Americans continue reducing debt-to-income ratio


CLARKONOMICS: Americans are continuing to heal their personal balance sheets by reducing the level of debt to income they carry.

When we entered the Great Recession 4 years ago, we did so with unprecedented debt among individuals and families — not to mention businesses and governments. We were carrying $1.30 or $1.31 for every dollar of income when the recession started. (Historically, Americans had carried about 60 cents of debt for every dollar of income, so that recession level was extremely high.)

Now the financial healing continues. The latest numbers show we’re down to $1.16 in debt to every dollar of income. That’s still way high by historical standards, but the trend is going in the right direction. You’d have to look back to 2004 to find the last time when we were at the debt-to-income ratio that we are now.

If you want to create breathing space in your life, you’ve got to resolve to attack your debts. Carrying big debt only prices your life for perfection. But life is not perfect. I used to ask people, “If you lost your job today, how many days, weeks, months or years would your reserve funds carry you forward?” “Milliseconds” was the answer for most people.

You really can’t price your life for perfection. No one could have predicted what’s going on in Japan, Egypt or Libya. Life always throws you the unexpected. So my challenge to you is to live your life financially in a way that you can deal with the unexpected. And you do that by saving for a rainy day and not carrying a heavy debt load.

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