Using Debt Rate (Dr) To Guide Conversations
Factors to Consider when Assessing Debt Rate
Average Debt Rate scores depend on a variety of factors, the most prominent being the client’s chosen career path and their aversion to debt. The following graph presents the range of average Debt Rates:
| Low 10 – 15% | Average 20 – 30% | High 40%+ |
Correlating Factors
Understanding the correlation between these factors and your clients’ savings habits will help you determine if the given Debt Rate is appropriate or not.
Savings Rate: High Savings Rate = Low Debt Rate
Debt Tolerance: Low debt tolerance = High Debt Rate
Age: Older = Low Debt Rate
Career: Different careers necessitate different debt levels. For example, someone with an advanced degree is more likely have much higher levels of debt than someone without one
In the majority of cases, you will work to decrease a client’s debt rate. This is most likely to be the case where the client needs to start saving, but there’s not yet enough free cash flow to do so.
However, some clients’ financial situations might allow you to focus on increasing their debt rate. This could occur to fund an investment opportunity or business expansion (not to fund a lifestyle beyond what the client can afford).
Questions to guide conversations
As you identify which direction the client should move to improve their debt rate, you may want to consider the following questions:
- What is the purpose of the debt? What are the interest rates / terms on their existing debt?
- What is the client’s debt tolerance?
- Does the client have ample liquidity?
- If the Debt Rate is too high, in what order should the client pay down debts?
- If the Debt Rate is low, could the client utilize more debt to accelerate growth?
- Should the client consolidate or refinance some debt?