthiesen says:

    Good tips, thanks for sharing your knowledge with us. 🙂

  2. Calvin F. says:

    Very important questions to ask oneself. Thanks

  3. Judy Cowan says:

    Some really good tips, paying off debt is something we are working on and making a priority.

    • Andrew says:

      Thanks Judy, your on the right track by making it a priority. It is not something that goes away overnight, good luck on paying of your debt.

  4. Stephanie LaPlante says:

    Thanks for sharing these tips. Staying out of debt is definitely a challenge.

    • Andrew says:

      No problem Stephanie. It’s hard to resist the temptation of getting a new car, bigger home etc with the low interest rates available. A little more debt for instant gratification always seems manageable until you step back and really look at the numbers.

  5. Margaret Appel says:

    Thank you for sharing this information! Thankfully I’m in good shape, but so many folks are living paycheck to paycheck with debt up the whazoo. Passing on this info, Thank you!

  6. Kelly says:

    This is really interesting. I have never seen the facts that you pointed out. I am one of those people that got too much credit too early. I have fixed the issue but sure is a tough thing to avoid.

    • Andrew says:

      Hi Kelly, thanks for your comment. It is too bad they don’t teach financial literacy in high school. I got into trouble with debt early on in life as well and if I knew more about cash flow and how borrowing works I could have avoided it.

  7. AD says:

    These are great tips! Easy to understand.

  8. DebH says:

    Great tips; thanks for sharing!

  9. LisaM says:

    Thanks for this – right now our only real debt is our mortgage and a line of credit (which was used for house repairs etc). We’re trying really hard to not add anything more until the line of credit falls!

  10. Julie says:

    This is very helpful as we decide about adding an addition, thank you!

  11. Kristi says:

    Keeping in mind the debt to income ratio is really helpful for knowing how much to be comfortable with.

    • Andrew says:

      Hi Kristi, you hit the nail on the head. You want to be able to sleep at night so knowing your debt to income ratio is a good reality check.

  12. Kam says:

    Good tips! I’m always hesitant to take on any debt.

  13. Kamy says:

    Really good tips!

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