US Household Debt Reaches a Record Low

In the fourth quarter of 2012, the US household debt-service ratio fell to 10.38%. That’s the lowest the ratio of debt payments to disposable personal income has been since measurements began in 1980! The debt-service ratio reached its peak in the third quarter of 2007, just before the recession.

This is great news. It means that household finances are finally improving after

the massive debt load we built up as the housing bubble was inflating. We’ve spent

the last few years cutting back to pay off those debts. And while that penny pinching was necessary, it put a huge drag on the US economy. We just weren’t spending enough to get the recovery going.

But now it seems, all that pain may be behind us. Now that we have our household debt in better shape, we’re beginning to spend again, encouraged by continued record-low interest rates, recovering house values and a strong equity market.

But amid all this hopeful news, it’s important to learn from past experience. Just because our debt is low, money is cheap and our home and investment values are rising doesn’t mean we should start living beyond our means again. That’s a slippery slope that leads to unsustainable debt and huge interest charges.

Here are some practical steps to help us avoid making the same mistakes twice:

·        Keep a written record of what you’re spending, on what and why.

·        Identify which purchases are “needs” (food, housing, transportation) and which are just “wants” (eating out, new gadgets, the latest fashion) and see which ones you can do without.

·        Once you know how much you actually need to spend each month, make a budget that allocates every dollar and stick to it.

·        Avoid going into debt for “wants” and pay off all debt as quickly as possible.

www.markfishernyc.com

www.bronxhomebuyer.com

Mark S. Fisher

Licensed Mortgage Originator (NMLS ID#478240)

(347) 242-1206