Question

1)What is your (you can give your own example) target debt/equity ratio or debt/income ratio? Do you hope to be completely debt-free one day? If modern tax laws were to revert back to laws before 1986, when interest on all consumer debt was tax deductible, would you change their answers? What influences your choice between incurring debt and paying cash?

2) Americans tend to go through life happily owing thousands of dollars. However, in other cultures, people will save for years so that they can pay for a house or another big ticket item in cash. Why is American behavior so different?

Answer 1

1.Current and target debt equity ratio is 0. I am debt free and intend to be debt free throughout my life under normal circumstances. Yes, to increase tax savings I would take certain loans which are necessary (housing loan, car loans, etc.) to the amount for which the interest expenses are tax exempt. Pay cash is better as it prevents customers from purchasing above their capacity. Taking debt can increase purchasing power in the short run but it can turn into a vicious cycle of increasing debt to such an extent that it becomes unmanageable.

2.Americans behaviour is different because it is a spending economy and the economic growth is driven by spending. Moreover, the banks and financial institution provide cheap credit options to customers at very low rates to encourage them to use crest cards and take loans. Marketing and advertisement also coax the citizens to spend more beyond their means. It’s mainly because of a shift in attitude towards spending

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