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| The Basics | Young, carefree . . . and deep in debt
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This member of 'Generation Broke' is 26 and has a good salary and few obligations. But she's amassed $12,000 in credit card debt in just four years.
By MP Dunleavey
Editor's note: Columnist MP Dunleavey and seven other women have come together online to strip away the myths surrounding money, speak frankly about their finances and liberate themselves from debt. Follow the quest for financial fabulousness of these "Women in Red" every other Monday in Dunleavey's column on MSN Money.
Young adults in America are in big financial trouble, according to Generation Broke," a recent report from Demos, a research and policy group in New York.
Not only has the debt carried by young adults aged 18 to 34 increased by 55% between 1992 and 2001, so have bankruptcy rates. These young adults have the second-highest bankruptcy rate in the country.
On average, theyre paying about a quarter of their income toward debt.
Lyndsey, 26, the newest member of the Women in Red, is a credit card-carrying member of Generation Broke, as she would be the first to admit. Thats why shes here.
When debt starts young
Lyndsey graduated from college in 2000 with no debt whatsoever. But a funny thing happened on the way to adulthood.
Despite an enviable salary of $43,000 a year and paying only $600 a month in rent for the Arlington, Va., house she shares with three roommates, shes now $12,000 in the hole and not quite sure how she got there. She doesnt have a car, a mortgage, a child or even a pet to cut into her cash flow.
Im bad with money -- Im horrible, she says. Ill go shopping and drop $200 on a pair of jeans. It makes me want to kick myself in the butt for not being more responsible.
Carrying debt myself for most of my adult life, Ive kicked my own butt many times. But when I graduated from college, you couldnt get a credit card until you got a job. These days, young people like Lyndsey are already an average of $3,200 in debt by the time they put on their caps and gowns.
Plus, young adults are carrying almost twice as much student-loan debt when they graduate as graduates did a decade ago, says Tamara Draut, co-author of Generation Broke. "And theyre trying to make their way in a job market that is filled with uncertainty and insecurity.
Financial fantasies at work
Lyndsey would be the first to admit that wanting a certain lifestyle, and then paying for it with plastic, is the root of her problem. I like to pretend Im rolling in money, but Im not, she says.
Draut sees another factor at work: media-induced financial fantasies.
More 'Women in Red' on MSN Money
You have this conflict that young people face. . . . Theyre supposed to have a certain material status, but theres a huge gap between reality and pop-culture depictions of young peoples lives. They grew up thinking that a waitress and a sous chef (on the TV show 'Friends') could afford a huge two-bedroom in SoHo, which is ridiculous.
This generation faces a lot of pressure to be materially successful, yet their ability to fulfill those expectations is lower.
Lyndsey's willingness to face facts is the essential first step in becoming one of the Women in Red. She got started by spending a week tracking her spending. It was pretty eye-opening, she says of her spending diary. It sheds new light on things.
Lyndsey spent $442 for the week -- and $250 of it was spent on meals and hanging out with my girlfriends. When she did some more math on the situation, she realized that a whopping $1,000 a month was going to eating out and hanging out.
I was like, WHAT AM I WASTING MY MONEY ON? she exclaimed.
Gearing up to get out of debt
If you want to get out of debt, you have to get specific. Whining along the lines of I wanna get out of deeeeeebt doesnt really get you anywhere. I should know. I spent years whining and not understanding why that didnt reduce my balances.
Lyndsey needs a plan:- Quit using the credit cards. I like the idea of putting them on ice, she said when I told her about the old Ziploc-baggie-in-the-freezer trick.
- Set a goal for when she wants to be debt-free, and use an online debt calculator to determine how much she needs to pay each month to get there.
- Set up automatic transfers to pay off the higher-balance card first.
- Figure out where to cut back, so that the savings can go toward debt. That process starts with setting up a budget and living with it for a month or two to see what works and what doesn't.
The reality of the situation
Right now, Lyndsey pays about $400 a month toward her two credit cards. They both have a 9% interest rate. If she sticks to this payment schedule and doesnt rack up any more charges, shell be free of debt in about three years, and she will have paid about $1,645 in interest for a total of $13,645.
But if she sets a target for herself, as in: I want to be out of debt by June 2006 (18 months from now), shell have to pay $715 a month. But she'll pay only $873 in interest, and less if she switches to a lower- or zero-interest card.
Doing the grunt work
Paying down debt is dirty work. Its ditch-digging. Or, since youve already dug the ditch, maybe its more like ditch-filling. Either way its messy, sweaty and uncomfortable.
And Lyndsey is just getting a whiff of that reality.
Could she cut back on her social life and put an additional $300 a month toward debt? I think she can. But I also know how hard it is to make that tradeoff:A) Here is your life, and you kinda like it the way it is.
B) Here is your debt-free life. You have to give up A to get to B. And thats hard for people of all ages.
Don't do everything at once
Even though shes in boot camp, I told Lyndsey to start slowly. If you try to change all your habits at once, youll crap out. Since I did the spending diary, Ive definitely tried to cut back on eating out, she says.
She and her girlfriends have found some places where they can split dinner entrees and get half-price wine. She and a co-worker are going to try working out during lunch and bringing sandwiches to the office. Thats a start.
But real savings begin when you admit that getting out of debt is a priority, and you learn to live that way. One simple illustration is this great chart on how small savings add up.
But lets give Lyndsey a hand: Shes only a month into the Women in Red and shes already moving forward. Are you?
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