Zoe Paul has made drastic changes to her former lifestyle. As a Web designer in San Francisco during the heady dot-com era, she started her mornings at Starbucks, bought her coworkers drinks during happy hour, and ate out nearly every night.
Now 30, Paul works without benefits for a small ad agency in the Bay Area and worries daily about being laid off. To help pay off $10,000 in credit card debt, she routinely empties coins into a jar by her bed. When furnishing her living room, a trip to a furniture store was not an option; instead, she bought a tweed sofa bed from a thrift shop for $67. She packs lunch every day. Cable is gone, so is Internet access.
The most painful trim: Abandoning her daily Starbucks run. “That’s a thing of the past. Now it’s a treat,” she said.
Serves her right, you think? Many twenty- and thirtysomethings raised on MTV and InStyle magazine have tried to mimic the glamorous lives of the rich and famous through the use of credit cards. But as the 21st century has ushered in skyrocketing housing prices, stagnant income levels and five- or six-figure student loans to pay off — a seismic shift has occurred: A growing number of young adults are reassessing their lifestyles and mimicking the frugal habits of their Depression-era grandparents.
They clip coupons, organize grocery-shopping trips to Sam's Club instead of darting to Whole Foods and now consider a $4 cappuccino as an infrequent luxury.
“Life just seems more expensive these days,” said Paul. “When I was growing up, I didn't know a lot about handling money or being frugal. Now I'm learning.''
High housing costs
With the median home price rising by 26 percent in the past five years — while young adults' income has gone up less than 10 percent — people in their twenties are playing an endless game of catch-up. Buying a home isn't even in the cards since prices in many urban areas where young people go to start their careers have more than doubled.
“It used to be that spending more than 30 percent of your income on housing costs was a major cost burden, but many young people are spending 40, even 50 percent,” said Bruce Nissen, director of research at Florida International University's Center for Labor Research and Studies. “Housing price and rents both have tripled, way faster than income.”
A Boomer in his fifties, Nissen is relieved that he bought his South Florida home in 1999 and has since seen the value triple, but feels bad for his two sons, ages 25 and 27, who are priced out of the overheated market. “Some still believe the American dream is owning a home, and they’ll use all their savings on it. Then there are others who believe it’s forever out of reach and just giving up on it. That’s why you have 40 percent of young people moving back in with their parents after college.”
A college degree is mandatory for most entry-level professional jobs, but most of today’s job growth is in low-paying, low-skill industries like retail and food preparation. That translates into a very bad time for twentysomethings to be entering the labor force, said Nissen.
“The job market is expanding but 80 percent of these new jobs don’t require a college degree. So your choices are working at either Burger King or Wal-Mart where, obviously, the pay is not good," Nissen said.
And with deep cuts to education and tax breaks aimed mainly older, wealthier Americans, government no longer has young adults’ back. Many economic forecasters doubt that those under age 35 will be the first generation not to equal or surpass their parents’ standard of living. That is a disturbing reality for a group that should be in its prime, looking toward marriage and their first home. Instead, they struggle to pay hefty student loans and credit card debt.
Eric Beeler knows this all too well. A 25-year-old office clerk for a local government agency in Sacramento, Beeler has $20,000 in student loans for a psychology degree he may never use. With an annual salary of roughly $27,000, he and his wife Kelly struggle each month to pay rent, car insurance, utilities, student loan and credit card fees. They have no savings and they just had a baby, which now increases their household spending even more.
''We use coupons, we defer payment on bills, but I'm grateful to have a job, because my benefits there helped pay for the maternity care,'' he said. “I’m also grateful for my son, but we’re definitely going to feel the pinch even more.”
Credit card and college-loan crunch
Between 1983 and 2001, credit card debt for 25-to-34 year-olds nearly tripled, according to the Federal Reserve, from $3,989 to $12,000.
So have college loans. Soaring tuition prices combined with decreasing federal student aid means that college students are graduating with close to $20,000 in debt. Grad students can count on approximately $45,000 in combined loans, while doctors and lawyers will be lucky to escape with less than $100,000.
The result, said Tamara Draut, author of Strapped: Why America’s 20- and 30-Somethings Can’t Get Ahead and director of the economic opportunity program at the New York City-based think tank Demos, is a young generation whose income is swallowed up by paying off debt.
“It’s much more difficult for this generation to work or educate their way into the middle class,” she said. “They’ll probably never match their parents’ standard of living because of big loans, low income growth and a cost of housing that’s much more expensive than for a generation ago.”
Draut, age 34, knows what she speaks of since she and her husband had to resort to selling their CD collection for food four years ago when they were out of cash, a week away from payday, and more than $75,000 in the hole due to credit-card and student loan debt.
Carmen Wong-Ulrich, author of Generation Debt, a how-to financial guide for young adults, and a former editor at Money magazine, said twentysomethings’ financial knowledge and saving habits are both equally nil.
“Many personal finance issues are completely foreign to them, even more if they’re not interested in it. For young people, debt is the norm and the mindset is ‘I’ll deal with it later.’ Many of them don’t start panicking until they have completely maxed out.”
Robert D. Manning, author of Credit Card Nation and professor of finance at Rochester Institute of Technology, now teaches personal finance classes because he is appalled at his students’ lack of financial literacy skills. “Young adults have nearly no knowledge of investing so they’ll have a negative savings rate and no assets outside their home, yet they’ll be retiring later than ever before," he noted.
“Economic insecurity historically leads people to save more and spend less, but this generation is different. The credit card industry has been extremely successful in marketing the message ‘You earn it so you deserve it,’ so people use their credit card as a reward to justify their purchases. On the surface, they’ve got a nice house, car and furnishings to make them look good, but the bad news is they’re borrowing from their future.”
But Draut argued that the young get a bad rap for consumer consumption. “Consumer pressures are definitely greater but since three-quarters of this age group do not have bachelor degrees, the idea of living this lavish lifestyle with iPods and $5 coffees does not really hold true.”
She said many of the people she interviewed for Strapped are working diligently to lower debt and increase savings. “Some people created spreadsheets telling them when they get out of debt down to the month or day. They know they need to be saving for retirement, and they’re trying to tuck away a couple of hundred here and there for emergencies so they don’t need to use the credit card.”
Even though many elders look at Generation Xers' and Yers' financial attitudes with disdain , Draut said she is surprised by who feels most for this generation. “When I do radio interviews for the book, most of the sympathetic callers are from people over 65 who lived through the Depression. When they look at what young people are up against today, they feel a lot of empathy.”
Despite all the economic strikes against them, is there anything young adults can do to improve their financial standing? Yes, but it requires a whole lot of vigilance, patience and sacrifice. Financial experts recommend these steps:
- Create a budget. Get a grip on what you’re spending money on and learn how to live within your needs. “Satisfy your needs like rent and groceries before your wants, like that winter trip to the Caribbean,” said Manning, who has a budget estimator tool on his Web site.
To start, Wong-Ulrich suggests taking a month’s worth of bills and receipts, dividing them into segments like groceries and entertainment, and adding them up to see where your money is going and determine what amounts can be changed.
- Set financial goals. Manning suggests creating five to ten clear goals (paying off your $3,000 credit card debt, saving up for a home down payment of $25,000) and deciding what you need to do to accomplish them. “Most importantly, if you fall behind in one goal, you need to decide what you must sacrifice in order to catch up.”
- Pay and save electronically. Automated bill payment makes it easier to stay on good terms with creditors and keep your credit report clean, while automated savings lets you amass your money for the long term.
- Know your credit. Be vigilant about your credit card report, which Ulrich calls a ‘financial report card’ since so many entities have access to it and can determine if you get a home, car, even a job. “In some industries, employers may not hire you if they don’t like the way you manage your credit,” Ulrich said.
But if you’re a good customer, you can make credit work better for you. “Card companies want your business bad, so if you’re a good customer who pays on time and thinks your interest rate is too high, call them and most likely they’ll lower it for you,” Ulrich said.
- Invest in 401(k)s, IRAs and mutual funds. Pensions are a thing of the past, so knowing how to invest your retirement is key. Manning even tells his students that the best use for their credit card is taking a loan off it in order to invest the annual maximum in IRAs. “They can pay off the card debt but they can never get back the accumulated interest they could earn on their investment.”
If your company has a 401(k), take advantage because that means free money for you, said Ulrich. “If you put in six percent and your company matches that, you’re essentially getting a six percent raise. That really makes a difference if you’re in your twenties with forty-plus years to invest.”
- Put your future over your children’s present. Many young families are lavishing more money on their kids when they should be thinking long-term first, said Manning. “They justify the money they spend on their youngsters, such as buying an expensive house in a good school district as worth it for their future, but in reality they would be better served if there was enough money to send them to college.”
- Rock the vote. Draut and Nissan said the most important thing young adults can do for their financial future is to get engaged in public policy and the political process on state and national levels. That’s an uphill climb since less than half the people under age 35 follow the issues or vote, but Draut says it’s the only way this generation can reclaim their future.
“We’re the first Americans to start our lives with five-figure debt and start our careers in an Darwinian new economy. Congress has decimated college financial aid and let the minimum wage fall to historic lows. If we continue to tune out and check out of the political process, our future will be all but stolen from us.”