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What is an ideal debt to income ratio? And savings to income?
Old 11-07-2008, 01:47 PM   #1
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What is an ideal debt to income ratio? And savings to income?

I feel like I've read a couple of articles (I believe in the weekend WSJ) where there was a chart of recommended debt to income ratios as well as a recommended savings to income ratio based on different age brackets. Does anyone have any numbers they'd recommend for these two? What is the ideal amount of debt that a family would take on? (we only have mortgage debt and are looking at buying a new home soon); I'm also curious on any recommended savings to income.

Thanks for any thoughts.
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Old 11-07-2008, 01:52 PM   #2
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I hate to be a wiseacre here, but the *ideal* ratios would be 0% and 100% respectively.

As for what is reasonable in terms of debt, it depends on whether or not you include mortgage debt. For many people a common consensus is that your mortgage payments shouldn't be more than 25-28% of your pay, and that total debt service payments (including mortgage) shouldn't be more than 35-36% of it. These days, of course, less is more.

As far as savings, the more you can save, the better. I think given where we're headed for a while I'd shoot for 15-20% of my pay at a minimum. Obviously, depending on the situation you might not even be able to do that, so even 5-10% would be a good start to force yourself into setting money aside before you can see it and spend it.
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Old 11-07-2008, 03:34 PM   #3
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0% Debt; 33% Expenses and 67% Savings (Income less Expenses = 67%). I would like to see expenses come down (and savings go up). Age group 60-70 and rising.
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Old 11-07-2008, 03:37 PM   #4
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Regarding savings to income. The 4% Safe Withdrawal Rule that you see discussed a great deal can also be thought of saving 25 times your salary. More accurately this would be you net salary less deductions for saving and social security.
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Old 11-07-2008, 03:43 PM   #5
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this was posted a year or so ago...
Attached Images
File Type: gif savings_and_debt.gif (8.2 KB, 297 views)
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Old 11-07-2008, 04:03 PM   #6
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age 65: savings to income = 33.3333 and debt to income = 2.5555.

I love 30 yr fixed and the 4th decimal place - and to think I was an en ga near in a prior lifetime before ER.

. I know I should be more serious but??

heh heh heh -
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Old 11-07-2008, 04:24 PM   #7
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What was shown in that picture is based on a retirement age of 65 (which is not retiring early), it gets thrown off quite a bit otherwise.

Ratios are pretty poor predictors of where you need to be, since they can't be applied to anyone except one person, the absolute average person with average goals in an average world (and even then it will be off somewhat based on data inaccuracies). Things don't work like that.

Your savings to income should be whatever savings is necessary to meet your goals while maintaining a lifestyle you can enjoy. If it doesn't work out to a number you like, you will either have to adjust how much you can save, or redefine what it takes for you to enjoy life.

The ideal debt load is one that you are comfortable with and will be able to keep paying off regardless of something unexpected happening to your income. I believe people try and shoot for something that has mortgage payments of 15-25% of their yearly income. I have heard that having a mortgage that is 50%+ of your income can be back-breaking.
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Old 11-07-2008, 09:32 PM   #8
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Only my two cents, but:

-No consumer debt is acceptable unless paid off every month (unless it is a true emergency, then pay it off asap)
-Car debt only if you cannot afford an economical car without it (i.e., only the very young should have debt for a car, because they depreciate in value faster than the loan amortizes). If you want anything more luxurious than barebones economy, save first and pay cash for it. You'll save tons of money that way, and you may think twice about how much luxury you really need.
-debt service on mortgage should be no more than 25% of your gross income. Have a mortgage for a modest home only. If you want more than modest, save first, then buy the home with a larger down payment so that the mortgage service is no more than the debt service on your current more modest home. You'll save money much faster that way, and you won't be paying all the extra utilities and taxes while you save up for the bigger home...helping you to save faster.

Bottom line: be patient. save first, buy later, in cash, except for a mortgage on a modest home. You will be happier that way.

My age: 47, no debt of any kind. Mortgage paid off 12 years or so ago, cars bought cash, when I could afford them.

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Old 11-07-2008, 09:58 PM   #9
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For me 0% consumer debt. Still have a mortgage with debt service below 10% of gross income. Consuming about 30%. Remaining 60% is savings and taxes. All good advice above this post. Peaceful feeling LBYM.
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Old 11-08-2008, 08:02 AM   #10
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Quote:
Originally Posted by Rambler View Post
Only my two cents, but:

-No consumer debt is acceptable unless paid off every month (unless it is a true emergency, then pay it off asap)
-Car debt only if you cannot afford an economical car without it (i.e., only the very young should have debt for a car, because they depreciate in value faster than the loan amortizes). If you want anything more luxurious than barebones economy, save first and pay cash for it. You'll save tons of money that way, and you may think twice about how much luxury you really need.
-debt service on mortgage should be no more than 25% of your gross income. Have a mortgage for a modest home only. If you want more than modest, save first, then buy the home with a larger down payment so that the mortgage service is no more than the debt service on your current more modest home. You'll save money much faster that way, and you won't be paying all the extra utilities and taxes while you save up for the bigger home...helping you to save faster.

Bottom line: be patient. save first, buy later, in cash, except for a mortgage on a modest home. You will be happier that way.

My age: 47, no debt of any kind. Mortgage paid off 12 years or so ago, cars bought cash, when I could afford them.

R
I second this answer.

-I have never paid a dime in interest on any credit card, and never had a loan on anything but a car and a house.
-First job was in 1977. Last car payment was 1982, all cash since then and no leasing.
-Moved for work several times, paid off my last 30 year home loan in 15 years, on a modest home.
-Age 54 with no debt whatsoever, which made it all worth the "sacrifice" relative to my peers...

LBYM is it's own rich reward.
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Old 11-08-2008, 06:00 PM   #11
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Originally Posted by ziggy29 View Post
I hate to be a wiseacre here, but the *ideal* ratios would be 0% and 100% respectively.
darn it, ziggy beat me to it - a most excellent answer.
zero debt
maximum savings AFTER all bills are paid + plus a little "mad money" for fun.
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Old 11-08-2008, 10:04 PM   #12
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A small poll on this forum showed that, of people still working:

Mortgage debt averaged 10% with a range of 0% to 22% of gross income.
Savings averaged 38% with a range of 10% to 73% of gross income.

Of course, people on this forum may not be representative of the nation as a whole... I seem to recall the national savings is below 0%. Therefore it may be best to see how you're doing not relative to what everyone else recommends, but rather how you're doing relative to your goals to meeting retirement. If you save X%, how long until you have enough money to retire? If you feel like working less (or more), adjust that % accordingly.
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Old 11-09-2008, 05:32 AM   #13
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Originally Posted by Dreamweaver View Post
A small poll on this forum showed that, of people still working:

Mortgage debt averaged 10% with a range of 0% to 22% of gross income.
Savings averaged 38% with a range of 10% to 73% of gross income.

Of course, people on this forum may not be representative of the nation as a whole... I seem to recall the national savings is below 0%. Therefore it may be best to see how you're doing not relative to what everyone else recommends, but rather how you're doing relative to your goals to meeting retirement. If you save X%, how long until you have enough money to retire? If you feel like working less (or more), adjust that % accordingly.
Interesting information coming out of this poll. However, I think the US Savings rate hit 13% (annualized) in September 2008. I know one month is not a valid indicator - but, such a savings rate, if it continues, will make the recession deeper and longer, so goes the thought process (not mine but the "talking head" news people). They say "We all need to save, pay down debt and get our economic house in order, but don't go overboard as "consumer spending" helps the economy". What a "catch 22" problem and IMHO stupid rationalization.
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Old 11-09-2008, 12:49 PM   #14
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Interesting information coming out of this poll. However, I think the US Savings rate hit 13% (annualized) in September 2008. I know one month is not a valid indicator - but, such a savings rate, if it continues, will make the recession deeper and longer, so goes the thought process (not mine but the "talking head" news people). They say "We all need to save, pay down debt and get our economic house in order, but don't go overboard as "consumer spending" helps the economy". What a "catch 22" problem and IMHO stupid rationalization.
Agreed... I think what the "talking head" people fail to mention is that savings helps the economy too...
More money in the banks eases credit and liquidity
Prevents bankruptcies, foreclosures, etc.
Lowers interest rates
Etc....

Of course, while some people win, some people lose. And plenty of people have built their careers on people spending like there's no tomorrow, so there would be quite a few losers out there.
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Old 11-09-2008, 01:05 PM   #15
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IMO - Zero debt.

I would like to try to keep it below 25%. Our current debt is about 18% of our after tax income.
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Old 11-16-2008, 10:34 AM   #16
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I hate to be a wiseacre here, but the *ideal* ratios would be 0% and 100% respectively.
I must respectfully disagree. I think the ideal ratios would be 0% and 1,000,000%.
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Old 11-16-2008, 02:43 PM   #17
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I seem to recall the national savings is below 0%.
One of those "lies, damned lies, and statistics" situations. The 0% savings rate doesn't count home equity or retirement accounts. You could have $500K in equity, $500K in a 401(k), another $500K in an IRA, and be eligible for a COLA'd pension, and still have a 0% savings rate.
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Old 11-16-2008, 03:37 PM   #18
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One of those "lies, damned lies, and statistics" situations. The 0% savings rate doesn't count home equity or retirement accounts. You could have $500K in equity, $500K in a 401(k), another $500K in an IRA, and be eligible for a COLA'd pension, and still have a 0% savings rate.
The savings rate doesn't count home equity, but it does count contributions to retirement accounts.
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Old 11-16-2008, 03:55 PM   #19
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100% debt used to buy gold which you bury somewhere.

Declare bankruptcy and your financial woes are over!*



*Some legal ramifications and prison time may result.
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Old 11-16-2008, 07:14 PM   #20
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The savings rate doesn't count home equity, but it does count contributions to retirement accounts.
I don't think so. I've been looking at the definition of the savings rate, and most (but not all) agree that pre-tax contributions don't count. As a matter of fact, some sources say that the contributions are actually counted as spending. I can't understand the BEA (U.S. Bureau of Economic Analysis (BEA) - bea.gov Home Page) information. It's written in legalese translated into bureaucratic babble. But some excerpts from other people include:

"By one measure, my savings rate is miniscule, i.e. no bank savings (at .25%!!!), and minimal taxable money market saving (at 5%). But, using the other definition provided by Dr. Feldstein, that same savings rate would be in excess of 35%, prudently invested in vehicles with historically high,inflation-beating returns over time. I would submit that the disparity of a zero percentage rate, to a 35% rate is sufficiently vast to skew the data significantly."

and US Savings Rate Based On Outdated Methods of Calculation - Seeking Alpha (too much to quote here, but agrees with what I said).

I would really like to know for sure how they figure this stuff. It would make the debate much more meaningful.
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