America has a debt problem. Most households in the U.S. carry some kind of debt, and most carry a significant amount. To many, the thought of the American Dream seems out of reach. With many young people carrying mountains of student loan debt on top of ordinary debt such as mortgages and cars, it has been very difficult for many to climb out of the debt hole and build wealth.
America’s debt problem is nothing new. For the last decade, debt levels have been steadily rising. With interest rates still relatively low and the economy percolating, there seems to be nothing standing in the way of debt levels continuing to rise to unprecedented levels. Household debt has already surpassed the all-time high water mark seen during the Great Recession.
With all this debt, will America’s up-and-coming generation ever have the chance to get to economic freedom? Will they be destined to live their lives paycheck-to-paycheck, struggling to get by?
Things are changing. Right now, young Americans may have the opportunity to participate in the biggest economic boom seen in this country in decades. With the economy roaring, the stock market soaring to new heights, and the job market flush with new opportunities, the time is now for young people to take advantage of this remarkable time to dump the debt and build a solid financial future.
It’s possible! Many young folks have been able to do it even in times not nearly as advantageous as these are. Let’s look at one couple’s journey.
The Best Made Plans Can Suddenly Be Derailed
Lara and Allen seemed to have everything carefully planned out. With Lara newly graduated and a job offer in hand, the young couple was preparing for a move to a new city and planning a wedding for the following year. Allen, an up and coming artist, was making significant inroads among the art community, and he had begun to see sales of his art climb. With Lara’s new job as a steady source of income, he would be able to focus on producing more of his art. Things couldn’t be going better.
With virtually days to go before the big move, Lara discovered something unexpected: she was pregnant. With no family in the new city, making the big move on their own was daunting. With not much time to consider all the options, they made the decision to stay put, where at least they would have some family to lend support. Everything would have to wait, including the new job, the big move, and the big, beautiful wedding.
The days that followed brought some big changes. Allen gave up his apartment, and the couple moved in together into Lara’s smaller, more affordable one. The couple married in a small, private ceremony with little fanfare and a small price tag, and both Lara and Allen started looking for jobs. With no steady income and a baby on the way, Allen had to, for the time being, put his art dreams aside to focus on paying the bills. In a week or so, he found a job waiting tables in a restaurant.
Lara, on the other hand, found work in her field difficult to locate, especially being pregnant. In addition, the pregnancy was a difficult one. Soon, it became apparent that she wouldn’t be able to be much help in contributing to the family income for the next year. With her student loans, their household expenses, car notes, and a baby on the way, life was suddenly a very expensive proposition. To close the gap, they began depending upon credit cards to get by.
After the joyous birth of their daughter, the young couple found themselves deeply in debt. Thousands had been added to their credit card balances over the past year, and now, with a new baby, there seemed to be an endless list of expenses. Health insurance was a major one since neither had a job that afforded benefits. In order for Lara to return to the workforce, they would need good quality childcare, which was expensive. Add diapers, formula, doctor visits, and all the baby equipment needed into the mix and the couple was struggling just to keep their heads above water. Something had to change. They went to Lara’s parents for help and advice.
Sacrifice and Dedication Are Often the Key to Getting Back on Track
Luckily, for the young couple, Lara’s parents were both understanding and resourceful. Putting all their heads together, they came up with a plan to get the couple back on track. It would require some sacrifice and discipline, but, if they were diligent, they could be back on track in a year or two.
Their financial picture was ugly. Lara had $30,000 in student loan debt. Over the past year, their credit card debt had soared to nearly $35,000. They both had car loans, and their housing expense was relatively high even though the place was small. Add in the rest of their living expenses; it became clear that they were heading toward insolvency. Something had to be done immediately.
Lara and Allen gave up their apartment and moved in with Lara’s parents. This was an idea that Allen was resistant to, as it made him feel like he was incapable of taking care of his family, and he deeply valued privacy. However, he quickly realized that this was really the key to the entire plan. With no housing expense, their incomes could be directed toward paying down debt and stopping the financial death spiral they were in.
Additionally, Lara’s mother could help with childcare while the couple worked opposite shifts; Lara’s job was 9-5 while Allen worked nights in the restaurant. Life wasn’t easy, but it was improving.
Attacking Debt and Turning a Corner
They attacked the high-interest debt first, starting with the smallest balance and snowballing their payments. As the payments became larger and larger, the payoff accelerated. In nine months, they were free from credit card debt. Next, they started paying down the student loan debt. With no credit card debt, they were able to refinance the student loan debt into a loan with a much lower interest rate and smaller payments. By making extra payments and paying more than the minimum each month, they began knocking the balance down at a good clip. By this time, they had also gotten rid of one car and traded down to a family-friendly, reliable vehicle with a smaller note. When they could, they made extra payments on that as well.
By the following year, they were able to start funding their savings again. Lara had stubbornly held on to the money they had saved for the wedding, hoping to still have the wedding of her dreams. However, after those first couple of years with the baby, she knew the family had bigger priorities. With the money, she began an education fund for her daughter and used the rest to pay off the last of their debt. It took three long years, but finally, the young family was looking at a bright financial future again.
A New Way of Life
When they were finally able to afford to move out on their own, they made a commitment to each other that, not only would they never let themselves get that far in the hole again, but they also would now focus on building wealth. Securing the future for themselves and their young daughter became their number one priority.
They began by formulating a budget and sticking to it. Not only did they budget their expenses, but they also budgeted for their savings. Instead of saving what was left over at the end of the month, they took the money right off the top before it ever made it to the checking account. This money was directly diverted to an investment account, where they carefully chose long-term growth vehicles such as stocks and investment funds. Investing in index funds kept their investment costs down and mitigated their risk, and every dividend earned was reinvested.
The couple also worked hard to keep their living expenses down. They treated themselves to one meal out a week at an affordable, family restaurant, and they cooked at home the other nights of the week. Lara packed lunches and meal-planned, so there was no wasteful spending at the grocery store. They rented a small home in a good neighborhood and decided to wait to buy a house. They paid attention to their thermostat and clipped coupons.
To save on childcare expenses, Allen continued to work nights four days a week and Lara worked days. While this meant the time they spent together was reduced, it allowed one parent to be with their daughter all the time, and it saved them lots of money. They were also able to maintain a one-car status, as Allen would take Lara to work each morning and pick her up at the end of the day. She would drop him off at work in the evenings. This saved them a car payment and insurance expense every month.
Lara and Allen also vowed to avoid making another purchase on a credit card. If they couldn’t afford to buy it with the money in the bank, they just wouldn’t buy it. With a healthy savings, they didn’t need a credit card to fund any emergencies, so they destroyed the cards and closed all of the accounts. Moving to a cash-only basis assured that they would never amass a large amount of high-interest debt again.
When it came to their purchases of larger ticket items, their motto was to avoid buying new. This applied to cars, furniture, and other household items. Lara even shopped the nicer consignment shops to maintain her work wardrobe and keep their growing little girl in shoes and clothes. If Allen needed tools or yard equipment, be shopped the thrift stores and discount shops. Saving money became a passion for them.
On the weekends, when they had time together, they took advantage of all the free entertainment their community had to offer, such as movies in the park, festivals, and street fairs. They packed picnic lunches and visited museums and zoos. Not only did it keep their entertainment dollars low, but it also provided enriched, cultural experiences for their daughter.
Sometimes, Delaying the Purchase of a House Is the Right Strategy
When their little girl was six years old and starting school, they decided to buy a house in a modest neighborhood in a good school district. By then, they had amassed quite a bit of cash, and they were able to put down a substantial down payment. Instead of a 30-year mortgage, they took a 12-year mortgage and set their sights on paying it off as quickly as possible. One thing that never suffered was their monthly cash transfer to savings, and they very shortly replaced the savings they had used for the down payment on the house. Once their little girl began school, Allen switched to working days so the family could spend their evenings together, and he was able to rekindle his art career.
As their income grew, so did their contribution to savings. Instead of absorbing the extra money into their lifestyle, they banked the money, understanding that the more they saved, the more they could earn through interest, dividends, and growth. Any windfalls such as tax refunds, bonuses, or profit sharing checks went straight to savings.
Instead of taking expensive vacations, they took advantage of all their surrounding area had to offer through staycations. Day trips to the beach or the lake or a day hiking in the national park became enjoyable options, and they banked at least a week of vacation pay per year.
Through hard work, sacrifice, and commitment, this young couple was able to not only pull themselves out of a financial death spiral but was able to go on to build considerable wealth. By leveraging their resources and making smart choices, they were also able to do it in relatively short order, too. Finding the path to financial freedom can take some winding turns for sure, but by being flexible and taking an active part in managing your money, anyone can do it.