It is refreshing to see a light at the end of the stock market tunnel…household wealth rose 3.8 percent during the last three months of 2010, says the Dallas Morning News, (“Stocks Lift Household Wealth as Debt Falls). This was in part due to the rise in stock prices. I recall back in late 2008 and early 2009 a few naysayers who really thought stocks would never recover. “The Dow will never see 10,000 again,” said doubters. But the market upturn is no surprise. It
always recovers; it is just a matter of when; if patience is not your virtue, stocks may not be for you.
But what raised my eyebrows was the other part of the wealth equation addressed in the article: Household debt fell by one-half of a percent. This may seem trivial but this is the “11th straight quarterly decline,” says the News. Hooray! Debt has been one of the overriding reasons that households do not have more wealth than they do…not the market crash, not the housing price tumble.
Here are some interesting facts about d
ebt and why paying down debt is the most important thing a person can do, aside from saving money. According to www.creditcards.com:
- The average interest rate (APR) for credit card purchases in 2009 was 12.83 percent.
- The average APR on a new credit card offer was 14.10 percent.
- As of February 2010, the average APR on a credit card with balance was 14.67 percent.
- The average credit card debt per household (as of December 2010) was $16,007.
Suppose you carried the average balance of $16,000 and wished to pay if off in five years at a 14.67 percent APR. The monthly payments would be about $370. The repayment cost would be $22,231! This is why high-interest debt is such a wealth-sapper. What does this have to do with retirement? Everything, because many households will enter their retirement years saddled with debt.
As the old saying goes, “It is not how much money you make that determines wealth; it is how you spend it.”