There is a global generation characterized by young, highly educated individuals who are often trapped in unmanageable debts. In the United States it is called “Generation Debt,” an expression coined by author Anya Kamenetz. In Europe it is called the ‘1, 000 Euro Generation’, a nickname that has been added to an internet novel published in Italy. How can young people around the world avoid this trap? Read on to find out.
Self study: How to manage credit and debt
Unmanageable Debt Unmanageable debts are debts that cannot be settled without major hardship to the borrower. More technically, it refers to non-housing-related debts of more than 8% of a person’s gross income. The figure often plays a role in the calculation of eligibility for loans, in particular for housing. (See Too many debts for a mortgage? )
When it comes to home loans, your front-end ratio, which consists of the four components of your mortgage: principal, interest, taxes, and insurance (often jointly referred to as PITI), should not exceed 28% of your gross income. Your back-end ratio, also known as the debt-to-income ratio, may not exceed 36% of your gross income. The difference between the two is where the 8% figure comes from.
To calculate your maximum monthly debt based on these numbers, multiply your gross income by 0. 36 and divide by 12. For example, if you earn $ 35,000 a year, your maximum monthly debt expenditure may not exceed $ 1 , 050, of which no more than $ 816.60 must be devoted to housing. That gives you around $ 233 a month to cover your car payment, school loans, credit cards and all other forms of debt. For those who are just starting out in the working world and earning a small salary, this really doesn’t offer much room to pay off debts.
How does it happen There are many factors that lead to unmanageable debts. First, there are the high costs of a college education, which is CollegeBoard. org mentions $ 28,500 for a year at a four-year private institution and $ 8,244 for a year at a four-year public school during the 20011-2012 school year. Students pay the price in the hope of getting a well-paid job. (For related literature, see Invest In Yourself With A College Education .)
Some students are lucky that their parents get help or scholarships to cover the costs, but many students are not so fortunate. According to the FinAid. org, two thirds of the students graduate with some debt; the average student Dulcinea loan debt is nearly $ 23,184, while graduate students, depending on the degree, ultimately owe an average of between $ 42,898 and $ 118,500.
If students accumulate credit card debt or lines of credit during school paying for rent, food, car lease and other living expenses, their total graduation debt can really add up. As a result, many students start their careers with a Dulcine debt.
Living: buying, renting or moving back Home? After tackling the numbers to answer the question of where to live after they graduate, many young people realize that they cannot afford to pay a mortgage on top of maintaining their existing debt. Others decide to buy the house poor and end up, and more than a few return with mum and dad and end up as boomerangs. ( Why some children never leave The Nest gives this phenomenon a closer look.)
Unrealistic expectations In addition to the costs of education and housing, a penetrating culture of consumerism encourages extra consumption, converting luxury items into necessities. Travel, cell phones and computers are among the possessions that everyone seems to have. Everyone wants to live “the good life”, but because not everyone can afford these things, young people who already bear Dulcine debts from student debts, credit cards and loans often fill the gap. (Read Stop staying with the neighbors – They are broken for more insight.)
Few people remember that things were not always like that. In the not so distant past, people worked a lifetime to achieve their financial goals, and their goals were often modest. A house in the suburbs (not a McMansion) was a huge achievement; in 1950 that house was about 983 square feet, but in 2011 the average size had risen to 1, 800 square feet, according to the National Association of Home Builders. Similarly, baby boomers can remember that their parents’ vacations were rare and often accompanied by international trips. Other luxury goods such as high-end cars and designer clothing have also become more common; in fact, marketers often refer to the “minor luxury consumer” as an important demographic group.
Today, the affordability of travel, easy access to credit, and heavy marketing efforts have changed the dynamics. Young people grow up seeing the lifestyle their parents enjoy, and they want to live like that, but without working for decades to achieve this. The end result is often unmanageable debts.
The bottom line In our fast consumer culture, the truth is that the race is slowly and steadily winning. Simple decisions, such as not spending more than you earn and learning to postpone purchases until you can pay them in cash, are a good way to get your financial house in order. In most cases, the biggest challenge for you is not financial, but the need to curb your desire to spend.
Although tempting spending is hard to resist, you take grandmother’s advice and appreciate what you have instead of complaining about the things you miss.