The Deleveraging of America

US households are continuing to reduce their debt burden. According to the Federal Reserve, the amount of money dedicated to paying off debt has shrunk from 14% of disposable income in 2007 to a current level of 11%


There are three ways to ease the cash flow burden associated with debt.

First, you can do it the old fashioned way: whittle it away a little each month. Then once you have eliminated some debts, don’t turn around and add on more. If you get the car paid off, drive it for another six months and accumulate a bigger down payment on your next vehicle. If you pay off a credit card, cut it up and close the account. Avoid taking out a home equity loan to pay for a vacation.

Second, you can take advantage of lower interest rates. If you refinance existing debt at a lower interest rate, either the term of the loan gets shorter or the monthly payments go down. Or both, depending on what the spread is between the old interest rate and the new refinance rate.

The third way you can reduce your debt and ease up your cash flow is by surrendering assets pledged as collateral in discharge of your debt. That’s just a fancy way of saying you get foreclosed on by the bank. In the last five years there has been a mountain of debt erased by this method.

However they are doing it, a reduction in household debt is good economic news. With more disposable income in their pockets, consumers will have more cash to spend. Deleveraging has the potential to help drive the economy forward.

Of course, with the paltry retirement savings of most Americans, the best use of increased cash would be to divert the extra money into long term savings.