Academy of Financial Services
Debt has become an increasingly significant issue among American families. Based on an analysis using the 2016 Survey of Consumer Finances (SCF), we estimate average household debt-interest payments exceed the expected returns on financial assets by more than 50%. In this study, we analyze the different economic, demographic and behavioral factors that are associated with household borrowing and leverage ratios. Then, we investigate whether the attributes related to different debt categories are similar by separating the “good” and “bad” debts. After checking the prevalence of high-interest debts, we perform “alpha-equivalent analysis” (compare debt interest savings with investment income) to calculate the potential benefits of liability optimizations. The results indicate that households with lower assets, income, and education levels need the most assistance and could significantly benefit from debt management. Families with myopic planning horizons are more likely to carry a higher amount of “bad” debts, such as credit card balances.
Author(s): Zhikun Liu, David Blanchett