Is Having More Income Equivalent to Having More Debt?

The New York Times recently published an interactive calculator that allows you to compare your debt situation to a group of more than 360 American families that were surveyed in 2004. After playing with it for a little bit, it was pretty clear that this survey indicates that those with more income are more likely to have debt. This led to me to ask, why is that those with more means seem to borrow more?

The calculator allows you to input your mortgage debt, credit card debt, automobile debt, and educational debt.  Then you can choose your income and age group on the bottom and it tells you how many percent of the families they surveyed are like you. So I put in $0 and less than 35 year old.  In my age bracket, 39% of families making less than $20,000 per year had no debt, and only 3% of families making more than $150,000 per year had no debt.  This is a very stark difference.  When I changed the age bracket to all age groups, 47% of families making under $20,000 had no debt while only 14% of families making more than $150,000 had no debt. That is still a very big difference.

I noticed that regardless of income, most of the debt of these families came in the form of mortgage. The average amount of mortgage debt goes up as you scroll up in income. This makes sense because more income allows people to qualify for larger mortgages.  Higher income families also tend to live in areas with high costs of living so housing is more expensive to begin with. Some would argue that mortgage is a type of “good” debt because it allows people to have a piece of real estate after it is paid off, but that alone  does not change the fact that it is a debt.

In all the other categories of debt, higher income families still owed more than lower income families on average.  The average automobile debt of families making over $150k  is nearly 9 times the automobile debt of a family making less than $20k.  All of this just shows that those with higher income spends much more on the same goods and services.

Personally I have lived in both ends of the income spectrum presented in this survey.  When we just moved to America we were living on one graduate stipend.  All three of us lived on less than $1000 a month and we watched our expenses day to day.  Nothing was bought without a coupon, and the damaged foods section is where we shopped first. When my family was at that income level, frugality was necessary for survival  and  there is no room for debt because one credit card interest charge could mean a week’s worth of groceries.

Later, my parents graduated and we moved to the San Francisco Bay Area.  They both had well paying jobs after a few years, and they took on a mortgage. A big change I noticed is that we no longer cut out every coupon we found for food and we ate out much more.  It was much easier to spend money because we had more income than before.  The rationale was that coupons were no longer worth the time and effort to redeem, and paying for good food was great because we can’t cook like that anyway. Being frugal is just harder when you have the means to spend your money and justify it later as only 0.25% of your salary.

Though, having said this, I would like to clarify that my family was never that extravagant and got in any debt other than their mortgages. Also, I think it would more interesting if the NY Times reported the amount of assets these families had and see if these families could cover the amount of the debt they have.  If the higher income families had enough assets to make their net worths positive, then they are not too badly off.  If they had the most debt and least assets, then they are really in trouble.

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