The notion of financial freedom is something I’ve been brewing over quite a bit of late. Likely triggered by the combination of opening an RRSP account, being promoted at work, and engaging in serious conversations with my girlfriend about our future together (foreshadowing), this thought has cemented itself, centre stage in my cognition. Though slightly idiosyncratic to my normal reservation that I’d always be a detractor in Canada’s national debt, likely be unable to afford a house, and be permanently indebted to my financial institution, my framing on this concept has swivelled from a far-flung, unattainable fantasy, to aspirational, marathon-level liberation.
Misery Loves Company
Despite facing a massive uphill battle in reclaiming my economic freedoms, there’s solace in knowing I’m not alone with this predicament. In Canada, the average Millennial debt hovers around a whopping $25,000 per person, with upper echelons owing upwards of $100,000. In an increasingly uncertain global economy, confounded by rising home ownership costs, and more individuals taking on short term employment through the gig economy, debt becomes a chastising factor in the lives of this demographic.
Not only does it deter entrepreneurship and innovation, but, one in five Millennials delay having children and starting lives due to being bogged down by debt. More despairingly, a 2017 BMO Wealth Management report cited that Millennials are the weakest generation in terms of their financial literacy, where only 24% have a rudimentary level of financial savviness. This in part might explain why debt delinquency rates are rising in this demographic, how over 50% of Millennials have no or less than $1,000 in savings, or why 20% expect to die without paying off their loans.
The outlook is abhorrent for my generation and can have serious macroeconomic implications for the future. For example, if couples delay on having children, there may be a reduction in the overall birth rate as the desire to bear children reduces with age alongside the rate of miscarriages in women. Even a modest generational decline of 5% on the birthrate can have lasting long term effects for daycare providers, entertainment businesses, and university recruitment. Starting families aside, the debt burden will impact other aspects of commerce such as investing, automotive industries, and consumer retail, which happens to account for approximately 20% of discretionary spend. As the primary objective becomes paying off government or private institutional loans, less money can be injected into markets, which, with enough volume, will stunt economy prosperity.
Bachelors of Debt, Minor in Loan Forgiveness
Unsurprisingly, the vast majority of debt faced by Millennials is attributed to student loans; credit card debt comes in at a close second. In Canada, this demographic as a total, carries 25 billion dollars in education related liabilities. While that is a hefty amount, it pales in comparison to our counterparts south of the border. In his Ted Talk titled “One Trillion Dollars, Student Debt, and Higher Education“, Greg Gottesman explains that students in the United States, hold a debt load four times greater than ours, clocking in at a cumulative total of a trillion dollars.
He goes onto explain that the reason for these gargantuan amounts is that since 1978, tuition costs have increased at a rate of 1000%, which happens to be four times the rate of inflation. This steep rise in tuition costs could be justified if employee wages grew at a commensurate rate, but, it’s the exact opposite. Since the year 2000, tuition has grown 72%, while average wages have actually declined approximately 15%.
This problem is exacerbated by the fact that post secondary institutions are not subject to the same market forces as traditional businesses. Though sensitive to slight fluctuations in the recruitment pool that year, they always have a steady supply of customers, eagerly seeking admittance into their prestigious programs. If it’s not the students leading the charge on this, it is equally the other customer, the parents of students, imposing the pressure. With such strong bargaining power, the increased need for more education due to global competition, and easy access to lending, it becomes apparent that the current model for funding post secondary education is simply not sustainable.
The marriage between rising education costs alongside poor financial literacy provides a grim outlook for future generations being any better off. As a systemic problem, it’s unlikely to be fixed overnight with a point solution. Rather, it needs to be targeted from multiple angles, focused on multiple variables. Fortunately, we’re slowly starting to see the impact of disruptive solutions, facilitated by technology, on these problems.
EdTech startups such as Udacity, CodeAcademy, and Lynda.com have been growing in stature by democratizing access to education, providing on demand courses the industry values, and has done so without adhering to the traditional cost value tradeoff. The impact of these players has in a way, forced the hand of traditional post secondary institutions into offering massive open online courses (MOOC’s) free of charge, reconsidering online learning, and even partner with startups. One such example is Georgia Tech University, in collaboration with Udacity, offering a fully online Masters in Computer Science degree for $8,000. That is an eighth of the traditional cost.
On the other end of the spectrum, we’re seeing a surge in FinTech companies, geared at working primarily with Millennials. Planswell, Intuit’s Mint, and WealthSimple are a handful of the noteworthy companies and products leading the charge on helping Millennials reclaim their financial freedom, by providing mobile friendly, low friction, and educational avenues to make sense of the daunting world of finance.
It’s All in Your Hands
While these companies do offer a set of tools that are a step in the right direction, the ultimate onus falls on the individual to want to break the cycle of debt. The harsh reality is that the road to financial freedom starts with a personal choice to endeavour on a long, arduous, and disciplined journey that requires a long-term perspective. Resources like Dave Chilton’s, “The Wealthy Barber Returns” (this is one of my favorite books on the subject), can provide a strong directive when undertaking this challenge.
But, more immediately, look at your spending habits. Consider the additive cost on daily purchases of coffee over a five year period. Reassess the need of your monthly subscription services. Reconsider the number of times you eat out in a week. Frugality is the name of the game. Resources to aid this pursuit are plentiful, it just requires a grander outlook.
At the end of the day, life is a numbers game. Put the numbers in order, make them work for you, and through the time value of money, everything will quite literally, pay off.