The Portfolio Doctor
By
David Cruise and Alison Griffiths
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Whew!!!! we've touched some hot buttons over the years; advisors, mutual funds management expenses fees and last week abuse of seniors, to name a few, but nothing has generated more interest correspondence than our three part series on the financial woes of our youth. (They're up on our website, Oct 29, Nov 5 and Nov 12.)
In the first two columns we pointed out what we believe is, based on letters from you readers and our own personal experience, to be a problem growing at almost epidemic proportions and in the final column presented some possible solutions.
We know first hand that it's easy to lay blame especially on the young people themselves - lazy, irresponsible, entitled not mention a few of the common descriptions -- so we ferreted out some research that pinpointed some rarely spoken of aspects of problem. We were also hoping to take a little bit of the emotion out of the issue. (We loosely defined youth at 20 to 32 years old because the bulk of the research we found fell into that age grouping.)
Closer examination clearly shows that the financial world has changed quite rapidly for the last few generations and not for the better. Quite simply young people don't make as much money as they used to.
"Wages of younger workers for all levels of education decreased significantly during the 1980s, the trend continued although at a diminished rate through the 1990s," concluded a report by Industry Canada.
To make matters worse, the same study pointed out that the youth unemployment rate was twice as high as the general population.
This would be bad enough if costs for young people remained the same over time. Exactly the opposite has happened. As their wages were declining relatively, from the early 80s through to 2005, the Consumer Price Index increased by 74.9 percent from the early 1980s through to 2005.
This is hardly a surprise to most of us intellectually. As well we know that expenses more specific to younger people are increasing at least as fast as the CPI; rent, university and other schools tuition, food and transportation.
Less money chasing more expenses; the crux of the problem starts to come into focus. So what happens next? Well the discrepancy between income and expense starts spilling over into debt.!
From 1992 to 2002, also according to Statistics Canada, average consumer debt, that is non-mortgage, non-student loan debt, grew at an average annual rate of 9.3 percent. At the same time disposable income only grew 3.7 percent. In 2002, the average consumer debt was $30,000 a person.
This is where it starts to get a bit complicated. Specific figures on youth debt are hard to come by. We do know from our own experience, and from what our readers tell that it's not uncommon for young people to have a debt load of $30,000 to $50,000 especially if gone to a university or other type of school away from home. Those who go on to more specialized educations, doctors, lawyer and others with graduate degrees obviously have even higher debt loads.
Another factor which makes it difficult to estimate youth debt is what we think of as hidden debt; debt that has been assumed either directly or indirectly by family, usually parents.
It's rare that we see a young person with debt problems who doesn't owe a portion of it to their parents; sometimes as much as 50 per cent, and sometimes to other family members a well. Many times, we find that parents have already written off thousands of debt to their children.
This parental debt can assume many forms; direct loans, cosigning or otherwise guaranteeing bank loans and guaranteeing credit cards when previous cards are redlining. Increasingly popular are cosigned consolidation loans which can carry interest rates of 29 percent. We also know of several situations where parents who've red lined their own credit cards to help out their children who've already maxed out theirs.
Oddly it's often the parents who can least afford it who've risked the most to help their children. And even more oddly a high percentageof those parents are paragons of thrift themselves.
The financial difficulties of our youth and their resultant indebtedness are problems that affect us all directly or indirectly. Parents and other family members face it most directly. A recent Statistics Canada study, illustrates a trend that many of us have seen first hand; to wit, nearly a third of parents with a youngest child aged between 20 and 34 years old, have at least one offspring living at home with them.
Twenty-five percent of this group are, as Stats Canada catchily calls them are, "boomerang kids" - those who have returned to the parental nest after departing one or more times. While some families are delighted to have grown children return home others find it an increasing and sometimes oppressive financial hardship.
And even if you're not a parent of a young person in financial difficulty it has an impact on you. Though the financial industry must be profiting from pushing credit to young people, the ensuing cascade of financial difficulties weakens the fabric of society.
Originally we'd intended to publish your letters and emails shortly after the original columns appeared but frankly we were staggered by the number of responses and the passion they contained.
Naturally we received numerous letters from parents, some reeking of despair and others inspirational. We were a little surprised by the "youth" we responded telling their own stories of how they got into financial trouble and often how they worked their way out of it again.
We received letters from 17 year olds, feeling unprepared and fearing to face their financial future. An 82 year-old-grandmother who emigrated from Hungary, with $5 in her pocket wrote of her fears for her grandchildren. She offered to set off on a lecture tour to vanquish the evils of credit card debt. As well a "lowly bus driver", as he called himself, who'd had his own problems with debt sent along his self published book on how to avoid, "too much credit, debt, and (the) bankruptcy road."
We resolved to read each and every one of them, and now we have. Starting next week we'll share some of their stories and ideas with you.