Ratios and savings rates, what??
Car loans, mortgages, student loans and fill in the blank credit cards are well known credit products. Obtaining each of these requires a credit application, proof of employment and income. The relationship forged between borrowers, lenders and underwriters provides financial opportunities through these products. But how can we tell when those newfound opportunities are costing us more than helping us?
According to the Federal Reserve, the ‘household debt service ratio’ is the percentage of total required household debt payments to total disposable. The types of debt payments used in this measurement are mortgages, student loans, automobile loans, and lines of credit from credit bureau data. Those total payments are then divided by disposable personal income. The Bureau of Economic Analysis (BEA) defines personal disposable income as the ‘total after-tax income received by persons; income available to persons for spending or saving.
A FEDS Notes by Daniel Ringo, dated September 4, 2024, explains the breakdown for each portion of the debt payments. The mortgage calculation includes principal, interest, property taxes and mortgage insurance. The consumer portion includes student loans, auto loans and lines of credit. The two percentages are added together to derive the total household debt service ratio. As of March 21, 2025, the percentages for mortgage and consumer were 5.77% and 5.51%, respectively, totaling 11.28%. What does that mean in practice? For every $1,000 of disposable income, $112.80 is spent towards service household debt.
Remember, disposable income is both spending and saving. According to the BEA, the January 2025 personal saving rate was 4.6%. Applying the same practical application, for every $1,000 of disposable income, $46 was saved by the household. If we compare the household debt service ratio and the saving rate, that means, for every dollar saved, nearly 2.5 dollars was allocated to debt payments. Households across the country feel that financial tension but may not recognize it in those terms.
Throughout the month of April, we will dig into how large amounts of debt can be addressed, and the pros and cons of each strategy. No situation is unsolvable, but it is important to know the facts.
50/70/100 is our mantra! Does the comparison of debt ratios and savings rates cause some alarm? Don’t worry just yet. StudioM Financial can help you work through those numbers in a practical and effective way. Reach out by phone or email at 469-615-0387 or letstalk@studiomfinancial.net. Until we meet, keep working on the change.
Other articles used: https://www.bea.gov/news/2025/personal-income-and-outlays-january-2025