Low US Household Leverage Bodes Well For The Economy

One of the things that gives me great comfort the health of the U

Economy is our historically low household leverage

According to the Federal Reserve Board, household leverage is now at an 80-year low—a remarkable sign of financial discipline

Back then, people lost their jobs and massive chunks of their net worth because of too much leverage

It took a decade to rebuild

After that experience, I mised myself: never again will I take on that much debt

Households Can Better Withstand the Next Recession Nobody s a recession or stagflation

Households are simply too cashed up to panic-sell

Instead, most will hunker down and wait for better times to return

Thanks to this strength, I plan to use any correction as an opportunity to buy the dip—for both my retirement accounts and my children’s

With so much cash on the sidelines, we’re more ly to see V-shaped recoveries than drawn-out U-shaped ones

Personally, after selling our previous rental, I’m sitting on ample liquidity in Treasury bills and public stocks I can sell and settle within days

And with a fully paid-off primary residence, there’s almost zero chance I’ll ever sell at a discount

Why would I, with no mortgage and no urgency

Owners now own their perties outright

Risk assets would ly skyrocket once again

And based on human nature and our historical appetite for risk, I wouldn’t be surprised if leverage ramps back up, especially as interest rates continue to decline

The Only Good Type of Leverage In general, the less debt you have, the better

But in a bull market, strategic leverage can accelerate wealth building

So what’s a financial freedom seeker supposed to do

First, understand that not all debt is created equal

Consumer debt, especially from credit cards, is the worst kind of widely available debt

For the love of all that’s good in this world, avoid revolving consumer debt at all costs

The only type of debt I condone is mortgage debt used to build long-term wealth

It’s generally one of the lowest-cost forms of borrowing because it’s secured by a real, usable asset

That’s why I’m a strong ponent of everyone at least getting neutral real estate by owning their primary residence

Hold it long enough, and thanks to forced savings, inflation, and mostly fixed housing costs, you’ll ly come out far ahead compared to renting a similar place

People to say they will and invest the difference, but most people can't keep it up over the long term

As for margin debt to invest in stocks

Stocks offer no utility, are more volatile, and margin rates are usually much higher than mortgage rates

If you’re going to use debt, at least tie it to something you can in and control

The Asset-To-Debt Ratio By Age Here’s a useful framework to assess your financial health: a suggested asset-to-debt (liability) ratio, paired with a target net worth by age

The asset-to-debt ratio applies broadly, regardless of income

In short, aim for a net worth equal to 20X your average household income if you want to feel financially free

After running the numbers and reflecting on real-world conditions, I believe most people should aim for a steady-state asset-to-liability ratio of at least 5:1 during their highest earning years to retire comfortably

Because having five times more assets than liabilities puts you in a strong position to ride out economic storms

Ideally, your debt is tied to appreciating assets— real estate—not high-interest consumer debt

By your 60s and beyond, the goal should shift toward being completely debt-free

At this point, most people are eager to eliminate all debt for peace of mind and maximum financial flexibility in retirement

The peace of mind and flexibility that come with zero debt (infinity ratio) in retirement is hard to overstate

Even though the rate was low, it feels great to have one less perty to manage

By then, I expect the 10-year bond yield to be lower, making paying down debt more appealing

While I might miss out on further upside if San Francisco real estate keeps climbing—especially with the AI boom—I no longer care squeezing out every dollar with leverage

I’ve built a large enough financial foundation to feel secure

These days, I’m optimizing for simplicity, steady income, and gradual appreciation—the kind that helps me sleep well at night

Chances are, once you hit your 50s, you’ll feel the same too

The drive to maximize returns eventually takes a backseat to the desire for clarity, peace, and freedom with the time we have left

Readers, what's your current asset-to-debt ratio

Household leverage is at an 80-year low

And do you hope to be completely debt-free by the time you retire

Optimize Your Leverage With A Free Financial Check-Up One of the biggest signs of a healthy economy today is the fact that U

Household leverage is near an 80-year low

If you’re working toward becoming debt-free and want to ensure your net worth is positioned for both growth and stability, consider getting a free financial analysis from Empower

This no-obligation session could uncover inefficient allocations, unnecessary fees, and opportunities to better align your financial structure with your long-term goals

A sound asset-to-debt ratio and investment strategy are key to lasting financial independence

Empower can help you stress test both

Get your free check-up here and take one step closer to optimizing your financial foundation. (Disclosure: This statement is vided to you by Financial Samurai (“moter”), who has entered into a written referral agreement with Empower Advisory Group, LLC (“EAG”)

Learn more here. ) Diversify Your Assets While Reducing Risk Exposure As you reduce debt, it’s smart to also diversify your investments

In addition to stocks and bonds, private real estate offers an appealing combination of income generation and capital appreciation

Fundrise also offers venture exposure to top-tier private AI companies OpenAI, Anthropic, Databricks, and Anduril through Fundrise Venture

If you believe in the long-term potential of AI but can’t directly invest in these names, this is a unique way to get access

Fundrise is a long-time sponsor of Financial Samurai as our investment philosophies are aligned

I invest in what I believe in

To Financial Samurai Listen and to The Financial Samurai podcast on Apple or Spotify

I interview experts in their respective fields and discuss some of the most interesting topics on this site

Your s, ratings, and reviews are appreciated

Everything is written based on firsthand experience and expertise

With an MBA from Berkeley and 13 years of experience at Goldman Sachs and Credit Suisse, he helps readers achieve financial freedom sooner

Sam is currently in residential commercial real estate and AI companies through Fundrise

Finally, to build greater wealth, pick up a copy of his upcoming bestseller, Millionaire Milestones: Simple Steps To Seven Figures

It'll be the best personal finance book you'll ever read

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