NEW YORK (MainStreet)—Generation Y - those born between 1981 and 1995 - carry less debt than the national average. But it isn’t necessarily a good thing. Most of Gen Y’s members hold “bad debts” – like credit card debt and other loan products that don’t build assets. No one can conclusively answer why. Maybe it’s the job market. Maybe impulse buying and a digitalized consumer-driven society are to blame. Whatever it is, experts are wary those debt woes aren’t going to get better anytime soon.
While more than 60% of Gen X’s debt is good debt, such as student loans and mortgages, Gen Y is heading in a different path - 48.4% of Gen Y debt comes from non-asset building loans – bad debt –according to a recent study of over 20,000 users by the financial reward site, Saveup.com.
Results found Generation Yers had an average total debt load of $28,930, including $4,113 in credit cards, $7,358 in lines of credit and $12,410 in car loans on average.
Some experts blame Gen Y’s losing debt battle on a slow-to-recover job market. Paul Golden, CEO of the nonprofit organization the National Endowment for Financial Education, says, “More education typically translates to more pay. However, the job market has been hard on Gen Y and has forced some to delay repaying their student loans, take a lower paying job, or remain in school longer.”
A recent analysis of government and university data for the Associated Press backs up Golden’s concerns. In 2011, 53.6% of workers under the age of 25 who held bachelor’s degrees were jobless or unemployed.
Changing patterns in education could also be to blame.
“Generation Y has accumulated more bad debt than good debt, because they spend more time in the higher education system,” says Greg Brooks, founder of Textbook Assault. Brooks believes Gen Y’s tendency to pursue education beyond a bachelor’s degree delays the beginning of careers and “creates a severe imbalance, because the individual isn’t making money, but also spending a ton on education.” To finance their cost of living, “they rely on credit cards and loans as a way to pay the bills,” according to Brooks.
What’s just as alarming—possibly even more so—we can’t learn from our own mistakes. “Studies are showing younger generations are more likely to continue to accumulate debt—even into their 70s--some could even die in debt,” says Roger Cowen, a financial planner and founder of Cowen Tax Advisory Group. It’s like some of Gen Yers are addicted to debt, like being in the red is some kind of high score in a debt video game. And maybe our almost cybernetic fusion with electronics is helping us pave the way to a debt-filled retirement.
“I think the digitalization of merchant services had a big impact on producing debt for the younger generations. The ability to pay for something with one or two simple clicks on a smart phone means people are now more likely making rash purchasing decisions,” says Soren T. Christensen, CFP and CEO of Advanced Wealth Advisors, LLC. Christensen thinks Gen Y’s ability to buy instantly, anytime, without having to shop in-store or purchase with cash encourages a kind of depersonalized reckless spending. “The more we distance ourselves from having to fork over actual money, and from the physical in-store purchasing process, the easier it is to accumulate bad debt such as credit card debt,” says Christensen.
But what about those Gen Yers with the so-called good debt? Jonathan Bunt, a 29-year-old insurance agent in New Milford, Conn., recently bought a home, putting him in the minority of Generation Y with good debt - but he doesn’t see it that way. To him, there is no such thing as “good debt” or “bad debt.” It’s a strain on his life and a cause for concern for his future whether it comes in the form of credit cards or a mortgage.
Bunt became discouraged after he had his home reappraised a year after moving in and found out it’s worth less than his total mortgage loan. His dream of homeownership started to darken.
“The model doesn't work anymore, not when people don't have the money,” says Bunt.
So what’s a generation to do? Saveup.com CEO Priya Haji believes it breaks down to two important, basic fundamentals: saving more and spending less. Haji recommends that everyone, not just Gen Y, try to “closely monitor the level of debt they are taking on, particularly consumption-related debt.” In other words, taking on debt should be a considered action—such as financing a return to school to finish a degree rather than a non asset-building purchase like a new car. Ideally, debt should be used “wisely for education, which can drive future earnings or for purchasing a long term asset like a home at a non-inflated price.”
Breaking online, impulse-buying habits is also a good way to avoid unnecessary debt.
Haji says that “while consumption early in life is most tempting,” it could also breed bad habits that will hurt the long-game approach to being financially stable with long-term savings.
For those with debt already, Cowen believes Gen Yers need to take a more direct approach. “Focus on paying off those credit cards, one at a time, starting with the one with the highest interest rate. Invest in your future- participate in a 401(k) or Roth IRA.”