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Generation debt

Why America's 20- and 30-somethings can't get ahead

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America is touted as the land of the limitless possibilities, but for one group of people, often deemed Generation X and Y, it seems that America's young adults are a generation whose income in being swallowed up in paying off debt.

In America, as the story goes, a young adult's economic options are limitless as long as he or she has the motivation, drive and intellect. After wrapping up college and preparing to enter the workforce at the age of 21 or 22, the expectation is that by their mid-30s an American with a bachelor's degree should be in a worthwhile job, a house with a backyard and enough money in the bank to support the children -- a life rewarded by ambition and hard work. This is not to say the dream is dead, but the new reality is much different. Today, 20-somethings are graduating college with five- or six-figure student loan bills, credit card bills with balances of more than $10,000 and are facing potential entry-level jobs often paying wages too low for the indebted, or even necessary unpaid internships.

Why generation debt is in the red

Some speculate that part of the problem is that 20- and 30-somethings have been raised in a culture of consumerism -- as youngsters watching MTV and reading fashion magazines, feeling that they have to mimic the lives of the rich and famous through the use of credit cards. But the situation gets trickier: The 21st century has ushered in skyrocketing housing prices, stagnant income levels and increasing payments on student loans. Also, Generation X and Y seem to have a lack of financial knowledge in relation to personal finance issues and savings tips due to the lack of education on the topic during their youth. For young people, debt is the norm and they are of the mindset, "I'll deal with it later".

High housing costs and stagnant income

While the median home price has risen by 26 percent across the nation within the last five years, young adults' incomes have gone up less than 10 percent. In an expensive housing market like San Diego, often times buying a home isn't even an option. Those that are able to buy a home are usually "house poor" and cannot afford to pay off their staggering debt and mounting pile of bills. According to the director of research at Florida International University's Center for Labor Research and Studies, spending more than 30 percent of your income on housing costs was a major cost burden, but now many young people are spending 40 to 50 percent on housing costs. The bottom line is that housing prices and rents have tripled, a lot faster than income.

Credit card and student loan crunch

With the advent of the credit card, it seems that money is easily accessible. Also, the credit card industry markets the message, "You earn it so you deserve it," so many use their credit cards as a reward to justify their purchases. And that marketing message has worked -- according to the Federal Reserve, between 1983 and the early years of the 21st century, credit card debt for 25- to 34-year-olds has tripled, from approximately $4,000 to $12,000.

In addition, college loan debt has increased. This has happened for a variety of reasons. Deep cuts to education have been made over the last several years, and tax breaks have been implemented that are mainly aimed at older Americans. Soaring tuition prices, combined with the decrease of federal student aid, means that college students are graduating with higher college loan debts. Also, recently student loan companies have announced changes in interest rates and that higher rates will take effect July 1. The difference means higher payments that could add thousands of dollars over the life of an undergraduate loan and potentially tens of thousands more for graduate students who typically spend more on their education.

Inadequate financial knowledge

According to the Associated Press (April 5, 2006), young people like to spend money but don't know much about how money works. On average, high school seniors answered correctly only half of the time on questions about personal finance and economics. This indicates that there has been a lack of attention paid to financial literacy.

Former editor at Money magazine and author of a how-to financial guide for young adults, Carmen Wong-Ulrich agrees with the above statement and believes that this generation's financial knowledge and savings habits are basically nil. She believes that many personal financial issues are foreign to that group and many are not interested in it. She also says that many don't start panicking until they have completely maxed out -- placing them in more hot water.

Others say that young adults have no knowledge of investing and don't understand the concept of saving money due to the advent of credit cards, on-demand spending and money available whenever necessary. Many institutions and corporations are taking note of this trend and are teaching personal finance classes or offering seminars on the topic.

Consumer pressures

Consumer pressures are definitely greater, especially with increased dollars spent on advertising by companies wanting to sell this group their product. Many also feel that they have to "keep up with the Joneses" and on the surface they have a nice house, car and furnishings, but the bad news is they are up to their eyeballs in debt.

Despite all of the economic strikes and consumer pressures against them, is there anything young adults can do to improve their financial standing? San Diego Metropolitan Credit Union would like to offer the following tips:

Create a budget

Creating a monthly budget and putting that budget on paper, especially in spreadsheet form, is a great way to analyze what bills must be paid, how to pay down debt and how to arrange for a savings plan. It also helps to budget for retirement savings and create some sort of emergency fund, in case of a lay-off or job change. The spreadsheet will help you get a grip on what you're spending and will help you analyze what you can live without. Make sure you budget for your needs before your wants, for example your rent or mortgage is a necessity and a winter trip or Starbucks stops are wants.

Set financial goals

After analyzing your spending and creating your budget, create five to 10 clear financial goals and decide how you will accomplish them. Your goals can range from paying off your credit card debt to saving for a car or home down payment. Make sure you are specific in your goals and cut those goals up into manageable pieces. For example, you have $30,000 worth of credit card debt. Write out smaller goals to pay off that amount, like pay $500 per month toward the credit cards in order to pay off the debt within approximately five years. Track your progress so you can see that your efforts are accomplishing something.

Pay and save electronically

Automated bill payment makes it easier to stay on good terms with creditors and keep your credit report clean. Automated savings lets you amass your money for the long term and often times can be taken straight out of your paycheck and allocated to a separate savings account.

Know your credit

Individuals are now able to access one free credit report a year, so there is no excuse not to be vigilant in checking the report to make sure you keep in good standing with creditors and check for inaccuracies. Bad credit can also spill over into other aspects of your life, and employers in certain industries will check your credit report. If the credit report shows that you can't manage your finances, it could cost you your job. If you are a good credit manager, you can make credit work better for you. If you are a customer who pays on time, you can get better interest rates on new credit cards and home and car loans.

Invest in 401(k)s, IRAs and mutual funds

Pensions seem to be a thing of the past, so knowing how to invest for your retirement is key. If your company has a 401(k) program, take advantage of the benefit and contribute the maximum in order to ensure a comfortable retirement. If your company doesn't offer a retirement program, set up an IRA on your own. These accounts take your money out of your paycheck, before you have a chance to spend it, and could save you money on your taxes at the end of the year.

Put your future over your children's present

Many young families are lavishing more money on their kids -- due to increased media pressure and an increased value on consumerism -- when they should be thinking long term. They justify the money they spend on their youngsters, such as buying expensive homes in a good school district, as worth it for their future, but in reality they would be better served if there were enough money to send them to college.

Rock the vote

It's a good idea to become more involved in public policy and the political process on state and national levels. With more involvement from Generation X and Y, more people will take note of the issues facing them -- and if this group is involved and vocal about these items, Congress may be more inclined to increase college financial aid and revamp the minimum wage system.

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RaeB 6:14pm March 26, 2011

Generation x really didn't have a leg to stand on. In my family my Mother and aunt got bachelor's degrees with no debt. This was in the 1980's. Gas prices for example, only went up like a dollar between the early 70's to 1999, when gas capped off that year at 1.20 a gallon. But between that year and now, gas has more than trippled in cost---in a twelve year duration. Yet, previous to that, for thirty years, it only went up like a buck. I know lots of people who were born in the seventies, like myself, who cannot afford to own a home, or complete a degree without debt. Very discouraging.

Em 8:46am June 6, 2010

What about the fact that more and more new graduates are being laid off in their first three years of work, IF they are able to find anything? What about the fact that those that are working are either continuing to accrue debt due to cost of living increases, OR are living at home with the very parents they have only recently moved away from? It's a wonder there's not more widespread depression!