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 decline, which is related to the low savings rate in the U.S. American households spend about 80% of their income annually, and 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 social decline.
Chinese families generally have higher savings rates and lower basic consumption thresholds, but 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, which is still a source of anxiety for some middle-class families.
How to avoid the risk of social decline and maintain a reasonable level of debt 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 exceed 60%.

1. Calculation Formula and Meaning
   Personal debt-to-asset ratio = (Total personal debt ÷ Total personal assets) x 100%
   Where:
   Total debt includes all repayable debts such as mortgage loans, car loans, credit card debt, consumer loans, online loans, etc.;
   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 financially
   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 mostly high-interest consumer loans, online loans, etc.), 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 risky.

3. Adjusting According to Personal Situation
4. Those with stable income and substantial quality assets (such as core area real estate) can slightly relax the limit to around 50%;
5. Those with volatile income and high-interest debt, such as consumer loans 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.
   Leverage for large consumption should not exceed 50%. If it does, avoid borrowing; if it surpasses 60%, start reducing the debt.
2. Estimate your personal debt ratio annually, and do so promptly when making major decisions or experiencing significant changes.
3. Asset valuation standards:
   Real estate is valued at 80% of market price;
   Stocks, funds, convertible bonds are valued based on broker collateral rates, or 70% for stocks and 90% for broad-based funds;
   Personal or private loans are valued at 50%, and loans overdue for more than a 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, parents can 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 expenses of 33,000, expecting income and property prices to rise.
   Calculate whether it was advisable to buy back then:
   Considering parental support of 100,000, total assets = 500,000 x 0.8 + 50,000 = 450,000 (if the house is valued at 550,000), total debt = 350,000, debt ratio = 350,000 ÷ 450,000 = 78% (or 63% if the house is valued at market price).
   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% (house valued at 77%), more severe;
   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% (house valued at 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 x 0.8) = 50%, so the maximum purchase price at 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, considering financing.
   If buying broad-based funds (valued at market price), using the 50 yellow line, the maximum loan is 200,000, with 3x leverage on cash, which is too risky; considering only cash, maximum loan is 100,000, with 2x leverage, still 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% leverage is high risk, but as long as cash flow supports, the house generally won’t be at risk of foreclosure.

3. Low-risk home buying strategy
   Buy fully paid properties, and allocate the mortgage portion to 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 needs improvement, consider renting a larger place first, then buy when close to full payment. Insufficient funds imply not reaching the consumption capacity.