“Recovery” is a complicated word when it comes to the economy. A recent study conducted by the Pew Research Center compared the spending habits and debt ratios of 20-to-30-something consumers between 2007 and 2010. The study concluded that adults 35 and younger reduced their debt by an average of 29 percent, while adults 35 and over reduced theirs by 8 percent. At first glance, these pre and mid-recession numbers seem like positive news; yet the underlying data paints a different picture. Read on to learn what Pew discovered, and how you can apply these lessons to your own life.
Lesson #1: Student debt can be dangerous.
Pursuing an education is a double-edged sword in this country. Faced with a competitive job market, young adults have no choice but to take out student loans in order to cope with exorbitant university costs. The study found that 34 percent of people under 35 carried student debt in 2007. In 2010, that number had increased to 40 percent. This development spells trouble for the economy and individual students. On July 1, 2013, the interest rates on federal student loans will double to 6.8 percent from 3.4 percent, making it tougher for younger Americans to begin their lives with financial security. Lower wages and higher debt is a recipe for disaster. With little options, new grads are relying on credit cards to get by, forcing them deeper into debt.
The lesson here: Education should not be pursued at any cost. Search for scholarship opportunities and grants, or find another way to seek a better future. Shouldering too much debt is not the way to do it.
Lesson #2: The nature of necessity has changed.
Home and car ownership have shifted from the “necessity” to the “luxury” category. In 2007, 40 percent of adults younger than 35 had mortgage debt. That number fell to 34 percent in 2011. 44 percent of the same group had car loans in 2007. In 2010, that number fell to 32 percent.
While many of these consumers are simply being more cautious about spending, economists argue that the shift is the result of increased student debt and unemployment. Put simply, Americans cannot afford to buy homes and cars. Affordability coupled with stricter lending practices have left would-be buyers waiting for the bus.
The lesson here: While unfortunate, consumers are making the right decisions when it comes to buying big-ticket items, opting to avoid purchases they cannot afford. Consider doing the same to avoid future blunders.
Lesson # 3: Spendthrift days are over.
Americans are working harder to control their finances. Adults 35 and under managed to reduce their dependency on credit cards in three short years. While 48 percent of them carried a balance in 2007 only 39 percent carried balances in 2010. This is good for the average consumer who is protecting their credit score by reducing their utilization ratio, or the amount they owe vs. their total credit limit. When times are tough, carrying a high credit card balance won’t make things easier.
The lesson here: Caution is the key ingredient of a stable life. The recession has left a scar on many credit reports, forcing consumers to reassess their debts and live a more conservative lifestyle. Take this lesson seriously and avoid the need for credit repair by keeping your debts low.
Lesson #4: Americans are less prepared for the future.
The Pew Research Center found less-than-positive news concerning long-term savings. Despite overall debt reduction, consumers still aren’t prepared when it comes to emergencies and retirement. Adults over 35 saw a 22 percent drop in their assets between 2007 and 2010, while adults under 35 saw a 14 percent decrease. The inability to afford homes, cars, financial investments and liquid savings has drastically reduced household stability and future planning.
The lesson here: Financial strength isn’t limited to debt reduction. Building a secure life requires savings in the form of liquid and long-term investments. Focus on credit repair by planning for the future in addition to paying down debt in the present. The result will help you avoid credit repair problems down the line.
Lesson #5: Appearances can be deceiving.
Although the Pew Research Center’s finding appear in a positive light, appearances can be deceiving. While it’s true that Americans are spending less, they are also facing new issues that prevent them from growing their financial portfolios and establishing themselves as borrowers.
The lesson here: Don’t rely on appearances to judge your credit health. Sure, you may own a house and enjoy disposable income, but does that mean your life is secure? Uncover the truth by reviewing your budget, balancing your responsibilities and making a plan for the years ahead. Understanding the facts will help you find the right path.