By Emma Johnson, MSN Money
What makes Sophia Wallace a typical member of her generation?
The 28-year-old New York resident has a master's degree from a prestigious university, a successful career in photography, stamps in her passport from around the globe and, until recently, personal finances that were out of control.
"Oh my God, I overspent!"
When Wallace graduated with a student-loan debt of $60,000, she found herself overwhelmed to the point of financial paralysis. She tore through a $5,000 loan from her dad as bills stacked up. She had no idea where her money was going -- despite making what she defines as a good salary. The sense of powerlessness crippled her.
When friends recommended she hire an accountant, Wallace packed a FedEx box with bills, receipts and mail and sent it off.
"He wrote me a letter that said, 'You've got to get your life together! Most of these bills aren't even open.' It was a really humbling thing," Wallace says. "But the next time, all my receipts were on a spreadsheet. No one had ever taught me to make a budget or balance a checkbook." What do you know about money?
Today, people in their 20s and 30s are more educated than ever before. Some 85% of those aged 25 and older hold a high school diploma, and 27% have a college degree. This generation of adults is also, of course, the most technologically sophisticated to date, with about half using cell phones for text messaging and 90% on e-mail.
Talk back: Is Gen Y dumb or just lazy?
And yet stats indicate our generation's financial literacy is abysmal, with personal finances to match. Only 52% of high school seniors passed a recent national financial literacy test, meaning adults entering the work force do not know enough about basic budgeting, interest rates or taxes to make sound decisions for their own lives. Quiz: Will you end up in your parents' basement?
As a group, we have failed to get a grip on fiscal reality:
- The median credit-card debt of low- and middle-income people aged 18 to 34 is $8,200.
- The average college debt for recent grads is more than $20,000 and rising.
- People between the ages of 25 and 34 make up 22.7% of all U.S. bankruptcies (but just 14% of the population at large), according to a recent report.
Carmen Wong, the 30-something author of "Gener@tion Debt: Take Control of Your Money -- A How-To Guide" and a former Money magazine staff writer, defends her age group. The problem is not lack of smarts, she says, but can be chalked up to an
environment in which parents coddle their children, bank deregulation has made the financial landscape confusingly complicated and consumerism rules.
"We're in a generation that was kind of shielded from a lot of financial responsibilities," says Wong. "Twenty years ago, when you were in college you didn't have a credit card, and (now) all of a sudden we had to take on debt to go to college. Then we get out of college and we have to have that handbag and an iPod," she says. "It is so easy to take on debt." One woman's credit nightmare
She points out that salaries have been mostly stagnant over recent years, while expenses -- especially health care and education costs -- have skyrocketed.
"The financial landscape is dramatically different today -- and yet financial education has not caught up," Wong says.
New financial products have introduced a new complexity. For generations, there was only one type of mortgage -- 30 years long with 20% down. Mortgage alternatives have changed that. According to the National Association of Realtors, today's median first-time homebuyer is 32 years old and puts down just 2% on a $150,000 home. Not everyone understands that such loans come with higher interest rates, more expensive mortgage insurance, steeper monthly payments and greater risk should the home's value depreciate and the owner be forced to sell. Way more choices today
Bob Manning, author of "Credit Card Nation" and professor of consumer financial services at Rochester Institute of Technology, says these problems are compounded by powerful cultural forces.
"The democratization of credit has really generated a competitive spending culture, and plastic has allowed for material goods not had in the previous generation," Manning says. Most of us grew up in a home with just one or two bathrooms for the whole family, he points out; today, new homes usually have at least one bathroom per bedroom.
"That change has happened so fast," Manning says.
He adds that people in their 20s and 30s grew up in an age of unprecedented technological advancements -- a factor that has affected their views of the future.
"This generation feels that somehow or another they're going to figure out some technological advancement that's going to get them out of their financial troubles and outsmart the market," says Manning, who served as adviser to the forthcoming documentary "In Debt We Trust." The documentary paints a picture of national financial crisis stemming from the personal-debt burden.
"It's a generation that thinks it has so much freedom of expression, but it is so encumbered with debt it might not be able to pursue the career and goals of its choice," he says.
Many of these attitudes are evident in our relationships with our parents. Not for nothing have we been labeled the "boomerang generation": We may not all be living in our parents' wood-paneled basements, but a recent Pew survey found that 68% of baby boomers with kids are supporting an adult child financially.
The ray of hope is that government and business authorities are starting to take financial illiteracy seriously.
Muriel "Mickie" Siebert -- founder of brokerage Muriel Siebert & Co. and in 1967 the first female member of the New York Stock Exchange -- is devoted to developing financial literacy among high school students. Now she is expanding her efforts to include senior citizens and working professionals.
Siebert worries that the nation's current negative savings rate, paired with escalating personal debt and a lack of basic financial understanding, will have ramifications beyond forcing young people to brown-bag it to work.
"It will affect the economy grossly," Siebert says.
Housing debt is at the heart of the matter, she warns: If people cannot afford to continue to live in their homes, the housing market will slide, and from there the economy would be increasingly at risk.
The fix? "There is hope for straightening (young people) out if they get an education," Siebert says.
Across the country, states are starting to mandate financial education in public schools, and Congress has passed a number of bills to encourage financial literacy.
Sophia Wallace envies friends who took financial classes in high schools and use those skills today. She and her partner recently started sessions with a financial planner, and have their spending, saving and budgeting under control for the first time in their lives; Wallace has also repaid the loan from her father.
"Now I feel really empowered," Wallace says. "These are invaluable life skills everyone needs to have."
Talk back: Is Gen Y dumb or just lazy?
Published April 22, 2008
