Would you rather buy a house or see the world? How Millennials handle debt.
They are carefree, live in the moment and overspend on experiences instead of saving up for the future: Is this assessment of the so-called Millennials accurate? Data from debt collectors and other show: It's complicated.
“When I was trying to buy my first home, I wasn’t buying smashed avocado for USD 19 and four coffees at USD 4 each”. This remark by Australian real estate entrepreneur Tim Gurner reflects the picture that many have of the millennial generation: twenty-to thirtysomethings with a laissez-faire attitude toward life, work, possessions and expenses. But is this reflected in their actual lending and spending habits?
Indeed, according to the UK Citizens’ Advice Bureau, youth debt is a growing problem in the United Kingdom. Between 2010 and 2012, young people aged 15-24 had the highest average unsecured debt-to-income ratio of any age group, and saw a 200% growth in their debts between 2006 and 2012. This increase was over ten times higher than for the wider population.
When it comes to paying back the money they owe, however, opinions vary: 38% of the members of the German Association of Debt Collection Agencies (BDIU) say youngsters are worse payers then their elders. 62% say the young clients are either equally or more reliable with their payments, so debt collection is not much of an issue there.
What do Millennials like to spend their money on?
So what are the things the ‘avocado toast generation’ is spending money and taking on personal loans for? If the clichés are true, we should see a difference compared to the general population. Which, according to the 2017 EOS Debt Survey, in countries like Germany, Russia and the USA is twice as willing take on debt. i.e. through a hire purchase agreement, to pay for a car or motorcycle as for their education.
On the causes of youth debt, 81% of BDIU members blame too high expenditure on consumer goods. They say youngsters get in trouble with online shops, telecom providers and fitness studios, whereas adults between 25 and 59 have problems repaying banks or building societies, energy companies and telecom providers.
Already we’re seeing a pattern emerge: the younger generation takes on more debts, but not so much for buying a house and more for spending on a short-term need. This preference for experiences is borne out in other research.
Experiences more important than possessions.
According to Ipsos research for Eventbrite, an online ticketing company, three quarters of millennial interviewees prefer experiences - traveling the world, seeing a show, being with friends - over possessions. German market-research institute GfK backs this up: from 2007 to 2017, ‘enjoying life’ moved from tenth to third place in millennial priorities. However, a 2015 survey amongst millennials in Germany yielded surprising results. While career came sixth, travel was down in fifth and financial independence was right up in second place.
Understandably, millennials want to be debt-free just like everyone else. We know from the Bank of America report that 35% are stressed about not saving enough. Perhaps they are just not able to achieve financial security so easily: Rapidly increasing housing prices in many places mean getting on the housing ladder is much harder for young people. For others, the high cost of basic items such as smartphones that are difficult to get by without in modern society cause problems.
Sometimes it's just about buying food and paying rent.
Even in Germany, where student fees are virtually non-existent, many youngsters take on loans to cover living costs. German media reports tell the stories of students who take on debt without seeking appropriate advice, or are limited in their ability to weigh up the pros and cons of financing options. Saddled with repayment costs later on, bad decisions in young years can have long-term consequences for these debtors and delay important life decisions: It's hard to buy property or start a family when you still have to recover from debt.
That’s why financial literacy on concepts such as credit and interest rates, hire purchases with their deposits and monthly payments, debt recovery and budgets is so important. The Global Financial Literacy Excellence Center (GFLEC) says the same applies to millennials, concluding: ‘Millennials lack the basic skills needed to make savvy financial decisions.’ Their creditors agree: 52% of BDIU members blame youth debt on financial illiteracy, with the wrong person borrowing at the wrong time at the wrong conditions.
Live for the day or think of tomorrow?
Clearly there is work to be done here. An optimist might say that, for the well educated millenials with many years ahead of them, it’s never too late to start learning about and structuring one’s finances, tracking and managing their expenses. So that they can have it both: avocado toast and a home to enjoy it in.