“January Wages Spent on debt”

This was a fascinating read today. Over in the UK, the good folks at www.unbiased.co.uk have declared February 1 “Debt Freedom Day”. They’ve calculated the average “debt freedom day.” (I guess it’s conceptually similar to the “Tax Freedom Day” that we declare over in the US.) It says that in Britain, the entire month of January was spent to pay down the interest on their debt.
According to the article,

“This week the Financial Services Authority said that personal debt levels were among the biggest risks to financial stability in the UK over the coming year. It said that while the evidence was that most people were managing, there was a risk that a sudden deterioration in employment levels or further sharp rises in interest rates could tip many households over the edge.”

It got me to thinking…how much do I have to work during the year to pay down just the interest on my loans. If I don’t include the interest on my house, I’m paying over $3,500 a year in interest, which would take me about half the month of January to pay down. If I include my house, my interest load is $19,127, which takes me nearly 3 months to pay down. That’s JUST INTEREST!

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System Shock?

According to an article in the Guardian, the Financial Services Authority has issued a warning to the city (I’m guessing London, but I couldn’t tell) regarding the economic impact of three areas of concern – any one of these could trigger what it calls a “shock to the financial system:”

• A Flu Pandemic
• Consumer Debt
• Change in the Way the Markets Price Risk

Ms Carlson quoted Franklin D Roosevelt, saying: “The time to repair a leaky roof is when the sun is shining.”

The FSA highlighted nine priority risks, in particular the possibility that a “significant minority” of customers could experience financial problems because of their high level of borrowing. The FSA has found 34% of consumers are having difficulty paying their bills. Many of them live in rented accommodation but the FSA notes that if house prices were to fall, homeowners would no longer be able to use equity in their homes to refinance other debts.

Ms Carlson admitted the regulator had been “rather surprised” by the rise in bankruptcies and individual voluntary arrangements given low interest rates.

“Even at low interest rates people are struggling,” said Lyndon Nelson, head of risk at the FSA.

Fascinating stuff…this is geared toward the economy in the UK, but is it that different over on this side of the pond? What would happen if there was even a modest rise in interest rates and people were unable to comply with even minimum payments on their debt? It just validates the decision my wife and I made to get rid of this enormous burden.

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