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From the Mag: Bound by Debt

From the Mag: Bound by Debt

Is this some kind of conspiracy? Between student loans, car payments, credit card bills and rent, young adults are drowning in bills. Seems like such prosperous times—so why is this happening? It certainly didn’t happen to our parents. To quote Kanye, “We’re broke! Broke! Broke! Phi broke!”

This article originally appeared in issue 21 of RELEVANT.

First off, yes, a college education has become a necessity to compete in the workplace. And it’s expensive—very expensive. So pricey, in fact, that college tuition is one of the fastest-rising consumer costs in the country, having increased 46 percent in the five years between 2000 and 2004. What about grants and aid? Disappearing. Back in the 1970s Pell grants covered up to 84 percent of the costs of a four-year college. Now that number is around 35 percent. So we take out student loans and open credit cards to get that degree, racking up an average four-year bill of $20,000+ in loans and $2,500+ in credit card debt. All this, and you begin your professional life with a starting salary of around $30,000.

But how much of this debt load is our fault? There is no doubt that student loans for a college education are like mortgages—a lot of debt, but an investment in your future and your net worth. But what about credit card debt? Is that college’s fault as well, or, as the numbers show, are we spending ourselves into a dangerous downward spiral of consumption?

We live in a consumer culture, and we have an entitled way of life. We reject delayed gratification and the patience our forebears had to reap the well-earned rewards of hard work over time—to wait patiently until we can really afford that new car or pair of jeans or indulgences as simple as that $5 Jamba Juice you put on your credit card. We want and need things now—Why wait? Don’t we deserve it?

And what about our friends? Our parents are used to hearing about “keeping up with the Joneses.” Who are you struggling to keep up with? It’s a human tendency to want to hang with a flock similar to yourself, but where does the bonding end and the competition to have the best stuff begin? Just because your best friend has a great new cell phone, do you have to have one too? How much are you influenced by those around you—especially those who have it easier with money?

How you’re able to deal with the pressures to conform and resist joining the race to the checkout line for the latest thing has more bearing on your financial future than you think.

Generations X, Y and younger have been dropped into a petri dish of credit-cards-for-all and a gimme-gimme competitive society. We know how to spend—and we have more ways than ever to do it—but we don’t know how to say no. Young adults are the fastest-rising group showing up in bankruptcy courts, and they are living back at home with parents longer than ever in a state of extended semi-adolescence—“boomerang kids,” as they’re now called. Businesses are catching on. SRI Consulting released a report in April 2006 stating that, at 8 million and counting, “boomerang households present an emerging market opportunity.” Someone has to help parents who are trying to save for retirement while their grown children come back home to nest. Wasn’t there a movie about this recently? Failure to Launch?

“But debt’s normal!” you say. Yup, it’s normal all right, but like drinking, eating or partying, it can easily get out of hand. And sometimes you pay a very big price for the privilege.

So, the struggle is how to be more responsible when it comes to pulling out your wallet.

It’s not easy to filter out all the pop culture and media noise that begs us to spend, spend, spend. Taking control of your spending and rejecting the need to buy the hottest gadget, follow the latest fashion or go to the newest bar or restaurant is going against the grain. Just like saying no to one too many drinks or to that proposition from an attractive acquaintance, it takes values, commitment and an understanding of cause and effect. But what do you do when it’s too late and debt is already knocking down your door?

Subdue the debt demon and avoid future credit woes with a combination of the right mindset, action and information. Here are two tips to build a useful just-say-no attitude and to show you how to take control of your financial future:

Define needs vs. Wants

When you don’t have a lot of money to spread around, the dividing line between what you need and what you want is probably not on par with deciding between a vacation in Maui and a new set of golf clubs. It’s more likely to sound like choosing between buying concert tickets or paying your Internet service bill.

One of the best habits you can develop is asking yourself—before you buy something—“Do I really need this, or do I want it?” It can be agonizing sometimes, but it’s more likely that you need cash for transportation and basic cell phone service as opposed to 20 new downloads or another night out on the town.

A good starting point to grasp the need-versus-want dividing line is jotting down your monthly fixed expenses and flexible expenses. Fixed expenses are set-amount bills or items that you pay for each month, such as rent, Internet service, gas and electricity, or car payments. Flexible expenses are things like magazines, dinners out, new clothes, lattes and movies. For the most part, fixed expenses are things you need—you pretty much can’t function well without them. Your flexible expenses are just that—flexible—and most of the time, they’re wants. You may not be able to cut down on your fixed expenses, but you certainly can cut down on some flexible expenses.

Understanding the difference between what you need and what you want gets you in the habit of controlling your money; then you can begin to look at why you yearn for more new things—boredom, low self-esteem or the drive to one-up your roommate.

Identify Your Goals

Surely you’ve heard stories of people who get a death-sentence diagnosis from a doctor and then, with little time left to live, go on a wild spending spree. Well, God willing, that won’t happen to you.

One thing we hopefully all have is plenty of time on this earth. And within that time, a lot can happen with the money we earn. If you’re deciding how to spend your money, doesn’t it make sense to think it out and plan? What do you want to do with your money? What are your goals?

Do you want to save up for an auto upgrade? Or maybe an engagement ring? How about a down payment for a home so you can stop paying rent? Or an annual vacation? What about something as seemingly small as painting your bathroom? Having and keeping financial goals in mind, both big and small, can serve as the Hoover Dam on your spending. The next time you go shopping with your friends and you really, really want those new jeans, remember: jeans now, or toes in the white sandy beach later?

Take some time to write up some financial goals for yourself and give each of these goals two things: a price tag and a deadline. The price tag will let you know how much you need to save up to achieve your goal, and the deadline will tell you how much time you have.

Just remember, these two goals should be at the top of your list: getting rid of credit card debt and saving up three to six months’ worth of living expenses in case you lose your job or are too injured or sick to work for a while. Trust me, you’ll thank yourself.

Your future does not have to be in the red. Anything and everything you do with your money now can help get you where you want to go. Debt doesn’t have to be your demon. You have the power and ability to change your attitude about and approach to money, and you’ll soon change your life.

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