This week, The Grid — a free, weekly magazine in Toronto — ran a cover story about the debt habits of twenty and thirty somethings. Written by a former colleague of mine, Carely Fortune, the piece suggests that easy access to credit and financial illiteracy has lead my generation to spend all of our hard earned cash, as well as a great deal of borrowed money, on all of life’s inessentials — trips to Cuba, new iPads, expensive jeans. We’d rather have instant gratification — lattes and cupcakes — than long term financial stability, retirement at 60 (let along ever) and living debt free. In short, we’re screwed.
The story opens at Woodlot, with Carley’s mom looking around the artfully under-decorated Little Italy restaurant, wondering how such a young clientele can afford the near $30 entrees. I know the scene all too well.
I remember eating at a similarly pricey establishment, Origin, after it opened in 2010. I was invited there by a friend of mine who was, at the time, unemployed yet living alone in a downtown apartment, eating out constantly and buying new clothes as often as most people pick up groceries. I was working but only just keeping my head above water. When the menu came, I did a quick, concerned calculation: how much money is in my bank account minus how much do I owe in rent minus how much money will this meal cost. The meal put me in the red, so as we munched our haute samosas and nitrogen-dipped popcorn, I couldn’t help thinking: how can my friend afford this? I have to assume it was debt. The question is why are we so eager to mortgage ourselves?
One argument that Carley puts forward — and it’s an argument I’ve heard before — is that because my generation hasn’t lived through hardships like the depression, world wars or the sky high interest rates of the ’70s and ’80s, we don’t have the same fears about debt and loss that older generations do. I can appreciate this argument to a point but ultimately it only works if you’ve been living in a coma for the past few years or you’re a member of the one per cent.
I was 9 or 10 years old when I learned the word recession. My mother had just lost her job —a high paying sales position — and was raising my brother and I on her own in a detached house that she could, suddenly, no longer afford. She cried. “We’re in the middle of a recession” — she explained — “we’re just going to have to tighten our belts.” It was the early ’90s. Our situation eventually improved but throughout the immediate years after the layoff there were times when I thought: “if my belt gets any tighter I won’t be able to breath.” We simply had to do without things like new clothes and vacations and meals out.
More recently, I was in my last year of University when Lehman Brother’s collapsed. Previously, I had never had a hard time finding a job as a student. I would send out ten resumes, have two interviews, and usually get one offer. Post graduation, things were different — I couldn’t get hired, I had no money and had to borrow from my boyfriend to pay my rent and buy food. Several times, I worried that I would never be able to pay him back. What if I couldn’t find work? Again, things changed, but has no one else my age had similar experiences? Mine are hardly extreme, and I’m guessing relatively luxurious to a young person living in Ireland, Greece or Spain right now.
Another argument that Fortune puts forward is much scarier, and seems more accurate. She suggests that because of the huge loans that young people accumulate for school, we become really comfortable with the idea of debt at too early an early age. The cost of post-secondary education has risen by 247 per cent in the last 30 years, and the amount of debt students have taken on has more than doubled. When you already owe $27,000 by the time you’re 22, what’s another hundred more for a pair of J Brand jeans? I suppose, too, that if you are cocooned with piles of money (borrowed or otherwise), a fluctuation in the economy might not be a big deal — provided the fluctuation is short term, you are willfully ignorant of the news and no one is pounding down your door for debt repayment.
In addition to student loans, I’m guessing that many young people are also used to debt because they grew up watching their parents over-leveraging themselves — taking out second mortgages to renovate or buy a vacation home, or taking out lines of credit to finance trips abroad or new living room suites. If your parents have hundreds of thousands of dollars in debt, what’s $20,000? It’s manageable in comparison (especially if you haven’t seen your parents lose their jobs and struggle)
I was extremely lucky. Through a combination of family support and student jobs, I didn’t have to take on any student debt. I didn’t even have my first credit card until I was 24, and when I got one my mother lectured me endlessly about the dangers of overspending. The first time I took on actual debt was when I had to borrow money to pay my rent after I finished school (the total of which was $2,000, all of which has now been repaid). I can imagine, though, that if I had been used to debt earlier — especially sums in the tens of thousands of dollars — it would really be no big deal to me to take on more. Likewise, if I had the memory of a fruit fly and couldn’t recall how being broke feels, I might also be comfortable with taking on more debt.
Even still, that doesn’t necessarily mean my financial outlook is healthy or that I’m on a significantly better track than any of my peers. Just over a year ago, when I set up my first RRSP, a financial planner calculated that, with gradual, moderate increases in my income, and gradual, moderate increase in my rate of saving (I stash away a tiny bit every month), plus an 8 per cent return on my investment, I would have about six or seven hundred thousand dollars by the time I retired in 40 years. The financial planner referred to this as “not an insignificant amount.” Yay? Not if, as Fortune’s article suggests, I will need between $2.5 and $4 million in the bank by the time I retire (especially as I can’t depend on any other sort of pension still being there when I get old).
Like my cohorts, I also like going to places like Origin and Woodlot, especially now that I’m making more than I was when I first graduated. I get really excited when a new, trendy place opens and someone wants to try it out with me. I’m not paying my tabs with debt, so in a sense I can afford it. But rationally, I know it’s a waste of money and that I should really stop so I can save for retirement, or for a house one day. The problem is that haute samosas just taste so much better than regular ones, and retirement seems like a really, really distant proposition.
Honestly, the whole you need multi six figures to retire is insane. Use a TMV Calculator put a 3% indexed inflation on your needs…. Ours is about 1600 Now money with no mortgage or debt repayment and you’ll be shocked at how little you need. What is really insane is the boomers retiring with any kind of debt and now they are struggling like crazy! This is a concept I cannot comprehend… A boomer had 40 years to come up with enough to not only pay off their mortgages but to save.
I encourage you to go with the less expensive samosas for now, and make a financial game plan. Figure out what you want to accomplish in life and how much money you need to make that happen. I have a lot of things I want to do in life and it is going to cost a pretty penny. Therefore, I have cut back to make this happen. Enjoyed your post.
Thank you Matt, this was a really great post.