Tips for young adults dealing with debt, high living costs and income insecurity

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Q: My husband and I are concerned about our daughter’s future. She’s 28 years old and finished university a few years ago. While she got a great job right out of school at the company where she had done her co-op term, it unfortunately didn’t last and she’s had trouble finding a job of equal calibre. In the meantime, she’s got her car loan to pay, some student loans and credit-card debt, and had to move back home because rent became unaffordable with the jobs she’s been able to get. Her boyfriend has helped her out a few times and while they’d like to make it official and plan a future together, our daughter’s financial situation is holding them back. That’s an added stress on her that is affecting her mental health. What can you suggest? ~Vanessa 

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A: Young adults aged 25 to 35 are facing significant challenges today. Many began their independent lives just before or during the pandemic and the subsequent period of high inflation. Some took on car loans when vehicle prices were at their peak and others bought homes during a time of high housing prices and exceptionally low interest rates. Relying on credit to maintain their lifestyles became common, but as the cost of living soared along with interest rates, and job markets tightened, many now find themselves burdened with debt and financial obligations while dealing with income insecurity or underemployment.

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Adjusting to these economic realities can be challenging, forcing many to consider options they would have traditionally avoided. Moving back home to save on rent, scaling back lifestyle choices and revising financial goals, or selling a dream home in favour of less costly housing are all proactive options to remain as financially stable as possible.

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With that in mind, here are some specific considerations to help young adults adapt and make the best of their situation.

Change is a constant — avoid rigid decisions when facing a temporary challenge

When economic challenges and stress weigh you down, it’s easy to lose sight of the fact that situations are always changing and your current circumstances are temporary. Interest rates have already started going down, inflation is close to pre-pandemic levels, and retailers are becoming more competitive with their discounts and pricing. In such a dynamic environment, it’s crucial to make decisions that benefit you now while also allowing for flexibility.

For instance, with car loans, the risk of purchasing a vehicle at its peak price is that as prices stabilize and the car depreciates, your loan might exceed the vehicle’s value. This is compounded by the substantial and often stressful payments associated with new car loans. If you find yourself in this situation, even if you intended to keep the vehicle for many years, changing circumstances might require a different approach. Allow yourself the flexibility to adjust your priorities to better manage your current situation.

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One option to consider is selling the car back to the dealer and using the proceeds to pay down the loan as much as possible. If the sale wouldn’t cover the entire loan, ask the lender if they can re-amortize your payments to reduce them while keeping the car. Although not all lenders can accommodate this request, especially if your credit rating has declined, it’s worth inquiring. If selling the car back is feasible, some lenders may require you to find a way to pay off the remaining loan balance. This is because taking back a car with an outstanding loan might not allow them to discharge the lien. Each lender’s policies will vary based on the remaining balance and whether the loan was obtained through a dealership, bank, or credit union.

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It can be tough to part with a car you love, so if you have alternative transportation options and want to keep the car, consider parking it to save on insurance and maintenance costs. This might free up enough room in your budget to keep up with the payments while you navigate your current challenges. If you decide to sell the car, make sure you have an alternate transportation plan in place first.

Remember, there will always be another car to buy in the future. You might even need a different type of vehicle in a few years, so try to stay flexible and avoid making rigid decisions about your options during these temporary financial challenges.

Budgeting Options Cheat Sheet

Student debt

Students who used government student loans to finance their education have some flexibility if repayment becomes challenging during periods of underemployment. Initially, loan payments are amortized over 9.5 years when a student finishes their studies. However, in times of hardship, students can request to extend the amortization period by up to an additional five years. While extending the amortization period typically results in paying more interest, Canada student loans and many provincial student loans no longer charge interest beyond what was accrued before the policy change. When a former student’s financial situation improves, they can make extra payments without penalty to pay off their loan sooner.

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Dealing With Student Loan Debt

However, student debt often includes credit-card debt, which typically carries high interest rates. It’s important to prioritize paying off credit card debt before making additional payments on student loans that have a zero per cent interest rate. Addressing credit-card debt promptly can relieve pressure on other areas of your budget. For example, without substantial credit card payments, it becomes easier to adjust your budget to accommodate modest vehicle payments or to save towards replacing a vehicle.

How to Pay Off Credit Card Debt as Quickly as Possible

Renting, buying and alternative living arrangements

Housing and transportation expenses are often the most challenging parts of a budget. For a young adult who has moved back home, reducing debt obligations can make it possible to move out once again. When that time comes, options to keep housing costs low include renting in a less expensive community, finding a roommate, sharing living costs with a partner, downsizing or moving closer to work to save on transportation costs and allocating those funds towards rent. Taking a holistic approach to managing your finances and lifestyle is usually the best way to achieve longer term goals.

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How to Convince a Landlord to Rent to You

One increasingly popular option is multi-generational living. If such an arrangement is possible with extended family members, it’s important that each generation contributes their fair share to the household, either financially or by helping with chores and tasks. Since time spent maintaining a home can take away from paid employment, a balanced agreement is essential to ensure everyone understands their rights and responsibilities.

Should Working Adult Children Living at Home Pay Rent?

Seek help with your job search

While there can be flexibility around expenses, having adequate income is still essential. If you or a loved one is struggling to secure sufficient income, consider reaching out to organizations that assist with job searches. Community agencies or former universities might offer personality testing to identify jobs that match one’s strengths, as well as help with resume writing and mentorship opportunities. Ask friends and acquaintances if they can connect you with someone at work who could conduct a mock interview and provide feedback on your interviewing skills. Taking on several jobs to earn the equivalent of full-time income is another option, but keep income tax considerations in mind if choosing this route. Industry associations and employment agencies can also support your job search. Ultimately, job hunting is like a full-time job itself and can be challenging to navigate successfully.

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The bottom line on managing expenses as a young adult

Young adults are navigating a complex economic landscape, balancing debt and financial obligations with the realities of income insecurity and a high cost of living. It’s a challenging time, and understanding these dynamics can help in finding strategies to manage and overcome financial hurdles. But if your mental health starts to suffer, don’t hesitate to reach out for help. A little support now can significantly ease the transition into the next phase of life, equipping you with valuable new skills.

Related reading: 

Would Getting Paid Every Day Solve Your Money Problems? 

6 Things Millennials Can Do to Buy a House Within the Next Decade 

How to Escape a Payday Loan Nightmare 

Peta Wales is President and CEO of the Credit Counselling Society, a non-profit organization. For more information about managing your money or debt, contact Peta by email, check nomoredebts.org or call 1-888-527-8999.  

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