Millennials and Generation Z today are facing challenges that the previous generations did not have to face. In this post, I am going to discuss what those challenges are and how to a develop a game plan to tackle it.
The scene shown above is one we are quite familiar with. I am always struck with how mainstream media depict the American economy by showing images of people swiping their credit cards, walking out of shopping malls holding bags in their hands and salesclerks frantically stocking shelves. Most people have become so accustomed to these images that they see nothing wrong with them.
Most Americans (and Canadians) today are drowning in record levels of personal debt. It has been discussed over and over again. Much blame has been dumped on the millennials. They are stereotyped as the “I want it Now” generation for whom instant gratification is a must. This overly simplistic explanation is, however, far from the truth.
Politicians and Debt – A marriage of convenience
How did it end up like this? As the economist Peter Schiff describes in his book, Crash Proof, politicians in their perennial quest for re-election, always want to avoid an economic downturn on their watch. Remember the famous phrase – it’s the economy, stupid! Politicians’ cure for economic downturns is the easy availability of money and credit. The government does not have any earnings, so the only way possible to pay for the spending is to raise taxes and/or borrow money. Raising taxes is always unpopular, especially during election years. So, the easiest and most politically safe option is to go into debt to keep the game of musical chairs rolling along. From a politician’s point of view, debt is fantastic – benefits can be realized immediately and the bill can be paid later.
So, how do the unintended consequences of these actions create challenges for you in your daily life? The two most significant challenges are runaway student debts and housing affordability.
Challenge# 1 – Runaway student debts
Well let’s look at college costs, for example. From 2002-2022, the tuition and fees at private, out-of-state and in-state universities in the US has risen by 144%, 171% and 211% respectively! In the same time period, inflation (as measured by CPI) has risen by nearly 54%.
Clearly the costs of getting a college degree are outpacing inflation. Make no mistake – easily obtained student loans have flooded the system. Colleges are free to jack up the tuition and fees every year (as well as executive salary and bonus packages) as much as they want. They know they can get away with it. Most of their customers, the students, have no choice but to simply apply for a student loan and the government is more than willing to raise the maximum loan amount every year in mathematical precision. The result – massive expansion in student debt. According to Experian, average student loan debt in the US has reached $38,792 in 2020, up from $21,542 in 2010 – a 80% increase in 10 years. Look around yourself – it is now rare to find someone who is able to graduate without student debt.
To make matters worse, a survey conducted by CNBC revealed that more than 50% of older millennials aged 33 to 40 do not even believe that student loans were worth it.
Challenge# 2 – Housing Affordability
There is no doubt that real estate prices have swelled beyond comprehension. This is well-known fact and needs no elaboration. However, what is interesting is that elevated real estate prices have not discouraged home buying. In the US, a recent survey conducted by Consumer Affairs showed that nearly 69% of homeowners feel ‘house poor’ – having little or no savings left after paying the mortgage and associated monthly expenses. In Canada, the situation is just as worse – RBC’s affordability index came in at the worst level in 31 years.
It is quite clear that speculative money is at play. More people are buying homes to make quick profits, rather than to put down roots. The traditional measures of median income and prices have faded into oblivion – the greater fool theory rules the market.
If you are a young person, is the risk worth it? Can you reasonably expect house prices to keep going up? The baby boomers and Gen X did not have to face this challenge. Housing was not the casino back then as it is today.
House Prices – Wanting what you can’t have
Given all the social importance attached to the value of being a home owner, it is no doubt that home ownership is viewed as a top priority. However, wanting to own a home and actually owning a home are two completely separate challenges. In a landmark report published in 2019 by Generation Squeeze, housing prices in Canada would need to drop by nearly 50% for a typical person aged 25-34 to afford an 80% mortgage on average-priced homes. Affordability is defined as an individual needing spending a maximum of 30% of his or her pre-tax earnings on housing. Talk about wanting what you can’t have!
Housing is far too complex of a subject to discuss all of it in a single post – I will talk more about that later.
What does it all mean?
In my introductory blog post, I mentioned that the cookie-cutter life manual is unlikely to work for most millennials and Gen Z. Hopefully, my rants about student debt and housing are convincing enough. I could talk about other challenges such as disappearing pensions, auto loans and credit cards as well – but that just reinforces the point I have tried to make. As stated by Generation Squeeze, there’s no doubt that the deck is heavily stacked against young people. This is in sharp contrast to the baby boomers and Generation X, many of whom graduated without a single penny in student debt and could easily buy a home and pay it off in 10-15 years (and at the same time the one parent could stay at home and take care of the kids).
There is light at the end of the tunnel
As I stated in the title of the post, the water is not fine. But that does not mean you should stay out of it. All that means is that you have to change the way you swim. How? By taking four steps:
1. Develop the rich mindset.
2. Eliminate/substantially reduce your debt.
3. Understand taxes.
4. Overcome the fear of investing.
In my next few posts, I am going talk specifically about each one of these steps. What I can tell you from my experience is that not only you can survive but actually thrive in these times! You can achieve the financial independence that you desire to pursue your passion fearlessly when you are longer constrained by the need to pay the bills. Or, you can simply enjoy a stress-free life without worrying about whether you will get laid off or not. Not only that, you do not need to wait until 60 or 65 years of age! Isn’t that worth it?