Wealth has always been a part of the American dream. So has basic financial well-being, such as being able to own a home and a car, start a family and educate children. The ability of Americans to produce wealth is one of the key signatures of the American dream.
But for the first time, the generation coming into financial and professional adulthood may be so financially hobbled by debt, specifically crippling student loan debt and ancillary credit card debt, to the point that wealth and financial stability may not be within their grasp.
Most baby boomers who went to college in the 1960s and 1970s graduated with no student loan debt because they paid very little in tuition at public colleges and universities. Their educations were also often subsidized by federal and state grants. Cut to today: student loan debt in 2017 stands at 1.4 trillion dollars. Today, the average student loan debt for a college graduate stands at $34,000.
It gets worse. Over half of millennials who use credit cards not only carry over balances every month, they are charged interest for it and are saddled with additional late fees and the like. In other words, the credit-economy that allows a 20 year old to click on Amazon, find a flat screen, apply and be accepted for an Amazon credit card, and have the TV delivered within days isn’t helping.
And then there is the decrease in real income. Young Americans today make less today than in the past, and the average earning for a millennial is the lowest today since 1980.
The result, generationally, is what Washington Monthly calls “downward mobility”.
Millennial debt is so bad that a recent study revealed that 4 in 10 would rather confess their private health concerns than confess how much they owe.
The newest generation of Americans might become the first to be less financially prosperous than previous generations. They are even delaying investing in homes or even buying cars. Many are too hobbled by debt to even think about marriage and children.
Given this perfect financial storm, it would seem that “wealth” needs to be redefined. It would seem for debt ridden Millennials, paying off their debt is the new American dream.
In other words, for debt ridden Millennials, zero is the new rich.
But how do they get there?
Well, some Millennials are waiting for the government to fix it, which is in part what the Million Student March was about. Given that congress prevented the discharge of government student loans in 1976 and private student loans in 2005, this isn’t something a Millennial should hold their breath for.
Some of the financial advice given to Millennials -- that they should live in an apartment with roommates, put off getting married, eliminate going out to dinner, not go on vacation – ie. that they should put their life on hold until they’ve paid off their debts is not practical. After all, if you follow that track then, yes, you may be debt free by 50, but you’ve just spent 25 years doing nothing but paying off bills.
This financial plan will appeal to no one. Nor should it. A non-starter financial plan like that only backfires to make Millennials feel there is nothing they can do to solve their debt problems without giving up living altogether, so why bother?
Millennials can also ignore it and hope it all goes away. For instance, a recent survey showed that almost 40% of Millennials with student loan debt did not know what their interest rate was, and 15% did not even know how much they owed. The problem with avoiding financial planning altogether is that you don’t actually avoid it – if you don’t do your financial planning then financial institutions and student loan carriers will do it for you.
What is needed for debt-ridden Millennials is a realistic financial plan to help them get to zero but still have a life.
· Face your fears and figure out how much you owe: You may feel so overwhelmed with your debt that you think you just can’t look at it. But believe me, someone’s looking at it – the credit card companies are looking at it, your student loans carriers are looking at it, the banks are looking at it. And they do not have your best interest in mind. So step one is to face how much you owe so you can start to make a plan to make it go away.
· Haggle them down on the interest: The first thing you can do to take a bite out of your ballooning debt is to reduce the interest you’re paying. If you are paying exorbitant interest rates for your credit cards you may be able to refinance. So, if you are currently paying 6% and you can haggle the credit card company down to 3.9% then you have that much more going towards the principle. The fact is that cutting down on the interest reduces the financial hemorrhaging that goes along with chronic debt.
· You can’t have it all on a zero-sum budget, so figure out what you absolutely must have and nix the rest: Getting to zero and splurging are incompatible. So the question is, what constitutes a splurge? Here’s how I define it: if you feel you simply can’t do without it, and your heart breaks over the idea of not having it or doing it, then it’s a necessity. If you can skip it and not feel like you missed anything essential in life, then it’s a splurge. If you absolutely love going out to dinner and drinks with friends, but can do without a showy car, then say “yes” to the dinner dates and “no” to the BMW. On a goal-zero budget, you can’t have it all. So figure out what is really a must, and save the rest for later.
· Keep an emergency cash-stash: You may think saving money for a rainy day and paying off your debts don’t mix. But they do. Here’s why: when the inevitable happens, like a lay-off from work or an expensive repair, if you don’t have cash on the ready to grab, you’ll have to charge your way through it. That’s the wrong direction. Ideally, keeping 6 months of living expenses stored can keep the credit card monster from knocking at your door when things go wrong financially.
· Call in a professional: An accountant can help prepare a debt reduction strategy that is in line with asset and wealth accumulation. According to CPA Marc Egort, an accountant can help you determine both the tax consequences and potential tax benefits of your debt. “There might be ways to take advantage of qualified debt for tax purposes if structured correctly,” he adds.
· Plan your estate even if you don’t have one: Just because you’re in the red doesn’t mean you don’t have an estate. A common excuse that estate planning attorney, Jennifer Sharpe, hears is, "I don't have an estate, so I don't need an estate plan." According to Sharpe, not so fast: even if you only have a pet or a valued vinyl collection or a ring you inherited from a grandparent, you need an estate plan to make sure they wind up where you want them to wind up should the worst happen. Estate planning also encompasses planning if you become ill or otherwise indisposed.
The main thing for a debt ridden Millennial to know is that you got into debt in the first place because you didn’t understand the rules. Now that you know the rules you have to reset the game to get to zero. Zero may not sound that glamorous, but it’s how you get past having debt drain the life out of you and get to investing in life, which is what true wealth is all about.
To learn more about Michael, as well as access resources including videos and newsletters to help with basic financial planning, go to Michael’s website here. You can also download Michael’s app through Google Play or via the App Store which you can use to contact him with questions; connect with Michael on LinkedIn; and email him directly at Michael.Most@LPL.com.
Content in this material is for general information only and is not intended to be a substitute for specific individualized tax or legal advice. You should discuss your specific situation with a qualified tax or legal advisor.