“Debt in excess of 36% of a person’s debt-to-income (DTI) ratio can be difficult to pay off,” says Emmanuel Werry Leong, a licensed financial planner with 13 years of experience.

“It can also make accessing future credit facilities more challenging,” shares the principal of Money Wisdom Academy, which provides financial-literacy training for children and teenagers.

To calculate your DTI, add your monthly debt obligations such as motor vehicle loans, housing loan repayments and credit card bills, and divide it by your monthly gross income.

Good/bad debts

According to Leong, there are good debts – those that generate income, such as business loans that could be used for expansion of a company – and bad debts.

“A certain percentage of debt is healthy and necessary to complement purchasing power and a desirable lifestyle,” he says, citing the example of credit cards, which, when used correctly, can be beneficial.

An example of bad debt would be taking out a personal loan to fund a luxury holiday trip.

“Likewise, using a credit card to purchase designer items and leaving the debts unpaid past their due dates will incur late-payment penalties and finance charges,” he says, adding that the compounding interest will only make it more difficult to manage the amount owed.

Warning signs

Leong says the clearest indicator of having too much debt is when your balance does not reduce despite making regular payments. “This is normally the case with credit cards, where the cardholder pays only the minimum on a monthly basis,” he says.

Other warning signs include living paycheque to paycheque with hardly any savings, and resorting to using credit cards for cash advances.

Leong believes that having too much debt impacts a person’s physical and mental-emotional wellbeing.

“It can also affect other aspects of their life – for example, without enough cash, they wouldn’t be able to make useful and necessary purchases such as signing up for medical insurance.

“They may even resort to acquiring more loans to cover their existing debt, and this will eventually make it more challenging for them to get out of the debt trap.”

What can be done?

For those with high levels of debt, Leong recommends a method called the “snowballing technique”, where you list your debts from the smallest to the largest amount – excluding your home loan – and dedicate money each month to paying off the smallest amount first, while making only minimum payments on the others.

“After the smallest debt has been paid off, the focus would be to put extra money each month towards the second-smallest debt amount, while continuing to make minimum monthly payments on the other debts.

“This process continues until all the debts are paid in full,” he says.

Leong also advises adhering to the time-tested lesson of “living within your means”, which can be supplemented by practising the “money jars system”.

“This is where a fixed percentage of one’s income is allocated into savings, spending, entertainment, emergency, and charity,” he explains.

“Doing this can help a person manage their finances by ensuring total monthly expenditure does not exceed total income.”

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