Generation Debt

Generation Debt is one of those books I wish I had available back when I was 20, and just entering a phase of my life where I caused financial harm that I’m still trying to dig out from today. At the time I thought debt, and student loans, and car payments were all a normal part of life. Generation Debt is written for the 18-34 year old members of Generation X/Y. If you know someone in this age bracket, or are in this bracket yourself, I highly recommend this book.

generation debtChapter 1: Why Do We Have So Much Debt, Anyway?
Author Carmen Ulrich focuses much of this first chapter on the costs associated with obtaining a college degree. College costs continue to skyrocket and kids and parents are struggling to keep up. Most are turning to student loans to finance the degree. This is leading to a whole new generation of young adults graduating school owing thousands of dollars. I picked up a few student loans myself the first two years of school, and then worked my final two or three years to finish up. If I had it to do over again, I would have worked the entire time and skipped the student loans.

Chapter 2: Get a Grip. Set Goals. Make a Plan.
This may be the book’s best chapter where Ulrich helps readers separate needs and wants, an important exercise for anyone struggling with their finances. Other topics discussed in this chapter include delayed gratification, budgeting, and the creation of an overall financial plan. I appreciated Ulrich’s tone in this section, not overly preachy like some financial gurus tend to get around the subject of budgeting, etc.

Chapter 3: Master Your Student Loans
Like the first chapter mentioned, thanks to rising costs of a college education, most students graduate with large amounts of student loan debt. This chapter walks readers through the various types of student loans available, the payback options for those who discover they can’t afford to repay, and provides an explanation on the popular consolidation method. I also found the section on student loan cancellation scenarios helpful for those who find themselves deep in student loan debt with minimal starting salary job offers. Military service, or an agreement to teach in an inner-city school district, may come with the perk of loan cancellation.

Chapter 4: The Potential Prison of Credit Card Debt
What financial book on debt wouldn’t include a chapter, or entire section, devoted to credit cards? Generation Debt provides some important background on the use of credit cards over the last few decades. One of the statistics I found most compelling was that “in 1970 the average card holder owed $185.” Compare that to the $8,000 or so the average household has in credit card debt. It’s obvious that the credit card’s marketing campaigns have worked, and carrying large, revolving credit card balances is now the norm in most families. What a sad commentary on our society. We have become a bunch of over-indulgers, buying up things we couldn’t afford to pay for at the end of the month. The remainder of the chapter goes on to explain the mechanics of credit card use, and includes a section on Consumer Credit Counseling Service and bankruptcy law.

Chapter 5: To Rent, Perchance to Buy
Home ownership has long been touted as the American dream. Unfortunately, for many that dream has become a nightmare in the last few months. A booming housing market has come to a screeching halt, thanks in large part to the subprime mortgage lending community who doled out loans to people who couldn’t afford to repay them. Consumers bought into the idea and snapped up properties they knew they couldn’t afford without “creative financing.” If you cannot afford home ownership, or are planning to move in a couple years, or are not sure about the stability of your job, there is no shame in renting. What a timely message from Ulrich in Generation Debt. Somewhere along the way “renting” became a dirty word. Realtors and banks sold consumers on the idea that renting was “throwing your money away.” Why rent when you could buy? Ulrich makes a strong case for renting, but concedes that it is time to buy if you “got a great promotion, love your city or town and you’ve decided to stick around.” The remainder of the chapter provides an excellent overview of mortgages, down payments, closing procedures, and real estate taxes.

Chapter 6: The Need for Wheels
Home ownership may be the American dream, but cars remain American’s first love. There is something about owning a car that makes us feel free, and the bigger, the faster, the sexier, the better. Of course all this comes at an enormous cost. Next to our homes, cars and their associated costs make up most household’s second largest expenditure. Generation Debt walks readers through the maze of car buying options: new or used, lease or purchase, trade-in or private sale, extended warranty or no warranty. I agree with most of what Ulrich has to say in this chapter, but I personally would have put more emphasis on the idea of buying used, and driving it until the lug nuts fell off! Too many people tie up their incomes trying to impress people at a stoplight.

Chapter 7: Honor the Tax Man
Yes, death and taxes are the only real certainties in life. This chapter is a great introduction to the payroll tax system, explaining how W-4s translate to the tax man getting his “fair” share out of each paycheck. I’ve always said that if taxes were not automatically deducted from worker’s paycheck, and taxpayers had to sit down every week and write out a check for 28% of their pay, we would have a tax revolt in this country. But, since Uncle Sam takes his portion right off the top we barely notice. This chapter emphasizes the importance of paying your taxes on time, whether you agree with them or not. Ulrich provides younger readers (and older ones who still don’t understand much about taxes) with an excellent overview of deductions, available credits, and ways to legally minimize your taxable income through pre-tax contributions to 401k plans.

Chapter 8: The Golden Net of Insurance
Insurance is one of those necessary evils in life. Ulrich walks readers through the importance of health insurance, particularly for young adults just beginning to start a family, but otherwise feeling invincible. Many young people are afflicted with illnesses that can crack and scramble a young nest egg. Health insurance costs have been on the rise, but it is just too big a risk to skip this coverage, particularly if you have the opportunity to join a group insurance policy through an employer. I really could have used this when I was 22 and signing up my young family for my employer’s health insurance. The options for health, dental, life, long term disability, short term disability, etc. were all a little overwhelming. Again, this is a time when I could have benefited from a book like Generation Debt, where many of these options are explained in a way a Gen X or Gen Y reader could easily grasp.

Chapter 9: The Magical 401(k)
There are few plans out there with the kind of wealth-building power as the 401(k). I know it is hard for twentysomethings to think about a retirement some forty or fifty years away, but if you start early it is possible to become extremely wealthy over the years thanks to tax-deferred compounding growth. I wish I had started contributing to my 401(k) and Roth IRA at twenty years old! I like Ulrich’s plan of paying off “bad” debt, or debt with interest rates above nine or ten percent, before you begin to invest. However, if you have low-interest debt, such as a mortgage or student loan, continue to pay on that debt and simultaneously make contributions to saving plans.

Chapter 10: A Pricey Future
All indications point to costs continuing to rise, so now more than ever it is important to get out of debt (and stay out), save a significant portion of your income, and keep costs low. Ulrich shares with readers her wishlist of reform she hopes to see in the coming decades. Here are a couple of my favorites:

  • Expand access to health insurance for part-timers and/or expand dependent coverage for young people who do not have their own insurance, but are no longer eligible for coverage under their parent’s plan.
  • Make student loan deferments longer (a year or eighteen months, instead of the existing six month grace period after graduation). This would allow graduates a longer period to get on their feet before larger student loan payments came due.
  • Require more personal finance education in schools. I think this one may be the most important. If we did a better job of teaching our kids the principles of sound personal finance, and prepared them for the dangers of credit cards, car loans and other financial traps, perhaps they would be better prepared to go out in a world full of financial pitfalls.

Again, I believe Generation Debt would make an excellent read for any young person starting out in a new career, or just beginning to think about college options. Personally, I think this book and The Total Money Makeover make excellent graduation gifts for a loved one, because they reinforce sound personal finance concepts, and provide information in an entertaining way that sits well with young people. Some personal finance books make you think the author is some stuffy finance professor talking down to you over his glasses. Generation Debt is a relatively short read at 241 pages, but is packed with great information for any young person hoping to get a better understanding of the principles of personal finance.

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