Article Written for The Australian – How to Avoid the Debt Trap
GENERATIONS X and Y are finding themselves in an increasingly worsening debt spiral because of cost of living pressures, social pressures and a lack of financial discipline.
The credit card, a necessary evil of modern living, is the main contributor to the debt problem faced by our younger generation today. Ten years ago, there were less than 10 million credit card accounts open in Australia but today the number has ballooned to more than 15 million, fast outgrowing population growth.
This week I met a young couple in their 30s looking to get a better control of their finances. They were white-collar professionals on good incomes but had accumulated credit card debt of $20,000. I asked the obvious question: “How did you manage to get into this mess?” On face value it does not make sense: a young, educated couple on good incomes with a large amount of credit card debt, which costs more than $300 a month in interest.
Their response may resonate with a large proportion of younger people who face similar debt problems. Although they lived in a small one-bedroom unit 10km from Sydney’s CBD, their rent, bills and other cost of living expenses heavily affected their monthly cashflow. Once they started to get behind on credit card bills, the problem quickly escalated.
When one of them required dental work resulting in an out-of-pocket cost of $4000 and then soon after, when they purchased furniture for a unit they were moving into, they ended up with a credit card balance they couldn’t shake. They describe it as a constant arm wrestle, trying to balance a reasonable lifestyle against mounting credit card debt.
Generations X and Y do not wish to sacrifice their lifestyle for the sake of financial conservatism like generations before. Keeping up with the Joneses is important, even if it means going deeper into debt. With social media applications such as Facebook interwoven into daily life, subtle social pressures to live a lifestyle similar to peers has never been greater. Regular updates on Facebook with pictures of friends enjoying the ski slopes of Whistler, relaxing on a beach in Bali or checking in for a flight at Los Angeles helps to fuel these pressures. Constant reminders of these lifestyle choices are like little advertisements in the minds of gen X and Yers and also help to rationalise the decision to fund lifestyle expenses with debt. Well, if my friends are doing these things, why can’t I?
Although global economic conditions are not ideal, it is a far cry from the Great Depression and a forced level of financial discipline is not ingrained into today’s generation. Add to this the relative ease of obtaining a credit card, the voraciousness of advertising campaigns promoting lifestyle goods and the social media and financial pressures, there is the perfect storm resulting in a generation of people with unmanageable levels of debt. It is not uncommon to meet people with $10,000 to $30,000 in credit card debt.
There is a way to move forward. But you first need to take control of spending and then start to make small steps in the right direction. The best advice I give to younger clients to avoid falling into the debt trap is to focus on their own situation and forget about what others have and do. Just because a friend drives a late-model car or lives in a nice house doesn’t mean they are not indebted up to their eyeballs. Live within your means and think more consciously about how your money is spent. Next time you are in the line at the cash registers, think about what is more important, the piece of clothing you don’t really need but are still about to buy or saving that $50 towards a deposit on your dream house.
James Gerrard is a certified financial planner with PSK Financial Services Sydney.
- BY:JAMES GERRARD
- From:The Australian
- February 21, 2012 12:00AM