What is a reasonable personal debt-to-asset ratio?

What is a reasonable personal debt-to-asset ratio?

Recently, the “kill line” has become popular, especially regarding the risk of American social class decline. This is related to the low savings rate in the U.S., where American households spend about 80% of their income annually. The middle class faces high basic consumption thresholds (property taxes, medical insurance, living expenses). If middle-class families lose their income sources or experience major setbacks, it can quickly lead to downward social mobility.

Chinese families generally have higher savings rates and lower basic consumption thresholds. However, for families with large mortgage amounts, significant housing price adjustments have brought some close to or into negative equity. If unemployment occurs, it can easily trigger a breakdown of the financial chain. This is likely the reason some middle-class families are still anxious today.

How to avoid the risk of social decline? Maintaining a reasonable debt level is crucial. So, what is a reasonable personal debt-to-asset ratio? Here is Yuanbao’s answer:

A personal debt-to-asset ratio is generally recommended to be controlled between 30% and 50%, and ideally not exceeding 60%.

1. Calculation Formula and Meaning
   Personal debt-to-asset ratio = (Total personal debt ÷ Total personal assets) × 100%
   Where:
   Total debt includes mortgage loans, car loans, credit card debt, consumer loans, online loans, and all other repayable debts;
   Total assets include cash, bank deposits, real estate (valued at current market price), vehicles (valued at current market price), stocks, funds, and other investment assets.
   This ratio provides a straightforward view of how much of your assets are financed by borrowing.

2. Meaning of Different Ranges
   <30%: Very stable finances
   Low debt pressure, strong risk resistance, but may not be fully utilizing low-interest leverage (like mortgages) to increase assets or returns.
   30%–50%: A reasonable range for most individuals and families, allowing moderate debt to improve living conditions (buying a house, car) without putting too much strain on cash flow.
   50%–70%: Higher debt level, requiring attention to repayment pressure and debt structure (whether much of it is high-interest consumer loans or online loans), to avoid difficulties during income fluctuations.

70%: High-risk zone, with weak financial flexibility. If income drops or assets depreciate, it’s easy to fall into insolvency or overdue risks. Banks and other institutions usually consider this level to be quite risky.

3. Adjusting Based on Personal Situation
4. Those with stable income and substantial quality assets (such as core area real estate) can slightly relax the ratio to around 50%;
5. Those with volatile income and high-interest consumer or online loans should aim to keep it within 30%;
6. If already over 60%, prioritize paying off high-interest debts, reduce unnecessary expenses, and try to increase income or assets to gradually bring the debt ratio back to a safe range.

You can first calculate your own debt-to-asset ratio using the above formula, then consider your income stability and debt structure to decide if adjustments are needed.

Based on Yuanbao’s answer, I’ve roughly drafted a personal debt warning line for home buying and consumption:

1. A personal debt ratio of 50% is the yellow line, 60% is the red line.
   For large consumption leverage, up to 50%; exceeding 50% is not recommended, and after consumption, if it surpasses 60%, reduce the scale.
2. Estimate your personal debt ratio annually, and reassess promptly during major decisions or major changes.
3. Asset valuation standards:
   Real estate at 80% of market value;
   Stocks, funds, convertible bonds at broker collateral rates, or stocks at 70%, broad-based funds at 90%;
   Personal or private loans at 50%, and overdue loans over one year are considered defaults.

Example:

1. Middle-class home purchase decision (estimated data)
   A city’s 30+ working family, one child, renting (rent 70,000/month), annual income 350,000, annual expenses 200,000, cash savings 100,000, parental support up to 100,000, planning to buy a house.
   Three years ago, bought a property costing 500,000 (similar to rent), with a 150,000 down payment, monthly mortgage 1,700, annual mortgage 20,000, plus 33,000 in expenses, expecting income and property prices to rise.
   Calculate whether it was advisable to buy back then:
   Considering parental support of 100, total assets: 500,000 × 0.8 + 50,000 = 450,000 (assuming market value of the house at 550,000), total debt: 350,000, debt ratio: 350,000 ÷ 450,000 ≈ 78% (or 63% if based on market value of 550,000).
   Not advisable to buy.
   Current situation:
   If income slightly increases, house price 350,000, debt 320,000, monthly payment 1,450, annual income 400,000, expenses excluding housing 15,000, savings 65,000, debt ratio: 320,000 ÷ 345,000 ≈ 92% (market value 77%), a more severe situation;
   If income slightly decreases, house price 350,000, debt 320,000, monthly payment 1,450, annual income 300,000, expenses 12,000, savings 50,000, debt ratio: 320,000 ÷ 330,000 ≈ 97% (market value 80%), even higher debt;
   Unemployment scenario is hard to imagine.

According to the yellow line of 50%, what is the maximum house price that could have been bought that year?
With a 200,000 down payment, you could buy a 333,000 house; 133,000 ÷ (333,000 × 0.8) = 50%, so the maximum purchase price based on market valuation would be 400,000.

2. Can conservative middle-class investment borrow from the 50-60 red line?
   A middle-class family with net fixed assets of 100,000 and cash of 100,000, seeking financing.
   Buying broad-based funds (valued at market price), at a 50 yellow line, maximum loan of 200,000; with three times leverage on cash, it’s too risky.
   Considering only cash, at 50 yellow line, maximum loan of 100,000; with 2x leverage, still too risky.
   In summary, the 50-60 red line is already quite high leverage; for consumption purposes, with cash flow support, buying a house at 50% is acceptable; for investment purposes, buying at 50% is high risk. As long as cash flow supports it, houses generally won’t be at risk of foreclosure.

3. Low-risk home buying plan
   Buy fully paid properties, and invest the mortgage portion in low-risk investments. When investments double, repay the loan; when funds are large but low-risk opportunities are few, partially repay the mortgage.
   If the family has a small property and insufficient funds for full payment but good cash flow and a desire to improve, consider renting a larger place first, then buy when near full payment. Insufficient funds imply not yet reaching consumption capacity.