COMMENT
Debt Problem? What Debt Problem?

By Cliff D'Arcy
March 2, 2006

Regular readers of The Motley Fool know we regularly warn people about the dangers of building up excessive debt.

This is something that I am passionate about, thanks to my personal struggle to pay off almost £50,000 of non-mortgage debt in the late Nineties. At the time, my money worries caused me real pain in the form of constant anxiety, depression and sleepless nights.

However, having had my awakening (what posters on our Dealing with Debt discussion board refer to as a "light-bulb moment"), I've turned my life around. These days, instead of being a bothered borrower, I'm a sensible saver and patient investor. Indeed, I've sworn never to "do debt" again, hence, my credit card is always paid off in full every month by Direct Debit.

However, in many respects, I appear to be "ahead of the curve", because everyone else seems to be borrowing as though the party will never end! To show you what I mean, I downloaded and analysed some figures from the Bank of England.

We know that our total debt has been rising for years, but this isn't a problem, because our incomes have been rising, too, right? Wrong! In fact, as the following table shows, our debt mountain has been growing at a far faster rate than our take-home pay:

Year-end	Debt (£bn)	Take-home pay (£bn)	Debt/Pay (%)
1993	410	466	88
1994	433	482	90
1995	458	511	90
1996	486	544	89
1997	519	576	90
1998	558	595	94
1999	610	623	98
2000	663	660	101
2001	731	705	104
2002	831	728	114
2003	940	766	123
2004	1,058	796	133
2005	1,158	* 834	139

* my estimate (Q4 data not yet released)

So, as you can see, our total personal debt (including mortgages, credit and store cards, personal and car loans, overdrafts and so on) has grown from £410 billion to £1,158 billion in twelve years. This equates to a compound annual growth rate of 9%, which is pretty high in historical terms.

On the other hand, our take-home pay has increased from £466 billion to £834 billion over the same period, which equates to an annual growth rate of just 5%. So, our debt pile is growing at a much faster rate than our wages.

Indeed, until the end of 2000, our annual take-home pay exceeded our debt pile. Hence, if we threw our entire earnings at our debts, we'd be in the clear in less than a year. Amazingly, in 1996, the ratio of debt to pay actually fell to 89%, compared to 90% in 1995.

Alas, since 1996, this measure has risen relentlessly and, in 2000, our total debt exceeded our total income for the first time in recorded history -- an important "tipping point". By 2005, it had risen to a whopping 139%, which puts us in the same league as the world's biggest credit junkies: our American cousins. That is not a record of which we should be proud, I believe!

On the other hand, about five-sixths (83%) of our current debt (or £966 billion of the 2005 figure of £1,158 billion) is made up of residential mortgages. What's more, we've enjoyed a nine-year house-price boom which has seen our housing wealth rocket to £3,408 billion.

Therefore, our asset wealth has increased enormously, so everything is fine and dandy, correct? I would argue otherwise, because most people wouldn't sell their home to pay off their debts, no matter how bad things were. Furthermore, borrowing against your home to consolidate (roll up) existing debts is an equally undesirable option, as I explained in Lessons From The Last Housing Crash! Who wants to sell off the family silver just to repay debts? Not me!

Finally, although some people have accused me of "talking up the debt crisis", my goal is both simple and entirely altruistic: to help my fellow Brits by recommending that they learn to control their "urge to splurge". Whether they do so is entirely up to them, of course, but I can't see how descending deeper and deeper into debt can ever be seen as a good thing, all things considered.

Finally, if you're worried about your ability to manage your debts (and I see more and more people in this position every week), then check out these links:

• Ten Ways To Dump Your Debts
• Twenty Steps To Debt Freedom
• our Get Out of Debt centre and;
• our ever-popular Dealing with Debt discussion board.

More: Fed up with paying too much interest? Try our Best Buy 0% credit cards and personal loans!