Unlike the older generation of baby boomers who were very conservative and borrowed only when there was an extreme need to do so; the millennials are risk takers and they would borrow to finance anything and everything. Millennials have been branded as high spenders and lovers of luxury beyond their reach; while expecting success in life to come overnight in what is being termed as micro-wave mentality. Businesses are now curving into this new opportunity by introducing credit cards with the best rewards that keep the millennials hooked to spending with the illusion of getting free cash or reward points in return.
This high spending habit among the millennials is not all lousy though; within a short period of time after completing their college education, most of them are finding themselves ensnared in a liquidity trap. A good number of the millennials are however waking up to the reality of how dangerous the path they are treading can be and they are considering taking corrective measures. According to the Money Habit Survey conducted by USA Today in collaboration with the Bank of America, two thirds of the surveyed millennials said that they had prioritized getting out debt in their personal financial planning. Among other insights, the study also showed that 60% of millennials with a college degree were happy with their financial status while only 40% of those without a college degree shared the same sentiments.
Blaming the high debt levels among the millennials on their personal traits alone is not revealing enough on the root cause of the growing debt trends. A report written by the George Washington University Global Financial Literacy Excellence Center (GLFEC) and PricewaterhouseCoopers on, “Millennials and Financial Literacy: The Struggle with Personal Finance” reveals that lack of financial literacy is the leading cause of high debts among the millennials. Most millennials are highly educated and are experts in their own professions, but they lack knowledge of the rudiments of financial planning and personal budgeting skills.
The “Millennials and Financial Literacy: The Struggle with Personal Finance.” Report further reveals that the saving culture has not been embraced among the millennials. With minimal savings and high and growing expenditure every month, the millennials find themselves moving from a situation of surplus income when they join employment after college to a situation of huge deficits by the time they are in their late 30’s.
A research by iQuantifi shows that the average debt load for a millennial between the age of 21 and 25 years is about $13,116. By the time the individual gets to the late twenties and approaches early thirties, their debt load will have more than tripled to about $46,622. In their late thirties, it is estimated an average millennial will have grown their debt burden about five times to about $69,552. These statistics paint a gloomy financial picture for a generation that is out to explore the world and have fun as they take huge risks on new adventures every day. How sustainable this kind of lifestyle can be then becomes questionable; and the potential busting of the feel-good bubble that is fueled by the borrowed money becomes more evident each day.
The debt burden starts being stocked from the college days when you get a student loan. Initially, this is viewed as “free money” since you do not have to work to earn it; the government deposits the cash into your account and you have it for your own use as you will. For most millennials, this is the beginning of a lavish life funded by the student loan and their credit cards; and the start of piling debts on their shoulders. After graduating from college, the students are hit by the hard reality of repaying the student loan amid other growing expenses such as paying their own monthly bills and rent. The challenge is compounded when they get their first job and take a mortgage to buy a house or get a loan to buy a car and keep up with the rising professional status.
With the student loan, mortgage, car loan and credit card financial obligations facing the millennials, the path of getting out of debt becomes thin as they progress in their careers. The more they rise up the ranks in their careers, the higher their financial obligations become and in the end they are trapped in the rat race.
Though burdensome, debt is not a bad thing if well managed. But to get out of debt and learn how to manage your personal finances prudently as a millennial, financial literacy is mandatory.