A young couple recently put me on the spot asking for financial advice as they began their journey in life together. Did I have any words of wisdom? I stumbled, bumbled, and stammered unable to give any semblance of a cohesive answer. All I could think of was the mountain of college debt they likely had, the unaffordable housing that stares them in the face, the changes their generation of millennials has suddenly made in owning a car, and the expensiveness of starting a family. I choked out something and I’m pretty certain my response sent yet another set of millennials scrambling for their parents basement.
This bothered me and I deliberated long and hard about what advice I should have given them. If caught in a similar situation, what universal advice would be right at the tip of my tongue for millennials? I was in need of a personal finance elevator speech, if you will.
First, I gravitated to the one dominant financial item finding itself in a majority of households and having its tentacles wrapped around so many issues (mirroring the concerns I had when questioned). Debt. This had to be the focal point.
A light bulb went off based on how I’ve personally viewed debt. I knew immediately that my advice would be to make certain to view ALL debt as two completely separate payments, log it as such on personal statements or checking account ledgers, as well as in all budgetary matters. You need to re-program how your payments are thought about. You do not have a mortgage – you have a payment for your house (principal), and you have a payment to the financing institution (interest). Simplistic you say? Search the internet and try to find one personal finance site listing housing and mortgage interest separately instead of lumping them together on a template. Try to never combine the two again.
Why so adamant about breaking apart these payments? First, you will immediately visualize the amounts better and you will refine your focus on how you can reduce the amount of money you are spending on interest. You’ll immediately start asking more questions like: How can I own this asset more quickly? What is my true return on investment here? That amount being paid as interest will stare at you just asking for a haircut and you’ll likely go on the offensive by attempting to refinance the debt, or you’ll get aggressive diverting more dollars toward principal.
This doesn’t refute that there are beneficial reasons to take on debt nor does it ignore that some situations are more difficult to help than others – it just helps to squarely quantify it and put its usefulness on center-stage. Instead of reassuring yourself that your mortgage debt is fine because you’re able to deduct it, you’ll be much more likely to dig into exactly what its return actually is.
This process will quickly expose interest rate heavy payments where the scales are tilted in favor of the lender. The risk of interest-only mortgages will (and probably should) make you sweat more, whereas that 0% financing deal you scored on a new vehicle looks all the more amplified. Yes, this seems simple, but it should be the driver before daily lattes and cable TV cutting are addressed.
College debt is a bit trickier. It still involves an asset (a college education) and the interest needed to finance the education. The difficult issue here is that college has been recently vaulted to must-have status among many, so questioning its financing has yet to be aggressively challenged. Given debt levels that students are being saddled with though, this breaking down of a purchase is likely something parents and students are subconsciously starting to do, calling into question the value of the college education (principal) given the burdens of the debt and interest payments involved.
Going forward, debt will continue to be a large focus for a majority of budgets. Instead of concentrating on peripheral issues and getting caught up in ways to cut expenses in order to merely afford debt servicing, try separating all your financed payments into the two components. It may not be easy, and for some it will not be fun. But it should help to assess many factors which will lead to a meaner and leaner personal balance sheet. This is my advice for millennials.
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Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
