Homes, Credit Cards and Debt: A Call for Gen Y Financial Literacy and Responsibility

Gen Yers are broke.   And it’s our fault – sort of.

Even before the recession, we sucked at financial management, says blogger Jim Liebelt in his piece, Generation Y: Huge Debt, No Savings, saying, “…Those in Generation Y — the latest products of a get-it-now, pay-for-it-later mind-set that has permeated the nation’s economy — faced a range of financial pitfalls.”

Recent research by think tank Demos found that Generation Y’s financial security is threatened by a number of things, including:

• stagnant wages
• job insecurity
• the decline in employer-sponsored health insurance and retirement benefits
• rapid increase in basic expenses
• soaring debt
• minimal savings

On top of those financial woes, the latest Bankwest/Mortgage and Finance Association (MFAA) home finance index shows that only one in three Gen Yers still dreams of owning a home – not because they don’t want one, but because it’s fiscally impossible for them to do so in today’s climate.

We’re not buying homes, no matter how much Uncle Sam tempts us with the old version of the picket fence/dog in the yard/pool in the back American Dream.

“We have never seen such pessimism amongst prospective first time buyers throughout the past five Indexes,” said Vittoria Shortt, Chief Executive, Bankwest Retail in a statement to MFAA.

“70 per cent of respondents were very concerned about the level of debt they will be committed to if they buy a property.”

“Good Debt” for Generation Y

It sure didn’t take long for the generation raised in unprecedented times of plenty, the 1980s and 90s in the United States, to wind up in a financial jam. It all comes back to the idea of debt – what we know about it, how much we have and what we’re going to do about it.

First, Gen Y grew up thinking that some debt was “good debt.” Not ok debt, not you-can-get-by debt, but real good-for-you-debt. Home mortgages were one, and higher education debt was another. Low interest rates on the latter and long-term investment for the former, made debt a good thing.

Now that we’ve seen the drastic effects of our parents, families and friends having gotten into homes they couldn’t afford, and how crippling those McMansions are, we don’t need it.

Consider that most Gen Yers are in their mid to late 20s. Not too many of us (though yes there are some) have children of our own, we want to travel and have a flexible work-life balance. Having a house doesn’t necessarily come into play for us – yet(?). We haven’t been out of college long enough to have amassed much savings. Not owning homes isn’t keeping us from being active parts of society or the work world. Not to mention many of us couldn’t get mortgages if we tried. Our jobs are still not stable. We’re hunkering down in jobs we don’t love because we have nowhere to go.

The U.S. is unique in my experience, in perpetuating the thought that to raise a happy family and live an actualized, “American Dream” life, you must have a home. In other countries where land and space is a premium, having a home is reserved for the wealthiest and many families live happily in apartments, condos and rented residences.

For me personally, the first five years out of college my savings went to new cars for myself and my husband (not to be flashy, to have vehicles that functioned) my wedding and travel, in that order.

I considered buying a home this year. The $8,000 federal tax credit is sure tempting, and I have plenty of friends who took Uncle Sam up on it. It may have been the right time for them – but there are still looming questions of housing market stability, longevity of the tax credit program (I think it will be extended again) and whether it’s really true that “renting is throwing your money away,” as so many Gen Yers were brought up to think.

Gen Y Kids of Excess

Homes are part of the financial illiteracy of Gen Y, for many reasons. Thinking that mortgages are always “good debt” regardless of factors surrounding taking on that debt, is one.

Secondly, homes are part of us living beyond our means, and here’s why. Our parents benefitted from skyrocking home values, and they leveraged their equity so that we, their Gen Y kids, could live a higher-priced lifestyle. Sometimes that meant nicer things like clothes, boats and toys – or higher-dollar experiences like pricey lessons, sports leagues, private schools or vacations abroad. We benefited from that excess – and we were kids. We didn’t know any better, and now our financial mindset is skewed because of it.

We got credit cards on college campuses because we got caught up in the atmosphere of a busy, sunny day on the union, with lots of kids throwing footballs, getting free college sport team T-shirts and spinning for prizes – all courtesy of VISA/Mastercard/Discover – whoever happened to be doing the college promo that day. Easy credit wasn’t a theory, it was reality for so many college students already taking on debt to be in school.

The need to live a high-roller lifestyle is also perpetuated by the number of celebrities sporting luxury clothing and toys from status bags (Louis Vuitton, Coach) and shoes (Manolos, Louboutins) to Hummers and bling. I’m appalled every time I see a girl under 20 with a luxury product. She didn’t buy it but she knew what it was worth, I assure you.

I won’t give Gen Yers a pass on this, either. I’m a Midwesterner, and we as a whole are nothing but pragmatic about finances. If you’re living beyond your means, you know it – you just maybe haven’t had to face the consequences yet.

USA Today cites that “Nearly 70% of Gen Y members are not building up a cash cushion, and 43% are amassing too much credit card debt, says a November MetLife poll.”

“On average, Gen Yers each have more than three credit cards, and 20% carry a balance of more than $10,000, according to Fidelity Investments,” the article Generation Y’s steep financial hurdles: Huge debt, no savings says.

Gen Yers know that credit card debt is bad – but we also haven’t educated ourselves on what to do about it. What is a good interest rate on credit cards, savings accounts or investments?  We have no idea. When once upon a time schools taught us how to balance check books – we just got debit cards and went off and used them.

But it’s up to us to be financially literate. I’m calling for it now. Gen Y (and maybe even our parents) need better community-sourced education about money – whether from upstanding banks or member-friendly credit unions or from organizations serving populations like women, disadvantaged residents or college kids – it’s a dire necessity.

I heard one college student this weekend tell about her family’s financial situation. “My parents both lost their jobs. I wasn’t sure if I was going to get to stay in college this year,” she said. The youngest of the Millenial generation, many who are dependent on their parents and in college, are already being impacted by the times in a very serious way.

Even within Gen Y, our national financial hardships have created a new mentality about money. It’s a new perspective on home owning and debt, and hopefully an understanding that fiscal responsibility isn’t just something to pay lip service to. You can’t ignore your debt and hope it goes away.

So my friends, stand up. Look at the bottom line of your credit card bill. Calculate your monthly expenses and put the excess earnings into savings. Don’t finance your dreams with a gold card. Be smarter than your parents when you buy a home. Be something Generation Y can be proud to be known for — the first financially literate generation.

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Addendum: The topic of debt must be on many people’s minds these days. Smart dudes Seth Godin and Dave Ramsey both just posted on the topic. See Consumer Debt is Not Your Friend by Godin and The Truth About Debt by Ramsey.