A combination of increasing student debt, tighter lending standards and high levels of unemployment and underemployment has hampered young adult’s buying power.
A recent article from CNN Money audaciously claims that low debt levels among young adults is bad for the economy. The author, Nin-Hai Tseng, suggests that “young people are less willing to take on credit card debt and auto loans” as if they are doing that by choice. Tseng claims that debt is necessary for a healthy economy. This may be true in the consumer driven American economy however I am not convinced that young adults are choosing to have less debt.
If you really dig into the data you will find that lower debt and spending levels among young adults is a result of the economy instead of an increase in frugality and/or savings. As the article mentions (and the report from Pew states) student loan debt has increased while all other forms of debt have decreased for people under the age of 35. The author is perplexed by this:
What’s maybe most perplexing is that student debt has increased while all other consumer loans fell.
This isn’t perplexing at all; the decline in other loans is directly tied to the increase in student debt and the great recession. Acquiring student loans is still relatively painless while it is much more difficult to secure other types of loans or lines of credit, especially for young adults.
Consider this: in 2007 it was extremely easy to get loans and credit while student loan debt levels were much lower than they are today. In fact the average student debt level for people under the age of 30 in the first quarter of 2007 was $15,848; however by Q1 of 2012 the average student debt level had grown to $20,835 among adults under 30 . Average student debt levels are accelerating with reports for recent graduates showing a staggering rise to $26,000.
A Special Trick to Increase Cash Flow
Mr. Money Mustache says:
There really is no suffering here, in this highly frugal life. Just a lot of rewarding work and effort and accomplishment.
I am one of the lucky American’s that gets free money from my employer just for saving money for retirement! Whoever invented this system is a genius. Additionally the Company I work for gives me the option of paying taxes on those retirement savings now or in the future. I have the choice between a traditional 401(k) and a Roth 401(k).
For those of you who are unaware a Roth 401(k) allows me to save money into a 401(k) account after I pay my taxes. Traditionally people are able to save into a 401(k) before paying taxes. Under the traditional plan you are forced to pay taxes when you withdraw that money in retirement. For me that is over 30 years away. Under the Roth plan any qualified distributions in retirement are made tax free because you paid taxes on that money before you put it into the account.
I decided to go with the Roth option when I started my 401(k) because I am currently in the 25% federal tax bracket. While it is impossible to guess what the tax rates will be in 30 years I am absolutely convinced that taxes will never be as low as they are right now. Tax rates are generally at the lowest level they have been in the past few decades. However, the United States has a massive debt that sooner or later is going to have to be paid back and in the coming years millions of baby boomers will be retiring with little to no savings and ever rising health care costs. The burden will fall to the people still working to pick up this tab, that includes me. I am happy to pay the 25% now and avoid the coming higher rates. 
The Number One Song in America: Thrift Shop
They be like, “Oh, that Gucci – that’s hella tight.”
I’m like, “Yo – that’s fifty dollars for a T-shirt.”
Limited edition, let’s do some simple addition
Fifty dollars for a T-shirt – that’s just some ignorant bitch, shit
I call that getting swindled and pimped
I call that getting tricked by a business
By now you have heard the hip hop-rap sensation Macklemore’s hit song, Thrift Shop. This is a catchy song that rejects the endless consumption mindset that dominates the American psyche and instead promotes wearing your grandpa’s hand-me-downs. I could not have chosen a more opportune time to live a more frugal life.
While not the best song from the Seattle artist I love the message of Thrift Shop. Macklemore tells us that we are being tricked, swindled, and pimped by businesses that want nothing more and nothing less than to separate us from our hard earned money. His message is simple, straightforward, yet powerful: We don’t have to buy (literally) into the consumer mindset and become a clone of our peers.
Status: On Track
- Extra Payment: $6,500
- Total Pay Down: $6,741.80
- Total Pay Down Since Start: $6,741.80
- Total Outstanding Balance: $64,430.95
- Percent Complete: 9.5%
*These numbers are for my Wells Fargo debt only.
January was the beginning of my journey to debt freedom. I got off to a great start and am well on my way towards my goal. This may be my biggest month in this entire process, from here on out it is going to be a steady marathon.
Outstanding Debt & Goals
This chart plots my high interest rate Wells Fargo loan. The black bars give you my outstanding balance goal each month and the red line is the actual monthly ending balance I achieve.
Click to enlarge.
I was about $10 shy of my outstanding balance goal mostly because I made my payment one day late so more money went towards interest than anticipated. Overall though, I am on track. The affect of my extra payments on my total outstanding debt is really starting to look good.
How I’m Tracking Every Dime
Mr. Money Mustache says:
Enjoying life while spending less money is a skill that develops just like a muscle, as opposed to a permanent state of deprivation.
One of the ways I am going to reach my goal is to build up massive frugality muscles. To begin I need to cut way down on the frivolous spending that has been dominating my budget for the past 18 months. The first step to cutting frivolous spending is to identify where that extra money is going. Identify it, recognize it, and neutralize it.
Mint.com does a good job of this already but I am looking for a little more detail. I want to be able to closely see how I am spending my money as it relates to my gross income and my take home pay. So, for the past week I have been building a badass budget tool that will track everything.
I have always been amazed at the magical powers that can be performed in Microsoft’s Excel program and I am a little bit of a spreadsheet nerd. With just a little effort I created a workbook that will track all of my income and expenses and all of my assets and liabilities. The best part is that this data is fully customizable. I can easily create summary sheets with my financial information and pull all of the data into colorful charts and graphs that give me a visual representation of where I stand.
These charts and graphs will help to re-enforce my debt pay down plan. Seeing my debts go down and my net worth go up will push me to do more and keep the process going. All I have to do is to input the data once a month (and keep making the extra payments).