One of the most important things to consider before applying for credit cards or taking out a mortgage is your personal debt capacity - that is, the amount of debt that you can comfortably afford. One of the most accurate methods to determine this is to create a monthly budget with cash receipts for income and cash disbursements for expenses. The amount left over when subtracting these two amounts is the cash you have left over to make payments on your debts. If there is no cash left over (or negative cash left over) you should not take on new debt, since you will not be able to pay down the principle while making interest payments without drawing into your assets. This method also allows you to analyze where your money goes. By cutting your spending in some areas, you can increase the amount of money that you have available to finance debt payments.

Another related concept to keep in mind is the 20% rule, which states that your monthly debt payments shouldn't exceed 20% of your total monthly disposable income (not including your mortgage). For example, if you have $1,000 in monthly disposable income, your debt payments shouldn't exceed $200 per month. This rule, however, becomes less important for those with higher monthly incomes.

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