Millennials in their 30s are breaking debt records – they racked up a record-high $3.8 trillion of debt at the end of 2022 according to data from the Federal Reserve Bank of New York, an increase of 27% from 2019.
They’re also tracking behind older generations when it comes to home ownership. A Redfin study revealed that about two in five (43%) 30-year-olds owned a home in 2022, compared with roughly half of baby boomers (52%) and Gen Xers (49%) when they were the same age.
Experts say that 2024 may be a better year to buy a home. But how do you plan a major life purchase such as a home or a car when you have debt? Credello spoke with Chelsea Fagan, CEO and founder of The Financial Diet, to get her insights on the topic.
Larger expenses require strategic budgeting
Planning for a larger expense while carrying debt is possible but it requires strategic budgeting. Fagan says that there are a few key financial considerations to factor in. For example, buying a house is a long-term investment and is a sustainable asset that will gain value over time and contribute to your financial health. On the other hand, cars lose their value over time.
“When millennials are looking to invest in a home, they should be thinking, ‘What does the value of this look like over the course of 10+ years?’ and ‘What are my long-term financial goals?’ to make a strategic decision that will align with their needs,” says Fagan.
“On the other hand, when looking to purchase a car, it is important to be budget conscious while also considering additional costs that come with owning a car like repair and maintenance. Using resources like Kelley Blue Book My Wallet allows car shoppers to find a car that won’t overextend their budget.”
Balancing debt payments and savings
You can also use tools like Credello’s debt payoff calculator to estimate how long it will take you to decrease your debt and be able to finance your big purchase. As Fagan puts it, it’s really important to remember that you need to simultaneously pay current financial obligations while planning for major expenses. It’s a balancing act.
Keep in mind that not all debt is made the same. “For example, if you have public subsidized student loans you might be better off paying the minimum and putting the rest of your money elsewhere,” says Fagan. It may not be worth maxing out your student loan payments when the average return on investment market funds is 7% or 8%, she adds. “On the other hand, if you have high interest loans, I would consider refinancing the loan if possible and making changes in your spending habits to consolidate debt.”
High-yield savings accounts can also be a great way to grow your money faster and budget for larger expenses. The idea is to work with what you’ve currently got and optimize it so you can meet your financial goals faster.
Saving money when paying down debt can, of course, be a struggle, especially if you’re tightening your budget everywhere. Fagan has a hack for this: visualize what you’re saving up for. Connect to your bigger vision and your goals to make the habit of cutting back more rewarding.
“One thing I encourage people to do is establish several different saving accounts, each with a specific goal in mind whether that is a new car, house or even student loans. By customizing these savings accounts it reminds you what your goals are and can eliminate the feelings of ‘just saving money’ for unknown future expenses,” she says.
Yes, your credit score matters
The bad news is, your credit score matters when it comes to major life purchases. The good news is, there are things you can do to improve yours. “As someone who went from a 450-credit score to 800, I can tell you that credit is important,” says Fagan, who adds that the best way you can obtain and maintain a good credit score is making payments on time.
If you’re going to be late on a payment, try calling your bank and ask for an extension – there may be some wiggle room there. Credit utilization is another key factor to consider.
Credit utilization is another key factor to consider when improving your credit score. The term refers to the ratio of credit you have access to versus money that you have borrowed. “One great way to improve your credit score is by raising your credit limit any time it is available while not raising your credit spending,” says Fagan.
This depends on your credit card and situation, but banks often notify clients when they can raise their credit limit due to good usage and on-time payments. You can also always ask your bank for an increase; there’s no harm in asking. Feeling stuck on that front? “Another great method is asking someone you trust with good credit to add you as an authorized user to their credit card, which will in turn help build your own credit score,” recommends Fagan.
Watch out for hidden long-term costs
When planning a large purchase and paying down debt at the same time, it’s easy to prioritize short-term spending without considering long-term costs. Fagan notes that interest rates have been fluctuating over the past few years in both good and bad ways. This is a trend you should be paying attention to because it will have an impact on future expenses beyond the initial sticker price of your purchase.
“The current mortgage rates have a huge impact on monthly payments and the course of your mortgage in the long-term and should be top of mind when investing in a home,” adds Fagan, who recommends planning for things like renovations, insurance, weather risk factors, and more. “While DIYing your home feels like a financially responsible choice, it can often lead to financial trouble in the future if not done correctly.”
When buying a car, don’t get tempted by a cheaper vehicle in order to spend the least amount of money upfront. This can often translate into more fees in the long run due to costly repairs.
So, factor in things like interest rates and maintenance costs when budgeting and shopping.
Remember that, similarly to your health, an ounce of prevention is worth a ton of treatment. Stay proactive in terms of upkeep for both your car or home, suggests Fagan.
In today’s economic climate, the best way that you can manage a big life purchase while paying down debt is educating yourself to make informed financial decisions. “Not only will it help you understand how to save your money, but it will also help ensure that you are spending your money in a smart way,” says Fagan.