Young and In Debt: What Should You Do?

Members of the so-called Generation Y are in over their heads. A new online survey by The PNC Financial Services Group shows that people in their 20s are carrying record debt, averaging $45,000 across the age range of 20-29.

Student loans make up the biggest slice of the 20-somethings’ debt pie. With the interest rate for government-subsidized Stafford Loans set to double this summer, going from 3.4 to 6.8 percent, the educational debt loads carried by young people will get even harder to bear. Credit cards, auto loans and mortgages make up the remaining debt.

High Debt Anxiety

Sixty percent of respondents reported feeling stressed by their debt. Add a tepidly recovering job market and the stress is multiplied as recent graduates and other young adults try to cope. Older 20-somethings are even deeper in debt than their younger counterparts. A typical 29-year-old, for example, carries nearly $80,000 in debt, compared to $12,000 for a typical 20-year-old.

It’s more complicated than just dealing with high debt. How can young adults start the important task of saving for retirement while also tackling their debt? The PNC survey reveals that many 20-somethings are neglecting their retirement planning, with only half of those age 28-29 contributing to retirement funds. The good news is that young people have time on their side, as well as access to an unprecedented supply of information, technology and tools for dealing with debt, saving for retirement and managing budgets.

Don’t Steal From Your Future

If you’re young and in debt, don’t panic; there are steps you can take to help gain control of the situation. Don’t use paying off debt as a reason, or an excuse, to sacrifice your retirement planning. The earlier you start investing in your retirement fund, the more time it has to grow. It is possible to simultaneously handle debt and retirement planning.

Analyze your spending habits. If you’re young, chances are your income falls on the lower end of the national average. But even if you’re nowhere close to the top rung of the corporate ladder, you can still control the income you have. Use accounting software or an app on your smart phone to track your income, spending, bills and debts. The better you allocate your income, the more you’ll have to put toward debt reduction.

Take advantage of your employer’s 401k plan. Invest as many pre-tax dollars as your company will match. For example, your company might match dollar-for-dollar all contributions up to 3 percent of your income. In this case, it would be wise to invest 3 percent of your income.

If your employer doesn’t offer a retirement plan, contribute as much as you can to an Individual Retirement Account. The sooner you start saving, the more money you will have for retirement.

Get educated about your finances. Even if you’re out of college, you can still school yourself on financial issues by researching online, going to the library or accessing other free resources. Talk to a financial planner or other professional with expertise in debt reduction and financial planning.

Negotiate reduced interest rates. Ask your bank or credit card company for a lower rate. Even a small reduction can make a big difference in monthly payments and the total repayment amount.

Carefully evaluate your debt. Look at the interest rates and pay off the highest interest accounts first. Your credit card balances probably have a higher rate than your student loan, so attack that Visa account until it submits. Once the higher rate accounts are paid off, use the freed-up income to pay down your student loan, car loan or mortgage.

Set aside an emergency fund. Even though a lot of your money might be tied up paying down debt, it’s important to avoid future financial crises. Methodically stash money into a savings account with the goal of having 6 to 8 months’ worth of income set aside. The last thing you want, after paying off your credit card debt, is to find yourself unemployed and living off credit until you land another job.

Whether you are a Baby Boomer or part of Generation Y, the principle is the same: to get organized, acquire knowledge, gain control of your budget, pay down your debts and fund your retirement account. The sooner you get started, the better.

Consult with a trusted financial or tax advisor to ensure that your debt reduction and retirement plans are right for you and your financial situation.

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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