Savings accounts must gain as Americans lose debt

Over the past few years, Americans have slimmed down their over-sized debt burdens. That's a start -- but it's only half the battle.

To really get their financial houses in order, Americans must go from reducing debt to putting more in their savings accounts and building retirement savings.

How low does debt need to go?

Although the economic recovery has been frustratingly slow, perhaps the most overlooked positive sign is that average debt burdens are coming down as Americans are choosing to spend less.

According to the Federal Reserve, since reaching an all-time high in the third quarter of 2007, the average Household Debt Service Ratio (the ratio of debt payments to disposable personal income) has dropped from 13.96 percent to 12.13 percent.

How low does the Debt Service Ratio need to get before the economy is on the road to recovery? In the 2001 recession and its aftermath, Americans never really made a dent in their debt burdens -- and the result was a debt-driven recovery that led to the financial crisis. In the aftermath of each of the two prior recessions, the average Debt Service Ratio got down below 11 percent, and the results were stronger, more sustainable recoveries.

So debt burdens are still a problem, but less of a problem than they were three years ago.

Savings accounts and beyond -- building long-term savings

Building debt was only half the problem for the average American household. A lack of retirement savings is the other half of the problem. So, real progress will come when money that used to go to making debt payments finds its way into savings accounts. Or, better yet, money market accounts, since money market rates are generally higher than interest rates on savings accounts.

As you go through this process, you should eventually look at longer-term investments such as stocks and bonds to balance out your retirement savings. In the meantime though, savings accounts or money market accounts are a good place to start -- as long as money is going there every month, you will have fully turned the corner from building debt to building wealth.