Is Gen Z Destined for Debt?

While inflation has cooled since the recent peak in June of 2022,  the overall cost of living in the U.S. is still elevated, as are interest rates. Unfortunately, Gen Zers (people born between 1997 and 2012) are particularly vulnerable to these conditions because of their limited credit histories, incomes, assets, and experience levels. But if you’re a member of Gen Z, does that mean you’re destined to struggle and accumulate debt? Not necessarily. Here’s a closer look at the current economic challenges and four tips on how to navigate them as a Gen Zer.

A Look at the Economic Challenges Gen Z is Facing

Many Gen Zers are attempting to fly the nest and establish themselves amidst a turbulent economy. But what are the main challenges you should expect? Well, the consequences of the pandemic era are still at large due to the hundreds of billions of dollars that were given to Americans and the record-low interest rates that incentivized a flood of borrowers into the market.

Now, interest rates are at a 15-year high , the inflation rate has somewhat stabilized about 3% higher than it was pre-pandemic , and housing prices are settling at over $100k more than they were pre-pandemic.  The result? Everything from rent to bread  is more expensive and it’s harder to get approved for credit.

So, how is Gen Z faring as a whole? According to the 2023 Better Habits Survey by Bank of America, 85% of Gen Zers say that at least one barrier is holding them back from financial success. The most commonly cited obstacle was the higher cost of living (53%), followed by not having enough income to meet their financial goals (36%), housing/rent expenses (30%), and debt (20%).

To overcome these challenges, Gen Zers are modifying their lifestyles, cutting back on savings, and — unfortunately — borrowing more. Between 2022 and 2023 alone, the overall non-mortgage debt of Gen Zers increased by 9.3%, according to Experian. In comparison, Millennials had an 4.1% increase, Gen Xers had a 6% increase, and Baby Boomers had a 2.3% decrease.

4 Ways Gen Z Can Avoid Debt

While the cards may be stacked against you as a Gen Zer in the current economy, here are four steps to avoid debt and build the financial future you want.

1. Create a Financial Plan and Budget

Before you can achieve financial success, define what it means to you. For example, it could mean paying off outstanding credit card balances of $4,000, having an emergency fund that can cover six months of living expenses, and saving 15% of your income for   a down payment on a house.

Once you’ve defined financial success in precise terms, get clear on where you are now. Create a budget to account for all of your monthly income and expenses — and note how much money you have left over each month. Then, comes the fun part of deciding how you’ll allocate your disposable funds to reach your financial goals. If you can’t afford to work towards them all right away, that’s okay. Decide which to focus on first and start there.

Next, stick to the plan, track your progress, and work on increasing your disposable income over time. Budgeting apps like YNAB   can help you stay on top of your money and manage it with confidence.

2. Avoid Unnecessary Debt

The next step is to avoid debt that you don’t need.

If you want to pursue higher education, for example, be very cautious. The average public university student borrows $32,637 to get a bachelor’s degree, according to the Education Data Initiative. To get the biggest return on investment from college, you’ll want to minimize your costs of attendance.

Here are a few ways to do so:

• Take transferable dual-enrollment/Advanced Placement courses in high school (when available).
• Apply for financial gift aid like grants, scholarships, and awards.
• Take a gap year and work to save up money for college.
• Attend a community college for your associate's degree. In some states, you can even get your bachelor’s degree from a community college.
• Attend an in-state college or university.
• Live with your parents or roommates during college to save on room and board.
• If you are going to take out student loans, look to federal loans and forgivable programs first.

Additionally, if you need to borrow money to pay for an emergency or necessary expense, try asking a friend or family before seeking an interest-bearing loan from a lender. And always look for ways to minimize the amount you need to borrow

Along with avoiding unnecessary debt, consider ways you can pay off outstanding debts as soon as possible while reducing your borrowing costs. For example, refinancing, debt consolidation, or a debt management plan may be able to help.

3. Look for Opportunities to Increase Income

Income increases can help you save more, invest more, and better prepare for surprise expenses. But how can you up your earnings? According to the Bank of America Survey, 75% of Gen Zers are taking or considering steps to earn additional income. For example, 34% said they are changing jobs, 31% said they are working on turning a passion into an income source, and 26% are taking on a second job.

If you’re happy at your current job but want to move up, ask your manager about an advancement path that will lead to an increase in income. Alternatively, you can request to pick up extra hours or strategize ways to maximize your variable income (e.g. commission, tips, bonuses, etc.). On the other hand, if you’re open to working elsewhere, consider:

• Shopping around for a better-paying job.
• Picking up a part-time job.
• Starting your own business on the side (e.g. freelancing work, social media management, delivery driver, etc.).

4. Be Mindful of Spending and Lifestyle Habits 

Last but not least, be aware of your spending and lifestyle habits. It can be tempting to overspend on things like going out, taking trips, or buying products due to social pressure or the fear of missing out, but that’s a quick way to end up deep in debt.

While some leisure spending can and should be a part of your budget, it’s important to be realistic about what you can afford. For example, if you love to eat out at a restaurant by your house, budget for one meal per week there.

The good news is — you won’t be alone in paring down your spending. In the Bank of America survey, 73% of Gen Zers said they were changing their spending habits amid record-high inflation. The key changes included cooking at home more often, limiting grocery shopping to essentials, and spending less on clothes.

Your Financial Success Is In Your Hands

While the current state of the economy isn’t ideal for anyone, especially if you’re in the early stages of financial independence, you’re not doomed to acquire massive amounts of expensive debt. That said, you will need to be strategic and practice self-control to avoid doing so.

To start, ensure you have a game plan and the intention to avoid unnecessary debt. Then, get creative with ways to up your income and live, go to school, eat, and enjoy life on a budget. If you slip up every once in a while, that’s okay, but get back on track as soon as possible. Establishing these habits can help you build a strong financial foundation that serves you well through both good and bad economic conditions.