I'm trying to figure out what a bad / normal / good personal debt / equity ratio is. Most sites deal with debt / income ratio, which is a cashflow metric, and I want to focus on assets / obligations. The closest I've come is understanding that 0.8 is considered borderline for a young couple who just bought a house, and that older people should have 0.5 or better. For someone newly out of school with an advanced degree, these numbers can't make sense. School is very expensive, and you can't acquire assets while accruing debt to attend. What are some normal numbers for this sort of situation?


--update-- There are some good answers, but I want the specific scenario addressed (already completed grad school, with debt.) If there is some formula that can take income into consideration (useful because "good debt" creates income), so much the better. Thanks!

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    Note that despite the sales job, it isn't at all clear that a young couple SHOULD buy a house. A lot of that mindset came from the belief that housing prices "could only go up", and we've seen what happens when you believe that incautiously. Owning is NOT always financially superior to renting; that depends on your own local housing market and whether you have the discipline to save/invest a portion of your income without a mortgage "forcing" you to do so. I rented until my mid-40's, and along the way saved enough to buy a house for cash if I had wanted to do so. – keshlam Mar 12 '14 at 0:46
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    Illiquid... yeah, especially in a sane-to-nervous market. "House rich, cash poor" is not exactly a flexible position to be in. Think about what happens if your next job requires that you move and it takes longer than expected for this house to sell. – keshlam Mar 12 '14 at 1:44
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    I would say that an average normal smart person's debt should be 0$ (with words : zero). – BЈовић Mar 12 '14 at 7:49
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    @RemcoGerlich - because like businesses, individuals can use good debt to increase their net worth and their income streams. Maybe you should start treating your personal finances more like a business - have goals, budget, incorporate risk management, and most important have a plan. – Victor Mar 12 '14 at 13:24
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    Businesses exist for the purpose of making money, I do not. If things go wrong businesses sometimes cease operations, my life will go on. I do have goals and the rest, but the risk/reward situation is incomparable to that of businesses. – RemcoGerlich Mar 12 '14 at 13:32

Average person's life

I'm going to say there is no normal debt level. Here's the standard life pattern:

  1. When someone finishes their studies in university, and are therefore highly educated, they'll have student debt with low assets, so they'll probably be in debt (negative equity, if you will). At least that's the case in Australia, where student debt is lower interest than a savings account.
  2. Then they'll get a job, rent a place, save up to buy a place, and soon they'll have very low debt.
  3. Next they buy a place with a mortgage, and they'll have very high debt.
  4. Over the years, they'll pay off the mortgage and reach minimal or zero debt.

So it really depends on your situation, it's way too spread out to quote a "normal" figure.

Cost of debt vs Gain from assets and Risk of income

You need to strike a sweet spot based on:

  • Cost of debt, as in interest. E.g. student loans are usually pretty cheap, mortgages are ok, credit cards are very bad
  • How much gain are you getting from the assets that are funded by the debt? E.g. spending on a holiday is a big loss, a car is a slight to moderate loss, but a house or shares are often a good gain. For it to be financially beneficial, you need the net gain from the asset to be higher than the cost of the debt.
  • How risky is the income from the debt funded assets, and your own personal income? A 90% loan on a house is a much safer bet than a 90% on the share market. Likewise, a freelancer who's income fluctuates heavily shouldn't be as leveraged as someone working in a job where they've "become furniture", or whatever the saying is!

Someone who is more educated in finance will probably be able to run a tighter and more aggressive financial strategy, whereas someone who is educated in, say, creative media may not be able to do as good of a job.

Running your life as a business

Someone here mentioned this, I think it's very true. Unless you intend on living day to day, with no financial strategies, much of our lives parallel businesses. Both need to pay tax, both look for low risk high growth strategies, and both will (hopefully) have a purpose that goes beyond bringing in $$$.

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Curious, are you asking about average, or the good numbers? The median family doesn't have $2500 to address an emergency. We are a nation of debtors, and spenders.

A young couple at .8 is doing well. It means they saved 20% for a down payment, and just bought a house. Not too tough to buy with 5% down, have no other savings, and a student loan to put the debt to equity over 100%.

Older people should be shooting for zero. I semi-retired at 50, and my mortgage is at about 8% of my net worth. 50% would be too high. Others 50+ should have at least 50% equity in their home and nearly half their "number," the amount needed to retire. So, a target is 25% maximum.

These numbers shouldn't impact you at all. You should plan wisely, spend frugally, and prioritize your goals. There are 'zero debt' people out there who make me look reckless, and others who invest in rentals with a goal of keeping them highly leveraged.

Neither group is wrong, what's right for you is what lets you sleep at night.

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    This: The median family doesn't have $2500 to address an emergency. And This: Older people should be shooting for zero. – Pete B. Mar 11 '14 at 19:23
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    +1 - one size doesn't fit all, and planning and setting goals is what one should be concentrating on. – Victor Mar 11 '14 at 22:05
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    +1 to this too. Debt used to produce income is a different animal than debt accepted in order to have luxuries, so a single number doesn't answer the question. – keshlam Mar 12 '14 at 0:51
  • Joe, why do you worry about the ratio of debt to net worth instead of debt/asset? – RonJohn Oct 10 '17 at 22:12

What is your biggest wealth building tool? Income. If you "nerf" your income with payments to banks, cable, credit card debt, car payments, and lattes then you are naturally handicapping your wealth building. It is sort of like trying to drive home a nail holding a hammer right underneath the head.

Normal is broke, don't be normal.

Normal obtains student loans while getting an education. You don't have to. You can work part time, or even full time and get a degree.

As an example, here is one way to do it in Florida. Get a job working fast food and get your associates degree using a community college that are cheap. Then apply for the state troopers. Go away for about 5 months, earning an income the whole time. You automatically graduate with a job that pays for state schools. Take the next three years (or more if you want an advanced degree) to get your bachelors. Then start your desirable career.

What is better to have "wasted" approx 1.5 years being a state trooper, or to have a student loan payment for 20 years? There is not even pressure to obtain employment right after graduation. BTW, I know someone who is doing exactly what I outlined.

Every commercial you watch is geared toward getting you to sign on the line that is dotted, often going into debt to do so. Car commercials will tell you that you are a bad mom or not a real man if you don't drive the 2015 whatever.

Think differently, throw out your numbers and shoot for zero debt.

EDIT: OP, I have a MS in Comp Sci, and started one in finance. My wife also has a masters. We had debt. We paid that crap off. Work like a fiend and do the same. My wife's was significant. She planned on having her employer pay it off for each year she worked there. (Like 20% each year or something.) Guess what, that did not work out! She went to work somewhere else! Live like you are still in college and use all that extra money to get rid of your debt. Student loans are consumer debt.

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    Now we need one "stay leveraged" answer and we'll complete the trilogy. – JTP - Apologise to Monica Mar 11 '14 at 19:49
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    +1 for "Normal is broke, don't be normal." Our society has a serious addition to gratuitous debt. NOT a good thing! – keshlam Mar 12 '14 at 0:40
  • You're right, man, there are way smarter ways to do things, financially, but I'm asking from the perspective of someone who already has a grad degree and student debt. Good answer, though! – Walrus the Cat Mar 12 '14 at 1:29
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    The student debt is effectively a "business debt", an investment in your career. Hopefully, it will pay back in improved wages (or at the very least in doing something you enjoy doing rather than "working for the weekend"). The question is, how much other debt can you afford to take on... and the answer is "as much as possible, don't unless there is a very clear reason and a very specific schedule on which you can and will pay it off." Pay off the credit card every month, if you possibly can; you'll save yourself a fortune over the years. – keshlam Mar 12 '14 at 1:49
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    I would not have survived my master's in physics study had I been working. Not taking student loans isn't an option for some people. – Almo Mar 12 '14 at 17:49

The problem with having no debt at all and relying totally on your income from working is that if you lose your job you'll have no income.

Now there are 2 types of debt: good debt and bad debt. You should stay away from bad debt. But good debt is good — it should produce an income higher than the interest payments on the debt. Good debt will help you supplement your income from work and eventually replace your income from work.

I have over $2M in good debt, have been semi-retired since 42, and sleep very well at night. By the way I also have zero bad debt.

As Joe says, you have to be at a level you are comfortable with, can sleep at night, and try to limit your bad debt by showing some delayed gratification when you are starting off.

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    Shame on the DVer. The question was a beautiful invitation to offer the three views to consider. I know when I'm offering facts vs opinion, and even though the question was opinion, the answers fit well into the three categories. +1 from me. – JTP - Apologise to Monica Mar 11 '14 at 22:40
  • When you say good debt, so you mean (for example) rental property that is cash-flow positive? – Phil Sandler Mar 12 '14 at 19:34
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    @PhilSandler - yes that can be one example of good debt. Basically I would define Good debt as any debt that is used to buy an asset that goes up in value and/or produces more income than the repayments on the debt plus other expenses to maintain the asset. However I would put more emphasis on the income as most assets are not guaranteed to go up. – Victor Mar 12 '14 at 20:57
  • @PhilSandler Negative gearing (cash negative) can also be good, as long as the long term capital gain plus the rent beats the interest payments. – andrewb Mar 13 '14 at 2:42

0.8 and 0.5 are fairly common numbers for Debt to Asset Ratios. I agree it is confusing since most places on the internet talk about Debt to Asset Ratio, and even here most commenters used Debt to Asset Ratios when responding.

In order to have a Debt to Equity Ratio of .8, someone would have to have 100% of their equity in additional assets after buying a house. e.g. After buying a $300k house with 20% down, they'd have to have $300k in assets in the bank above and beyond the downpayment. Ya, I agree that someone out of college isn't going to achieve that easily or realistically.

Regarding your question. A person that buys a house at 20% down is typically considered be doing "ok" to "good". Debt to Asset puts that person at .8 (80%), but Debt to Equity Ratio puts that person at 4 (400%). So in an extremely basic over simplification, I'd say having a Debt to Equity Ratio under 4 is doing pretty good, and over that is less so.

Say around the age of 50, someone paying a house half down and having 100% of the home's value in additional assets (nest egg) puts the Debt to Asset Ratio to .25 (25%) and the Debt to Equity Ratio to .33 (33%).

Buying a house with 5% down and no other assets puts someone at a Debt to Asset Ratio of .95 (95%) and a Debt to Equity Ratio of 19 (1900%).

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