AMY LINDGREN: Gen Y advice about debt
Millennials, listen up. I want to tell you something about money that you may not be hearing elsewhere. Namely, that it’s good to have some, to save some, and to give some, but not to owe some.
I know you’ve been hearing your whole life about “good debt” and “bad debt”, with the idea that some things are important enough to go into debt for. I agree. If we all waited until we had the cash to buy a house, we’d be hosting housewarming parties in our 80s.
Likewise, education is considered good debt, with the assumption that this purchase will help you earn more money and pay for itself eventually. I’m a holdout for a different view, where the value of education is in being educated, not trained – that’s a different value, for a different kind of coursework – but I still agree that debt for this category of spending makes sense.
Aside from some nitpicking about the details, my core issue is simple: No debt is ever “good”. This is more than semantics. I believe that we have somehow rerouted the neurons of at least two generations by making certain types of debt seem like a virtue. What may have started as a well-meaning reassurance to debt-averse parents trying to help their kids enter college has become a national mantra that doesn’t seem to serve the average person so much as it benefits major institutions, such as colleges and banks.
Regardless of the reason for your debt, here are the basic truths:
• The more money you owe, the less freedom you have.
• The longer you owe the money, the more it costs in lost opportunities and hard cash.
To reframe your thinking, it’s useful to remember that most of our ideas about debt were constructed for a different reality than the one you’re likely to experience. Talk with your grandparents and you may find that they and their parents anticipated shorter, less healthy lifespans. One-earner families were more common and people held onto jobs as long as they could. Degrees were the ticket to better employment while starting a business was a major endeavor, rather than a side gig to test out as interests dictated. In short, they were raised to be worker bees, whose financial mantra might have been “slow and steady wins the race.”
Using a broad brush to paint a generation is a risky business. But if you go with my theory, here’s where it leads. The generations that formed our current concepts around debt came from a reality where you invested slowly and regularly in savings, and accepted two or three major debts as nearly lifelong companions – namely the mortgage, college tuition for themselves or their children, and possibly business loans.
In this view, credit cards and revolving debt are nearly always “bad”, and it’s acceptable to pay a mortgage for 30 or 40 years – because that’s “good debt.” I’m going to suggest we ditch the good-debt/bad-debt paradigm and go to a single term: Useful debt. As in, if the debt serves a useful purpose that aligns with your long-term goals and values, go for it. But even then, pay it back quickly, rather than accepting it as your new normal.
Here’s an example: Destination wedding for your best friends, at a total cost of $3800. Is that “useful” debt? Perhaps not the way a car loan is. But for someone who values experiences and friendships, maybe the answer is yes. If so, I advise paying it in six months, either by saving forward for it, or paying it after you return.
Yes, that’s a lot of money on a monthly basis. If you can’t cover it with a second job or by selling something, I would opt to divert retirement savings for those six months to help pay it. Why? Because the reality is, 6 months of missed IRA interest returning perhaps 5% balances well against two or three years of credit card debt at 15% interest.
And yes, I know that the magic of retirement savings includes compounding interest, tax deductions, etc. But I still vote for acquiring the habit of regularly erasing debt. I extend that idea to mortgages and student loans, by the way. My advice is to accept a 30-year term so you have the lowest monthly obligation in case hard times hit. Then take a second job and pay it off at least twice as fast.
Bottom line? Millennials have a different reality than previous generations and they need financial guidelines that fit them. With their long lifelines and patchwork career paths mostly ahead of them, people in their 20s and early 30s must learn to leverage and manage debt, just as previous generations focused on managing savings and investments.
Amy Lindgren owns Prototype Career Service, a career consulting firm in St. Paul. She can be reached at firstname.lastname@example.org or at 626 Armstrong Avenue, St. Paul, MN 55102.