Time to get a flying start- 16th October 2002

Annette Sampson - Sydney Morning Herald

The rich get richer and the young get the picture, but what can generations X and Y do to get ahead?
It's the perpetual lament of the under-30s (and quite a few in their early 30s, as well): how do you get on top of your finances? Easy access to debt, pesky credit card bills that refuse to go away, HECS debts, not to mention house prices that read like telephone numbers all seem to conspire to keep generations X and Y broke.

A recent report by the National Centre for Social and Economic Modelling confirmed what many have been sensing for a while: it is the older generations who are doing well while younger people are going backwards.

The report found 25- to 34-year-olds are less affluent now than in 1993. In 1993, households headed by 25- to 34-year-olds had savings averaging $198,000, but by this year this had fallen almost 40 per cent to $121,000.

The most significant cause for the fall, says report author Simon Kelly, was a fall in home equity from $106,000 in 1993 to $66,000 in 2002. "The trend away from home ownership for younger households appears to be impacting significantly on their ability to save,'' he said.

It seems younger people, unable to get together the deposit for a home, are continuing to spend their money rather than set it aside for the future. Or spending so much on a home that they have no money left for saving.

But does it have to be that tough?

Generations X and Y may be facing an uphill battle in some fronts but they have huge advantages over older people trying to get started. If nothing else, they have time to take advantage of one of the most powerful tools of wealth creation: compound interest.

Peter Thornhill, the principal of Motivated Money, says you need time before the real benefits of compound interest kick in and young people have this in spades.

Compound interest is simply the process where, by reinvesting your profits each year, you earn interest on your interest. Over time the value of your capital and the interest grows until you're really rocketing along.

"The question I get asked by all the younger people [who come to my seminars] is what can they do,'' says Thornhill. "They need to set up medium-term savings plans and not try to shoot the lights out [in terms of returns] but let them run, and never touch the money. The hard part is that once they have a reasonable amount there's a temptation to spend it. They never enjoy the wonders of compounding.''

Time also gives younger people freedoms not enjoyed by those who have the end of their working life in sight. These include the freedom to invest more aggressively in the knowledge that they can ride out market ups and downs and the freedom to learn by making mistakes.

Michael Blomfield, the chief operating officer with Commonwealth Securities, is not at all surprised that the under-30s make up about 15 to 20 per cent of CommSec's client base.

"They are a very important part of our market, particularly when you take the view that investing has to be a long-term strategy,'' he says. "But there's a real polarity between those who think `I'm young and I need to be very secure' and those who think `I'm young and this isn't a lot of money so I can afford to go crazy'.''

Blomfield says products such as regular saving and regular gearing plans are popular with younger investors as they provide them with a disciplined structure through which they can build wealth.

Those who want maximum performance with minimum risk tend to opt for putting aside a fixed amount each month through regular savings plans, while those who are prepared to be more aggressive are more likely to use the newer regular gearing plans where your regular savings are supplemented by borrowed funds.

Unlike their parents who grew up without easy access to financial information today's under-30s tend to be self-directed, says Blomfield. They are comfortable using the internet to research and invest and, with most of them now covered by compulsory super, are more aware of the alternatives available.

Marissa Broome, the principal of wealthadvice.com.au, says many younger people are well placed to get on top of their finances. It's just that they may not do so in the same way their parents did.

The essential requirement, she says, is to realise that you don't have to make huge sacrifices to your lifestyle. Inevitably, you'll have to spend less if you want to save and invest, but your financial plan should recognise that doing things like backpacking around the world are an important part of being young.

Thanks to a society that promotes debt, Broome says sometimes her biggest jobs are helping younger people reduce their debts. But once the borrowings are under control, most of her clients are borrowing to invest through margin loans, investing through regular gearing products, or just setting up a simple savings program.

"I'm using ING Direct because [young people] hate bank fees [and it has none] and they can do it all online,'' she says.

In fact it's debt, more than anything else, that is leading many younger people to feel financially stretched.

Narelle Brown, the co-ordinator with Ryde-Eastwood Financial Counselling, says the education system lets us down by not teaching us how to manage our money. When we get our first pay cheque, we spend it. Then we spend the second one because a whole world of spending and having what you want now has opened up.

"It opens up more when you get your first credit card; then you get offers for more credit, and so it goes on,'' she says. "It seems at the early stages that you don't have a lot of money so you spend it. But you get into a cycle of debt.''

Brown says that, with tough times ahead, financial counsellors have been trying to get the message out to younger people that they need to reduce their debt and put aside some money.

But debt doesn't necessarily have to be a bad thing. Colin Lewis, the head of technical services with Ipac Securities, says borrowing to fund your lifestyle can be bad news for the under-30s but an increasing number is learning to use debt to build wealth.

"There's a better understanding of how to use debt to get ahead,'' he says. "The people we see seem to borrow more but repay it quickly and then get into debt again. That's not necessarily a bad thing so long as they are educated about what they're doing, have the cash flow to service the debt and understand the risks.''

Broome says younger investors are also more inclined to invest "wealth-effectively'' rather than "tax-effectively''.

The traditional advice has been that investment borrowings should be on an interest-only basis (so that you're not paying off your loan) but she says younger people are more inclined to pay off their investment debts particularly if they are planning to have a family and want one partner to be able to stop working.

The smart gen Xers and Yers are also finding ways around the problem of Sydney's spiralling property prices.

Lewis says it can make better sense for people without a lot of resources to gradually borrow to invest. "You can bite off manageable chunks maybe borrow to invest $10,000 or $50,000 rather than buying a $300,000 property,'' he says. "And sharemarkets have traditionally shown they recover eventually.''

Broome says owning a home is not as important to many of her clients as it was: some have substantial investment loans and are still renting because they see the transaction costs involved in buying and selling property as excessive. "They're not prepared to pay that until they can afford what they want on one income,'' she says.

For those who do want to buy now, the first home owner grant has made housing more affordable for many younger people if they change their perception of where they can afford to live and are prepared to work to get their finances organised, says Broome.

"I had one couple who came to me with too much debt and three years later they're in their own home,'' she says. "It was a matter of them living on one income and using a savings plan to invest in managed funds. They were also thinking they wanted to buy an $800,000 house but that wasn't realistic. A $250,000 unit was.''

Chris Fitzpatrick, the president of the Real Estate Institute of NSW, says if you're looking to get into an established three-bedroom home you have to look west of Parramatta.

"Twenty-three of Sydney's 50 local government areas have median house prices of $500,000 or more but in Campbelltown, for example, it's $228,000,'' he says. "You have to get into the market in a location where you can afford to service the debt.''

An alternative, says Fitzpatrick, is to look for a unit closer to town with the long-term objective of trading up as earlier generations did.

Some young buyers, he says, are buying investment properties rather than a home to get a foot into the market, while others are delaying their first home purchase until they are better set financially.

"But if you're going to put off buying you should be budgeting to save so you have a bit of capital when the time comes,'' he says.





Back