Actual Versus Acceptable Debts of Americans

If you enjoy this post and would like to receive free, daily suggestions on how to grow your net worth, you can subscribe to Free Money Finance using your feedreader and this link.

I'm in the process of preparing for a speech on how to get out of debt. I begin the message by detailing the amount of debt Americans have versus the acceptable levels of debt and thought I'd share that with all of you.

Dave Ramsey in his book The Total Money Makeover: A Proven Plan for Financial Fitness quotes the following:

• The typical American with a $50,000 annual income will have an $850 house payment, a $495 car payment, and an additional $180 payment on the second car.
• They have a $165 student loan payment.
• Their monthly credit card payments are $185.
• Also, this typical household will have other miscellaneous debt on things like furniture, stereos, or personal loans on which they pay another $120.
• All these payments total $1,995 per month.

Crown Financial Ministries lists the following maximum accepted debts an average American making $50,000 should have. They are:

• Housing – $1,000 per month – including mortgage, insurance, utilities, and maintenance.
• Auto – $406 per month – including auto payment, insurance, maintenance, repairs, and replacement.
• Debt – $156 per month – all other debt – student loans, credit cards, consumer loans, personal loans, and so on.
• Total per month: $1,562

Now, let's compare the two:

• At first blush, it appears that the average American is “only” spending 28% more on debt than he should be. But it’s actually a lot worse than that.
• Dave’s numbers are simply the debt payments while Crown’s numbers assume you’re paying for much more than just loans in their percentages. Items like insurance, gas, maintenance, utilities, etc.
• These will add at least another $300 per month (probably more like $500) to Dave’s numbers to make the two truly comparable.
• This means that the average American is closer to spending at least 50% more than he should be on debt.

And this debt is killing people financially. Consider these two facts:

• Dave Ramsey estimates that if you took that $1,995 spent on debt each month and invested it, you would be a millionaire in 15 years. In my opinion, this assumes a return rate that’s a bit aggressive (12% to 13%). But still, you will have hundreds of thousands of dollars if you invest that amount (at 8% you have $650,000).
• Leading investing company Morningstar says that, “Over a lifetime, the average American will pay over $600,000 in interest.”

So in short, many American’s are in debt up to their eyeballs and their finances are taking a beating as a result.

In fact, the typical American’s relationship to debt makes me think of this guy:

You know, things are often the funniest when they are true. Unfortunately, I think that commercial is way too accurate.

Comments

[Holly]

This is a great example of the misinformation that the banks were giving young homebuyers. Back when we purchased our first home in 1997 and even later in 2004 when we sold our first and purchased our second home, you were told that 28% (oftentimes 30-35%) of your pay could be allocated for housing. Still don't know whether we're talking about gross or net pay.

What they neglected to tell younger, less-experienced (NAIVE) consumers is that 'housing' shouldn't mean simply 'the mortgage payment'; it should mean mortgage + insurance + maintenance + utilities and (probably) taxes. Add in those extra 'hidden' costs, and now you can only afford half of what you thought you could. The bankers just wanted to make the deal...ethics went out the window as they approved your loan and held the door as you stepped right in the danger zone.

I know many people say, "Now come on...these borrowers must have known what they were getting themselves into!" Some did but...many were preyed upon by the aggressive loan sharks hawking their low-interet arms, interest-only, and jumbo loans. Some banks that were even falsifying information (i.e. the pay history of the applicants) and purposely leaving out extremely important details of the loans. Believe me...it was a contest for the banks and they were handsomely rewarded to sign up many unqualified buyers.

[Budgeting in the Fun Stuff]

I'm not surprised the average American is in debt up to their eyeballs...the longer I read personal finance info, the more I realize that the average person seems to be perfectly fine if they can cover all of their monthly payments with their paycheck. Debt means nothing if you have enough for that oh-so-important monthly payment. Ugh.

[RJ]

Haha love that video.

@Holly - The standard 28% is based off of gross income but should really be net.

[Rick Diefenderfer]

My parents bought their house in 1962. Back then ONLY one income was considered for qualifying for a home loan. These days, two incomes are considered. And so, is it any wonder that so many people are now losing their homes when one or the other spouse looses their job?

My wife and I realized the mortgage companies weren't doing us any favor by offering to consider both incomes. We insisted that they only consider ONE income (even though we were both employed) to qualify. Today, we're in our mid 50's and OWN our 2600 sq.ft. home situated on 1.5 acres with a 1/2 acre pond stocked with catfish in the backyard! Paraphrased - we learned to live BELOW our means... try it... you'll like it!

[Jim in Portland]

Why do people feel they need to spend so much money? I read Dave Ramsey's book and learned nothing! I knew the principles and strategy of finances growing up in the family home. It was not because I was lectured by my parents, but rather I had one parent who understood how to build into us helping us to become complete and whole individuals at the core of who we are. I think most people spend money, because of deeper issues at the core of personal unfulfillment. They are weak in personal confidence and satisfaction as to who they are. You might watch too much TV and therefore hear to many commercials telling you to much garbage on what you need as well.

When I see women who never were the same clothes or shoes, it screams out to me that they have low confidence and low self esteem . They're confidence is propped up with attachments. Many guys struggle with driving the right looking car. They cars are props and stifle the real you from growing/developing personally.

I think a good place to start is to remind yourself that people love you just as you are. I do know some people who have the right car and who wear lots of different clothes and are truly whole at the core. Percentage wise they are not a very big percentage of the population and they just make alot of money to boot. I have no problem with that . . . but that success brings a whole new set of issues most people will never have to ponder.

Drive a clunker, were the same cool clothes very often and learn to burst at your personal core. You will like the results.

[jim]

I don't think Ramsey's numbers are really "typical" since most families don't have all those debts.

Per the Survey of Consumer Finances 2007, looking at middle quintile income households:

15% of households have student loans.
35% have a car loan.
10% have 'other' loans.
46% carry a credit card balance.
46% of houses carry a mortgage.
24% have other lines of credit.

It is not "typical" for a family to have all of these forms of loans. Look at student loans. Only 15% of households in the middle 20% income group have any student loans.

[Kate Newby]

This is a great way to break things down. I am definietly going thome tonight to figure out where I stand in relation so both of the examples above. However, I am still single and rent so I am not sure how close I should be to these numbers.

[wj]

Dave Ramsey's numbers may be a bit aggressive. But I can testify to this from personal experience: if you
1) don't take out loans for anything except a car and a house (and that means no on-going credit card debt either), and
2) you live on one spouse's salary so you can use all of the other spouse's salary to pay down the loans as quickly as possible, then
you can end up in 20 years with a house you own free and clear, and over $1 million in assets -- NOT counting the value of the house.

No fancy financial skills required (I don't have any). Just live within your means and pay off the debt you do have as quickly as possible.

[Elizabeth]

I think Dave Ramsey's estimates are probably right on, except housing costs. $1,000 for housing is a bit unrealistic depending on where you live. Try living in the New York/New Jersey area. You'd be hard pressed to find a decent place for $1,000/mo. even with a $50K salary. It won't you get far.

[cg]

Haha! I love that commercial. It's a few years old, I think it first came on when I was in high school and it actually made a big impression on me. I swore never to get in that situation (seems to be a lot of keeping up with the Joneses). Nice to see it come up again.

[Monique]

WOW...thanks for the perspective

[Mike]

Good post. Interesting that in Dave's #'s the average family is paying almost as much for autos as they are for their house. To me that is just dumb. The most liberating thing that I have done in my personal finance career is to not have any car payments. Being able to invest that money each month will be beneficial for our future. When we're rolling in dough at some point in the future, maybe then we'll buy the new Bimmer...