Ability to pay
Assessing your ability to pay is especially important if you are thinking about borrowing money for large purchases such as a car or a home. In which case, your ability to pay must be adequate to make the monthly repayments. Your finances also need to be flexible to meet any unexpected expenses that might come up.
Ability to pay means your ability to pay bills when they fall due. This tells you whether your income is sufficient for your household expenses and whether there is leeway in your finances. Calculate your ability to pay to see whether you can afford new purchases, how much new debt you could repay and whether you have money left over for saving.
Once you have assessed and written down your income and expenses and subtracted your household expenses from your disposable income, you can see what your ability to pay is.
You have ability to pay if your income is at least equal to your household expenses. If your household expenses are greater than your income, you do not have ability to pay and will become indebted if you do not do something about it. If you have assets, you may be able to pay some of your expenses using the return generated by the assets (for example, rental or dividend income) or by selling assets.
You should also consider whether you could increase your income. If you do not have a possibility to increase your income, you will have to compromise on something to cope with your expenses and think about what items of expenditure are important, what are essentials and what you can do without.
Assessing your ability to pay:
|Your ability to pay only covers essential expenses||=||Your ability to pay only covers essential expenses|
|Besides covering essential expenses, your ability to pay also covers other frequent household expenses arising in practice, such as health, leisure activities, clothing and telecommunication expenses, etc.||=||Reasonable ability to pay. Your finances also withstand occasional unexpected expenses.|
|Besides the above expenses, your ability to pay
also covers other expenses such as buying
eyeglasses or household appliances, an increase
in family size, a rise in debt interest rates, holiday travel, etc. You alsohave enough money left over for saving.
|=||Good ability to pay|