If there is any single idea associated with “the American dream” it is prosperity, and that everyone has an equal opportunity to reach it.
But for the generation coming into adulthood – ie. Millennials – the opportunity for prosperity may not be as equal as it was for previous generations of Americans. A massive student loan burden combined with the downward spiral in real income have put the Millennial generation in the red from the get-go of adulthood, making financial prosperity for those born between 1982 and 1999 less of an equal opportunity than it was for their parents and grandparents.
Given the financial vacuum that Millennials find themselves in, it would seem that “wealth” for those coming into adulthood today needs to be redefined as simply being out of debt.
In other words, for debt ridden Millennials, zero is the new rich.
In my first installment in this series, I introduced a basic financial philosophy that puts you on a course for zero debt, including facing your fears and figuring out how much you owe, haggling your debtors down on the interest, and understanding that, on a zero-sum budget, you simply can’t have it all.
But it’s not just wealth that has been made potentially out of reach for Millennials. Poor credit scores, lack of funds for down payments, and incomes vacuumed up by student loan repayments are putting the kibosh on Millennial’s hitting basic adult milestones such as buying a home, purchasing a car, getting married, having children, investing, saving, retirement, etc.
Getting to zero debt puts all these milestones back on the grownup “to do” list.
But prioritizing getting to zero above all calls major adult life choices into question.
In other words, does getting to zero mean putting off growing up?
The answer is yes…and no. Here’s the breakdown:
· Does getting to zero mean you have to put off buying a house?
Ideally, you shouldn’t even think about buying a house before getting to zero debt or at least close.
Millennials are already finding this out the hard way. According to a report by the National Association of Realtors and American Student Assistance, 71% of those with student loans who have not purchased a home point to those loans as the main reason why. A study by the Federal Reserve Bank of New York demonstrates a clear correlation between student loans and Millennials having problems entering the home buying market.
There are many reasons why student loans are getting in the way of Millennials’ ability to buy a home.
To begin with, student loan repayments siphon off money you need to come up with a down payment. On top of that, the loans themselves make it harder to qualify for a mortgage. Typically, it’s hard to get a mortgage if your monthly debt payments take up more than 43% of your income. A car payment, credit card balances and student loan bills can easily knock a Millennial out of the mortgage game.
Millennials who do buy are having to aim their sites lower in terms of what kind of house they’d really want (they prefer new homes but are buying older homes) and they are often financing upwards of 93%.
Student loans have made Millennial home buying so out of whack that, in down market areas of the country, Gen Y buyers without college degrees are actually able to save up for down payments faster than their college educated counterparts. That’s not how it’s supposed to work.
Point blank: getting to zero debt first before you get into the running to buy a home gets you out of this mortgage morass. It does translate into living in ways you think it’s time to grow out of, such as renting, having a roommate, or even living with your parents for a period of time, which is an unfortunate condition a lot of Millennials are finding themselves in right now. But doing so makes room for a financial future where you can generate real wealth, not just manage chronic debt.
· Does getting to zero mean you have to put off buying a car?
Let’s start off the topic of cars and getting to zero this way: buying a Hummer you can humble brag about on Instagram and getting to zero debt are mutually exclusive.
On the other hand, getting to zero doesn’t mean you have to ride a bike or take the bus to work (assuming you don’t live in New York City, where busses and bikes are actually appropriate).
But if you want to get to zero debt so you can start amassing real equity and real wealth, you’re going to have to let go of all the dreams of cruising around in tricked-out rides like you’ve seen in rap videos your whole life and think practical. For now.
That is part of the problem. Millennials were raised on reality shows and rap videos with stars flaunting wealth. Wanting to then brag on social media about everything – including your new Beemer – and feeling pressured to keep up with friends’ spending habits feeds into Millennials making financial decisions that will just dig them in deeper. I’ve known people in their 20s who made 50 grand a year who bought cars that cost as much. Instead of getting to zero, that financial plan will simply drive you deeper into debt.
The one adult spot in this, however, is that, unless you are self-employed and can write off your ride, as a rule, buying will get you to zero sooner than leasing. That’s because even though your monthly lease payment may be lower than if you bought, the new down payment you have to make when you sign a new lease eats those savings up.
So if you’d rather not be forced to downgrade to a Honda Civic when you’re 35 in order to keep up with a student loan bill that has turned from bad to worse, then drive one when you’re 25, throw the rest of your money at that student loan debt, and save the Beemer for later. …and it will be all the sweeter.
· Does getting to zero mean you have to put off getting married?
The answer is “no”…however, putting getting to zero debt above all other priorities does mean ditching the “dream wedding”.
According to reports, the average cost of a wedding nationally is around 27 grand. The average cost in Manhattan is 70 grand. Any way you slice it, one or both partners could pay off all or most of their student loans right there.
So having your dream wedding and getting to zero debt definitely do not mix.
On the upside, marriage itself can help you get to zero faster. A spouse is, essentially, a roommate you can share expenses with. So if getting hitched is an adult milestone you want to reach, go for it – it might actually get you to zero sooner.
· Does getting to zero mean you have to put off having children?
In a nutshell, the answer is: absolutely.
To illustrate the point, let me take it to the worst case scenario, which is what many Generation Xers are experiencing right now. The average student loan debt of those between the ages of 35 and 50 is $20,000. As a result, they are less able to save and pay for their own children’s education, leaving their offspring with the choice of taking on student debt themselves or going to cheaper schools. The result a cycle of intergenerational debt.
So, unfortunately, as the plight of many Gen X parents demonstrates, having children and paying off student loans don’t go hand in hand. And doing so might result in progeny who are in deeper debt than you are.
Let the student loan woes of many Gen X parents encourage you to wait to have kids until you’ve gotten to zero – believe me, your children will thank you for it.
· Does getting to zero mean you have to put off saving?
You would think that paying down debt and putting money away are incongruous. But in this case, they aren’t.
That’s because the purpose of saving on a zero-debt financial strategy is to be able to use it as an emergency cash fund when the need arises. Borrowing from yourself, as it were – when you find yourself unemployed, when you need to pay for an unexpected repair, etc. – will prevent you from charging your way through the problem and winding up deeper in debt.
· Does getting to zero mean you have to put off investing?
Well, this one is complicated. Here’s why:
The big advantage with investing is time. The longer your investments have time to grow, the greater they pay off on the other end. So the time to invest is always sooner rather than later; always younger rather than older. Investing at 45 means having to put in 4 times as much money as you would to get the same dividend if you started when you were 25.
On the flip side, if you put a significant amount into the market in lieu of paying down your debt that very debt can grow as well.
The conflict here is that both investing and getting to zero are about your long term future.
So I would try to so I would try to solve it this way:
Getting to zero should always be your top priority. If you anticipate being able to get to zero in, say, three to five years, then wait to invest until you’ve paid off your debt.
If getting to zero is going to take 10 to 20 years then you really don’t want to wait to invest, and I would recommend starting now – that way you at least have some money growing while you aim for the zero finish line.
· Does getting to zero mean you have to put off saving for retirement?
If you work for a company with an established 401k that they match then you should do it because it’s free money.
If you are self-employed or work on a 1099 basis then it probably doesn’t make sense to save for retirement, if only because your income will have peaks and valleys. So, say you put 10K into an IRA, and along comes the inevitable dry spell in your business or as a freelancer – you then have to borrow from it to survive, which means paying penalties and taxes.
The upshot is that if you are gainfully employed then go for the 401k. If you work for yourself it’s best to get to zero debt first before you start thinking about gearing up for your golden years.
· Does getting to zero mean you have to put off starting a career in the arts?
This one is tough, so let’s get right to it.
The fact is that most careers in the arts – whether it’s a career in music, acting, writing, photography, film making, you name it – is high risk financially. To begin with, anyone with a career in the arts has to pay dues interning for free, working at night so they can audition during the day, performing gigs for pennies in hopes of nabbing the all-powerful record deal, working for free to build a portfolio, etc. etc.
People don’t go into their chosen career in the arts because it pays well, and everyone knows that the possibility of making real money is a major gamble.
Well, should you get to zero debt first before you move to New York to become a writer or to LA to become an actor?
Not a chance. You don’t apply for internships at magazines or start a band at 30. At that point, you’re over the hill and it’s too late.
My only admonishment to those who are driven to follow their purpose in the arts is to be aware of what happens to debt that isn’t paid over the long haul. A student loan balance that starts off at 30 grand can, if delayed, deferred or ignored indefinitely, turn into 150k with interest and fees over the decades. I’ve seen it happen.
So pay what you can along the way. That way, if you eventually get a good book deal or a regular job on a TV series you won’t have to waste all your royalties and paychecks on bloated student loans.
As I communicated in my first installment on Zero Is The New Rich, 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 suck 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.
The opinions voiced in this material is for general information only and are not intended to provide specific advice or recommendations for any individual.