The American dream is more like a nightmare for the 76 million members of Generation Y. When we were kids, our parents told us the key to success was simple – go to school, get a job, get married, buy a home, have kids, and live happily ever after. But if you want to live the American dream today, you better be prepared to pay for it. In this article, we’ll explore the rising cost of living the American dream and the challenges young adults face as they struggle to realize the American dream in their own lives.
Economic Outlook for Generation Y
For the first time in my life, I’m scared about our country’s economic future. Education and healthcare costs are absurd, jobs are scarce, incomes are flat, the stock market is schizophrenic, and the cost of living continues to rising. Compounding the issue is a dysfunctional political system where grownups fight like children, special interests rule and millions of families across the country are struggling to stay in their homes. The only bright spot seems to be the fact that housing prices and interest rates are low (thanks to the biggest financial collapse in our nation’s history).
As an investor, my reaction to the current situation is to buy in the bad times and sell in the good times. My only problem with this approach today is that I’m right in the middle of the mess – struggling to build a successful business, accumulating loans to finance my education and looking out into a job market wondering when things will turn around.
When I look at the numbers, I start to sweat. Unemployment for Generation Y is miserable today. According to a recent report from the Pew Research Center, unemployment for young adults ages 18-24 is 15.3% and 10.3% for young adults ages 25-29. Additionally, the costs of living are rising. Since I graduated in high school in 2002 the cost of tuition at a private university has increased over 37%. Healthcare costs nearly doubled during the same period.
In a perfect world, we would be able to earn more money to offset the increase in our cost of living (i.e. inflation). That’s not the case for Generation Y. Since my graduation in 2002, the S&P500 has only gone up by 23% total (or 2.3% per year). Similarly, interest rates on a 1-month CD were around 2% in 2002. Today, I would earn about 0.25% on a 1-month CD. Meanwhile, real incomes are flat since 2002 (note: real income = income adjusted for inflation). That means we aren’t earning as much money as we used to. Give all these factors, how is Generation Y supposed to afford to live the American dream today?
The Total Cost of My American Dream
I’m a pretty typical guy. I went to college, got a job and decided to go to graduate school. I’d say the next step in my life will be to get married, buy a home, have kids, and live in a safe neighborhood with good schools. I also want to coach a little league baseball team one day and play golf on the weekends. This all sounds great to me, but here’s the problem – my American dream will cost $2.8 million. To calculate the cost of the American dream, we put together the American Dream Calculator. Here is a breakdown of the numbers:
- Cost of College = $186,000 : Tuition, room and board at Hendrix College – considered one of America’s “Best Values” for undergraduate liberal arts colleges by the Princeton Review.
- Cost of Graduate School = $97,000 : Between tuition, fees, books, and accrued interest on student loans it will cost me about $100,000 to get my MBA from Georgetown part-time. This doesn’t account for my living expenses or the interest on my student loans (~$75,000 over the next 15 years). All in, my graduate degree will cost me nearly double the price tag.
- Cost of Marriage = $40,000 : After buying an engagement ring, paying for a wedding and going on a honeymoon, I’m expecting to spend around $40,000 on marriage. While that may seem high, it’s not crazy. Today, the average wedding costs nearly $30,000! I expect to spend a little less on a wedding and more on an engagement ring.
- Cost of Kids = $397,620 per child: According to the USDA’s cost of raising a child calculator, the annual cost of raising a child is $39,960 per year between the time they are born and the time they turn 18 years old. I hope to have a couple kids, so that adds another $800,000, and that doesn’t even account for the cost of paying for their college 20 years from now.
- Cost of a Home = $637,000 : Buying a home isn’t cheap either. When I checked out average home prices in my city, a 3-bedroom single-family home cost around $637,000. If I factor in interest, taxes and home insurance, my home will cost me approximately $1,080,000 over the next 30 years. Ouch.
All in, the total cost of my American Dream is around $2.8 million. These numbers don’t even include my cost of living which isn’t cheap either. If you’d like to calculate the cost of the American dream, download our American Dream Calculator for free and feel free to share it with friends. Here is the link to share:
How to Afford your American Dream
So what is a kid supposed to do? Well, I’ll tell you exactly what I’m going to do:
- Work Hard – If you are going to make it today, you’ve got to work your butt off. That means getting up every day, going to work and looking for opportunities to create additional sources of income by turning my hobbies into cash flows.
- Pay Off Debt – Tackling student loan debt is my top financial priority once I graduate. I don’t like paying interest, and I’ll do everything in my power to get rid of my debts as soon as possible. To do this, I’ll most likely consolidate my student loans and look for the most attractive repayment option. I’ve already paid back my highest interest rate loans while in school, so my overall interest payments will be reduced.
- Live Frugally – Being frugal and being cheap are two different things. Being frugal means living below your means, making smart spending choices and getting as much value from each dollar spent as possible. Being cheap, on the other hand, is a nasty quality that makes other people feel awkward (e.g. your friends who haggle over every penny at restaurants). By living frugally in the coming years, I’ll probably live just as well as I would if I overspent on every meal and bought everything I wanted all the time. My weapon for tracking my spending is my cash flow statement and budget. Make sure you download our financial statement worksheets so you can keep track of your progress.
- Save Aggressively – If I want to achieve my American dream, saving is not an option – it is a rule. My goal is to earn enough money in the coming years that I will be able to pay my student loans and other fixed expenses and have enough money to save 20%. I’ll allocate half of my money to investments and 5% to retirement savings and emergency savings. At least, that’s the plan.
- Invest Wisely – There is no better defense to market downturns or economic conditions than knowing what you are doing. I’ve spent most of my adult life studying markets and learning to invest, and I don’t expect to change this anytime soon. I highly recommend getting familiar with different types of investing or finding a trusted financial advisor to help you navigate the financial marketplace.
- Protect my Assets – I’ve said it before and I’ll say it again – bad things happen to good people. To defend against the major risks in my life, I will make sure that I have adequate insurance coverage on my home, car, health, and life. If something bad happens to me, I won’t let my family suffer.
- Live Life Well – I’m going to play golf on the weekends, take vacations and enjoy my life. While today may be tough, tomorrow may never come, so I make it a mission to live each and every day to the fullest.