Brandy Auterson:
It’s now time for 4 Your Money. We’re joined by James Nelson, financial advisor at NelsonCorp Wealth management. Welcome back, James.
James Nelson:
Thanks, Brandy.
Brandy Auterson:
So we’ve heard a lot over the past few years about big increases in debt. Governments, corporations, and households have all been increasing their balance sheets. Is this something that regular investors need to be worried about?
James Nelson:
Yeah. The world has a very high indebtedness right now compared to history. And a lot of things have contributed to that. It was the trend prior to the pandemic, but things really ramped up when the pandemic started. Now, debt isn’t necessarily a bad thing. Corporations and governments use it all the time. Businesses use it to finance new projects or products, and it can alleviate a strain if they need to extend payments or in recent times, just refinance to cut their interest rate costs.
James Nelson:
We have a chart here that kind of looks at a metric that we’re interested in. We think it’s very important. It’s the debt service ratio, and what the debt service ratio looks at is, is U.S. household, compares the total debt payments a household has versus their disposable income. A high ratio would suggest that a large part of the household income is simply going towards just paying back debt, not much left over for spending. However, currently, as you can see on the chart there all the way to the right, we’re at almost all time lows for that ratio. So there’s a couple reasons for that. Low interest rates being the big one, government stimulus really helped people pay down a lot of debt last year, which is a good thing. And then incomes are up in general.
Brandy Auterson:
All right. So what could some of the implications be given the message this is suggesting?
James Nelson:
Yeah, so overall households are in a better spot today than they have been in recent years. This bodes well for the economy in general. Consumer spending’s up, which is good thing for corporations, corporate profits, and will reflect that. Longer term with all of the home purchasing and the refinancing that’s taken place in recent years at low, mainly fixed rates, that would suggest that the ratio probably stays low or near where it’s at right now, because all of this has taken place the last couple years. Right now we’re hovering around about 2% below the normal average for the service ratio. And again, that allows that extra 2% of disposable income to be spent on something else other than just servicing debt. So overall a good thing for the economy and a good thing for consumers.
Brandy Auterson:
If you missed any of our discussion, we’ll make it available for you.