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Financial Planning

Breaking the debt cycle: Tips for millennials

12 November 2018

Money & Life team

Money & Life contributors draw on their diverse range of experience to present you with insights and guidance that will help you manage your financial wellbeing, achieve your lifestyle goals and plan for your financial future.

Research from James Walker-Powell CFP®, Principal at More4Life Financial Services shows millenials are having their lifestyle choices limited by debt. Find out more about how personal borrowing can hold you back and get guidance on how to keep your finances on track in your younger years.

When borrowing becomes a problem

As father to a daughter who left school recently, James takes both a professional and personal interest in the fortunes and finances of young people today. “According to in their State of the Credit Card Market Report, the most indebted generation and gender are millennial females, with 64% having credit card debts of $3,811 each on average,” says James. “This is one of several alarming figures I came across when researching millennial debt for my Masters Degree in Financial Planning. It quickly became clear to me that many millenials are at risk of starting their lives as adults buried under a mountain of debt with no hope of repayment.”

With this in mind, the news that Australian millenials are far less likely to be homeowners than their peers around the world should come as no surprise. According to an HSBC bank study, only 28% of Australians aged 18-36 own their home. This puts them behind every one of the nine countries involved in the study, except for the United Arab Emirates.

As James points out in his research, having difficulty buying a home is just one of the potential problems that can result from a large personal debt burden among young people.

“The danger of debt that the millennial can ill afford has been proven to hold them back financially in years to come,” says James. “As well as the outcomes for housing and wealth, there are also significant health and social consequences. People with high debt levels are three times more likely to suffer mental illness, for example.”

Why does it happen?

James has identified several key factors at play in this crisis of economic and personal distress fuelled by debt. “The combination of young people being bombarded with materialistic media messages conveying that happiness, beauty, popularity can be purchased, together with easily accessible yet high interest debt, is leading to a potential economic and social catastrophe,” he says.

His research also backs up his own observations about the optimistic and impatient nature of many young people. “When you want to achieve a certain lifestyle and don’t have the means to pay for it, you just take it for granted that you can borrow now and earn plenty down the track to pay it off,” says James. On his More4Life Financial Services Youtube channel you’ll find an interview with Bryan, who talks about wanting to live in a nice home and go out more and gets into debt to make it happen. His story is a good example of how personal borrowing can become a way to fuel lifestyle inflation. When someone gets used to spending day-to-day at this level, it’s hard to see how they’ll ever budget to repay their debts.

The real cost of borrowing

One of the things James has explored at length is just how easy it is for young people like Bryan to borrow. “For a young person to apply for a personal loan or credit card, a history of regular income needs to be established,” says James “But very little attention is paid to what financial and life consequences will occur with use of the credit or debt. The approval process has been taken away from the Branch Manager to a central processing centre. So in many cases, lenders are automatically making debt freely available to those who are least able to pay it back.”

What this can lead to is many young people taking on debts with no real grasp of what impact repayments will have on their personal and financial goals. “They’re ending up burdened by debt that’s not in their interests, both in terms of the value they’re getting and the impact on their financial position,” says James. “67% of millennials reported they did not receive adequate information about loans before taking them out, while 47% could have borrowed in less risky and more affordable ways.”

“As a financial planner, I’m required to offer advice that’s in my clients’ interests,” says James. “I would like to see lenders being held to a similar standard. They’d be obliged to communicate with their customers about the consequences debt will have on future lifestyle decisions before a loan can be approved.”

What to do about it

So if lenders won’t stand in their way, how can young people get a more realistic picture of what their financial future holds if they borrow? “Making an informed decision has to come from their own research, because the lenders take a narrow, short-term view of loan affordability,” says James. “A realistic analysis of the pros and cons of taking out the loan should start with just how long it will take to earn enough to fund borrowing, compared with saving up instead.”

To help young people get a handle on some real figures, James has created an Equivalent Work Hours to Achieve Goal calculator. “It’s simpler than it sounds,” he says. “You punch in the amount you need for a personal goal – a holiday perhaps – and the amount of interest and the term if you were to take out a loan to pay for it. The calculator will show the extra hours it will take to cover the interest. You’ll get to see the ‘sweat equity’ you’re losing when you borrow.”

“As we heard from Bryan, it may be you’re working all those extra hours to buy another round or rent a nicer home,” says James. “This begs the question – is putting your hand in your pocket really making you any happier? Bryan says he was least happy when he was trying to live a life beyond his means and then working hard to get in the clear from his debts. It’s only now that he’s unencumbered that he can feel a real sense of happiness and freedom. It’s a strong case against this widely held belief we must spend more to be happy.”

Want to find out more about keeping your finances in the black early on? Get tips from James Trethewie, Financial Planner AFP® as seen on The Bachelorette on being young without going broke.