One thing that gives me comfort in the health of the U.S. economy is our historically low household leverage. Household leverage is now at an 80-year low, a significant sign of financial discipline, according to the Federal Reserve Commission.
So let me be the first to congratulate you on the debts of many people who did not precede the worst financial crisis of our lives as between 2000 and 2008!
At that time, people lost their jobs and a lot of net worth due to too much leverage. I was one of them – I had two mortgages and ended up losing 35 to 40% of my net worth in just six months. It took ten years to rebuild.
After that experience, I promised myself: I will never take so much debt again.
Families can better withstand the next recession
No one likes recession or scattering. However, with the household leverage reaching 80 years, it is highly unlikely that we will face another global financial crisis like we did in 2009. The family was too fulfilled and panicked. Instead, most people will fall down and wait for better time to come back.
Due to this power, I plan to use any corrections as an opportunity to buy dipping sauce – for my retirement account and for my kids’ accounts. We are more likely to see the recovery rate of the V-shaped than the U-shaped one that attracts the U-shaped.
Personally, after selling our previous rent, I sat in the Treasury bills and public stocks that could be sold and settled within a few days. And, with a completely paid junior living, I will sell it at a discounted price with almost zero chance. Why am I not having a mortgage and no urgency? Now, about 40% of homeowners fully own their property.
Just imagine if household profits return to 2007 levels, the stock market, real estate and Bitcoin could surge. Risk assets may soar again. And, based on human nature and our historical desire for risk, I wouldn’t be surprised if the appreciation is exploited, especially as interest rates continue to fall.
On top of that, millions of homeowners locked in Rock’s lowest mortgage rates in 2020 and 2021. The national knock-on net worth is huge compared to 2007, which makes another housing-powered crash extremely unlikely.
The only good type of leverage
Generally, the less debt, the better. But in a bull market, strategic leverage can accelerate the construction of wealth. So, what should people seeking financial freedom do?
First, understand that not all debt is equal. Consumer debt, especially in credit cards, is the worst debt. Since the average credit card rate is 25% north of you, you basically give lender Warren Buffett himself envious. To love all the benefits of this world, avoid revolving consumer debt at all costs.
My only type of debt is a mortgage debt used to build long-term wealth. Usually, it is one of the lowest forms of borrowing because it is secured by real available assets. Being able to take advantage of a 5:1 utilization by placing only 20% of your home and then live in your home for free, even profit, is an incredible opportunity.
That’s why I’m strongly supportive of everyone at least by having a primary residence. Hold for a long enough time, and you may be much ahead of the way than renting a similar location due to forced savings, inflation, and most fixed housing costs. People like to say they save and invest in the differences, but in the long run, most people can’t keep the differences.
As for margin debt to invest in stocks? I’m not a fan. Stocks do not offer utilities, are more volatile, and profit margins are usually higher than mortgage rates. If you are using debt, at least connect it to something you can live in and control.
By age, the recommended asset to debt ratio
Here is a useful framework for evaluating your financial position: the recommended asset-to-debt ratio (responsibility) and paired by age as the target net worth. The asset-to-DEBT ratio is widely applicable regardless of income.
The net worth target assumes that the household income in their working years is between $150,000 and $300,000, maximizing 401(k), saving 20% of the 401(k) post-(k) income, and having a primary residence. In short, if you want to be free financially free, your target net worth equals 20 times your household income.
After running numbers and reflecting on the real world situation, I believe most people should aim for it Steady-state assets and liability ratio are at least 5:1 During the top years of income, you can retire comfortably.
Why 5:1? Because five times the asset is the responsibility to put you in a strong position to avoid economic storms. Ideally, your debt is related to appreciating assets (such as real estate) rather than high-interest consumer debt. If your liabilities account for about 20% of your assets, you still benefit from some kind of leverage without taking too much risk.
By the 1960s and beyond, the goal should turn toward completely debt-free. one Asset to debt ratio is 10:1 or higher This stage is ideal, for example, assets are $1 million and the remaining mortgage debt is $100,000. At this point, most people are eager to eliminate all debts for peace of mind and maximum financial flexibility in retirement.
The peace and flexibility of zero debt (unlimited ratio) in retirement is hard to overstate.
No more maximizing every dollar
After selling my former primary residence (I rented it out for a year), I deleted about $1.4 million in mortgage debt. Even if the price is low, it is difficult to manage a smaller property. Now, when I approached 50, there was only one mortgage left, life felt simpler and easier to manage.
When my 2.625% ARM reset to 4.625% in the second half of 2026, I may start paying additional principal monthly. By then, I expect 10-year bond yields to lower, making debt more attractive. While I may miss out on further upside, if San Francisco real estate keeps climbing (especially during the AI boom), I no longer care about squeezing out every dollar with leverage.
I built a financial foundation large enough to make it feel safe. Today, I optimize for simple, stable income and gradual appreciation that can help me sleep well at night. Once you hit your 50s, you will feel the same way.
The motivation to maximize returns ultimately makes us leave the time we desire clarity, peace and freedom.
Reader, what is your current asset-to-DEBT ratio? Are you surprised that household leverage in the United States is at an 80-year low? Do you think another recession may be as long as 2009? Do you want to be completely debt-free when you retire?
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