Impact of Household Debt on Ownership of Financial Assets

Growing household debt has resulted in increased research interest. Using a probit model estimation, we found a robust negative impact of having household debt on probability of owning financial assets. The finding corroborates results from other studies that availability of credit reduces household financial assets because it becomes a substitute for precautionary saving against income uncertainty. The result affirms the intertemporal resource constraint that the individual earns enough to cover debt repayment in-order to participate in saving. The study supports government debt relief policies to alleviate household debt.

We introduce age as a quadratic function in the probit model estimation. The positive second order derivative indicates an upward relationship between age and owning financial assets. Although not a robust finding for the quadratic function the result is significant for adding age as a first-degree variable. The study confirms other research that people save more when life expectancy is higher and that aligns with the life cycle hypothesis that the individual will save to smoothen consumption over the life time.

The study supports the need for wealth advisors to review client’s debt and age. Debt and age have impact on whether the client has any utility from acquiring financial assets or not. We expect aging individuals to derive higher utility from owning financial assets- either through consumption smoothing or bequests. Additionally, the higher the debt burden, the more the individual would prefer to settle their obligation than own financial assets.