Members of Gen Z (currently ages 12 through 27), face increasing financial burdens due to a number of economic factors. In fact, inflation is this generation’s biggest cited concern, with many costs outpacing gains in income.
As a result, taking on debt is becoming more common. Debt accounts for 16% of Gen Z’s income, compared to just 12% experienced by their Millennial counterparts 10 years ago.
While it may feel difficult to overcome these financial challenges, it’s important for Gen Zers to focus on building strong habits instead of giving into normalized debt loads. Here are three ways society is normalizing debt, plus actionable strategies to take control of your finances.
3 Ways Debt Feels Normalized
It’s understandable that Gen Z feels like debt is inevitable. According to a Bank of America survey, 46% of Gen Zers reported struggling with their financial goals based on their current income. And there are several factors contributing to these challenges.
1. More Types of Debt Products are Available
Debt is becoming increasingly available, and consumers of all ages are tapping into these sources. Credit card debt increased by more than 17% between 2022 and 2023, totaling $1.07 trillion. Similarly, personal loan balances jumped 10.7%. By age, Gen Z had the largest jump in debt balances in the same time period, which increased 15.4%.
In addition to traditional debt products, consumers now have access to Buy Now, Pay Later (BNPL). This is a type of short-term financing that allows online shoppers to spread out small purchases over multiple payments.
Finally, many installment loans have increased in maximum term length. Auto loans, for instance, now stretch as long as 84 months. While that helps keep your monthly payments lower, it also keeps you in debt for longer and increases your total interest paid.
2. Inflation Taking a Bite Out of Purchase Power
Gen Z has entered their young adulthood with a much higher cost of living than most previous generations have experienced. Since 2019, grocery prices have increased 25%. And the increase in rent prices have increased faster than median incomes over the last 20 years, compounding the higher cost of living for Gen Zers entering the workforce with entry level salaries.
3. Low Interest Rates Have Disappeared
Many Gen Zers are reaching the milestone of wanting to buy their first home. But the historically low-rate environment enjoyed since the 2010s has vanished over the last five years.
In July 2019, the average 30-year fixed mortgage rate was 3.75%. In July 2024, that number jumped more than three points to 6.77%. Here’s how that shakes out in terms of monthly payments on an example mortgage of $300,000.
At the 2019 rate, the monthly mortgage would be $1,389.
At the 2024 rate, the mortgage payment jumps to $1,950.
On top of that, home prices have jumped 47% since 2020, creating a difficult housing environment for Gen Zers hoping to build equity through real estate. They may feel that they’ll have to choose between overpaying for a home or missing out on buying a home at this point in their lives.
How to Reset your Attitude Towards Debt
Clearly, there are many reasons why Gen Zers turn to debt to compensate for a tough economic reality. But it’s possible to choose a different path from normalizing debt, particularly when using it to pay for non-appreciating assets and general living expenses.
Here are a few ways to recalibrate your financial mindset and avoid over-burdening yourself with high debt balances.
Understand Your Current Financial Picture
While we’ve talked about a lot of generational statistics so far, take some time to evaluate your own personal financial situations. Start by identifying your biggest stressors. Maybe it’s housing costs, debt balances, or a combination of several factors.
List out all of your financial obligations and think critically about whether or not you can change them. If your housing takes up a huge chunk of your income, consider how realistic it would be to lower those costs. Maybe your remote job lets you move to a cheaper area or you could bring in a roommate for a year or two.
In addition to reducing costs, think about how you could increase your income. Negotiate a raise at your next review, or take on a side hustle to bring in some extra cash. Do some best- and worst-case calculations for the next few years based on your career goals.
Avoid Money Dysmorphia
Next, take the time to reflect on your own personal and financial goals. Try to avoid looking at what others are doing on social media. “Money dysmorphia,” or the act of feeling financially inadequate compared to your peers, is prevalent among 47% of Gen Z. Instead of basing your goals on what others view as important, create your own set of values to inform your money mindset.
It’s easy to pull financial figures out of thin air, like making six figures or having a $1 million net worth. But you may not need to actually hit those numbers to pay off high interest debt or save for your dream house.
Expand Your Financial Education
As you reframe your attitude towards debt, continue to educate yourself on managing your finances. For instance, you may consider the pros and cons of refinancing your student loans. As you build your emergency savings, you could consider investing in a retirement account, particularly one that comes with tax advantages.
Look for trusted guides with real credentials; ideally, it should be someone who isn’t trying to sell a product. Every stage of life brings new goals and new challenges to learn about, so don’t think you’re ever done learning.
While debt isn’t necessarily a bad thing, it doesn’t have to control your finances or your life. Learn how to manage your money and identify sustainable changes you can make to strengthen your financial security one day at a time.