Gen Y and their finances

Reading fellow blogger’s discussions of social media and recent feedback from my own contributions on SmartCompany has prompted me to write about Generation Y and their personal finances.

Before we get into this I would like to make one personal view made clear and that is – I’m not a fan of labels.

Gen Y, Gen X, why is it necessary to pigeonhole based on when you were born? We are all just people with different experiences aren’t we? And on networking? How about just forming and building friendships and relationships based on mutual trust.

Networking sounds to me like you want to be my friend just so I buy something from you or do business with you.

With our 20-somethings (or our fresh-batch-of-new-taxpayers), when it comes to their finances and money two words come to mind ‘credit’ and ‘debt’.

The banks love you

Overwhelmingly Gen Y are optimistic about life based on the experiences brought about by rapidly rising property, economic, resources and share market booms. They are confident in getting a job and confident they will be rising rapidly to the top.

They are efficient and proactive and keen to live in the here and now and generally not as financially astute, though that’s not to say they aren’t financially savvy. Gen Y’s are very well represented in the entrepreneurial stakes.

In 2008, 3.7 million credit cards were applied for, of which a third of applicants were between 18 and 27, while a separate survey commission in 2006 revealed that some 73% of 18 to 24 year olds where already ‘highly geared’ with debt.

Gen Ys are comfortable with debt and hold the attitude that they’ll “pay it off later”, in stark contrast to previous generations who are very cautious when getting into debt.

It’s never been easier to obtain credit and get into debt. The banker’s love Gen Y because they’re paying for their $5,000 country club membership.

Although they may feel they are invincible in their 20s, assuming most will survive this period, they will come to realise they are not so invincible at some point and will have to start planning for the future.

Out comes the finger

The ‘parent ATM’ will not last forever and although Gen Ys may expect an inheritance, if they are not disciplined with budgeting and planning to begin with, without these skills then any such inheritance just won’t last.

They have a tendency to spend what they earn, if they earn $1,000 a week they’ll spend it. If they earn $2,000 they’ll spend all of that too.

Debt consolidation and budgeting is the first step to stopping the overspending credit and parent ATM ‘gravy train’. After determining your cashflows a fixed percentage of your income can be set aside to start a regular savings pattern of say 10-20%. This could go into a high interest online account to kick start the savings habit.

An alternative to a cash investment could be a regular investment into a diversified fund of as little as $1,000 upfront and $100 per month and it’s also a good time to be taking advantage of a slight correction in share prices recently.

To be cost-effective and return effective direct share investments are only appropriate if you have at least $4,000 to $5,000 to buy a decent number of shares in any particular company and to obtain adequate diversification you’ll need at least a minimum of four to five different share holdings so regular drip feeds into a diversified fund is a far more cost-effective and diversification effective starting point.

This simple strategy ‘drip feeds’ the buying of units and is a good way to reduce volatility. Over time volatility will become less of an issue as your investment value increases with returns both from distributions and capital gains.

These arrangements can be set up automatically even on pay days so they’ll hardly be missed.

But I’m missing the (residential) housing train!

Don’t be too concerned with this, there used to be a saying on Wall Street – If the cab drivers are talking about which shares you should buy then it’s time to get out of the share market.

At the moment the same applies to residential housing. You can refer to my previous article on this here.

First Home Savers Accounts and the first home owner’s grants are great but are only helping fuel demand. For the FHSA for every $5,000 you contribute you get a 17% contribution from the Government, (assuming all the relevant criteria is met). Breaking it down, that requires you to debit about $97 a week from your pay.

Interest earned on the account is taxed at the same rate as super which is currently 15%. There are other ‘minor’ criteria to be met, but nothing too onerous.

I shall cover the other areas such as superannuation and insurance next week.

Nick Christian is a Financial Adviser and planner and authorised representative of Millennium3 Financial Services.

 The views and opinions expressed within this letter are those of the author and do not necessarily reflect those of Millennium3 Financial Services Pty Ltd.

The above is general in nature and should not be acted upon without seeking the advice of a professional licensed financial planner.