Why the face of debt keeps getting younger.
It was a Saturday night a couple of months ago and my fiancé and I were eating dinner with my parents at Woodlot, a restaurant at College and Palmerston. I was puzzling over the menu. Would it be the $28 whey-fed pork chop with walnut sauce or the $29 Nova Scotian sea bass with braised endive and smoked white-bean velouté? But my parents, small-town restaurant owners, were distracted. “Everyone here is so young,” said my mom, looking around at the other diners, a mix of twenty- and thirtysomethings. “How do they afford it?”
It was a good question. It turns out that adult Canadians in all age groups have a staggeringly high debt-to-income ratio: For every $100 we earn, we owe $150.60, which is worse than in the U.S. And the picture looks especially gloomy for the 18- to 34-year-old demographic. We are notoriously bad at budgeting. Several recent studies indicate that we want to retire before 60, but only about 40 per cent of us actually have a financial plan—and 40 per cent of those planners say they have it “in their head” rather than on paper.
My mom’s question stuck with me over the next few weeks. Every time I went for dinner, I’d notice the same casually dressed, cocktail-lubricated, young crowd. Our grandparents and even our parents would reserve dinners out for special occasions, but that’s not the case in downtown Toronto in 2012. My fiancé and I (29 and 28, respectively) eat out once a week at least, not including weekday lunches, as do many of our friends. It’s entertainment. We consider a $60 bill for a few rounds of beef-cheek tacos and bourbon sours at Grand Electric cheap.
“How do they afford it?” Well, some of us don’t—not really. And even if we have the cash, blowing our paycheques instead of socking it away is a surprisingly self-destructive habit.
The problem is, “making do” doesn’t come easy for a lot of my peers. There’s some psychological reasoning for this. “Individuals who went through a war, or other difficult life experiences, look at finances differently,” says Sandra Abdool, regional financial planning consultant for RBC. “People in their 20s and 30s generally view finances through a lens of more immediate gratification.” We want to relax, we book a trip to Cuba. (We work so hard, we need a break.) We spy a $250 pair of J Brand jeans on sale for $120, we buy them. (Can’t afford not to.) A new iPad comes out, we line up for one. (It’s a career investment.) One of my best friends, who I’ll call Rebecca, doesn’t foresee having children or a big wedding, and knows her parents will put a hefty down payment on a house when she’s ready to own. So she spends much of her money on decorating her place and going out. “I have all this disposable income, and I actually dispose of it,” she told me. “I want my small, cheap Toronto apartment be up to the standards of what I’d want my dream home to be.” She laughs when I ask whether she pays off her entire credit card balance every month. But she’s not worried about saving for the future: “Why do you need to save money, when you can buy everything you want right now?”
Ryan Grant, a senior financial consultant with MD Management Limited, believes that twenty- and thirtysomethings in Toronto are often leading a lifestyle they think they deserve, rather than the one they can afford. Grant has worked closely with med students and residents who, like a lot of young professionals in this city, expect to be making far more in the future and are spending aggressively now. “They have an expectation that their incomes will catch up with them,” says Grant. “With physicians it’s not entirely unreasonable, but I think that trend holds true with a lot of people in their 20s [regardless of their income]. They have an appetite for the best,” and fuel it with credit. Grant calls this attitude “premature affluence.”
Next page: Are Canadian 30-year-olds screwed?