Often, if your income just barely exceeds your obligations, on paper you look like you'll get by just fine, but in reality you may find yourself coming up short at certain times of the year.

Suppose, for example, that you have an income of $26,000 per year (after taxes) and $25,000 in obligations. A problem often arises when one of your periodic expenses, such as car insurance, is due. Technically, you might have enough income from January to December to cover your car insurance, but if your insurance bill arrives in February, you may not have had time to put enough money into savings each month to cover this expense.

This is called a cash-flow problem, and in order to manage this situation successfully, you have to reduce your debt (or increase your income) to the point where you're living far enough below your income that you don't have trouble paying your large periodic expenses.