Gen Y and their finances: part 2

Last week I touched on the unaffordable housing rout caused by a flood of excess credit and lack of supply. Signs are finally emerging that the ‘me too-ers’ have realised that residential housing has finally had its run and mortgagee auctions are on the rise.

That’s not to say I would never recommend housing as an investment as part of your portfolio, but if you’re sticking to the mantra and habits of the billionaire rich investors or super investors, remember the trick is to pay a good price for a great asset. For mine the ‘intrinsic value’ of an investment in housing is far too great at the moment.

Ask me again if the price falls 40-50% due to mass hysteria and a no-end-in-sight pessimism and I’ll give you a very different answer.

Gen Y will learn the investment lesson of steering well clear of inflated asset prices and avoid the ‘me-too’ approach. Will it last? No. As Warren Buffett’s right-hand man Charlie Munger says: “the trick (to intelligent investing) is to get more quality than you pay for in price”. Very few houses are worth paying that extra for and at today’s prices, simply cannot justify future economic returns.

But don’t take my word for it. Read the greats of investing to appreciate the value of the lesson I’m trying to impart here. Take a look at John Kenneth Galbraith who, in his book The Great Crash, wrote that it is when all aspects of asset ownership such as income, future value and enjoyment of its use are thrown out the window and replaced with the base expectation that prices will rise next week and next month, that the final stage of a bubble is reached.

Swimming against the tide is not popular. But I get paid to tell people what they DON’T want to hear – to swim against the tide, make money from the folly of investors and stop them from making the mistakes of the many.

This is similar to those who say the Chinese miracle economy will continue long into the future – it simply won’t.

Superannuation – huh!?

There is definitely a serious lack of interest here. Among Gen Y it’s about as popular as well, a hangover.

Keeping an eye on consolidation is the least you can do to keep on top of things. Ten different superannuation accounts is not diversification.

If you think you may have a lost super account use the ATO website to find the Superseeker super search engine. All you need is your tax file number and hey presto you’ve found them again.

Many may well be inappropriately invested according to their risk tolerance and time horizon and may be missing out on long-term gains. There’s a lot more to it than just ticking the default fund from your employer.

We are often bombarded with the industry super fund’s ads and they love to knock the retail super competition, but the benefits from the advice of an intelligent adviser and planner over the long run will far outweigh any of the ISF’s ‘cost’ alone assertions.

Self managed super funds may be an option for the savvy Gen Ys, but it is very important to understand the strict rules to operate them and understand the duties and responsibilities of being a trustee. The costs to operate a trust can also be extensive so must also outweigh the returns.

An alternative to a SMSF for Gen Ys in the higher income bracket (ie. $80,000-plus) is to make concessional contributions by salary sacrificing into super; the maximum it will be taxed at is 15%, however keep in mind the maximum contribution for this is $25,000 and again this will be indexed to the average weekly ordinary time earnings (AWOTE) for next financial year, not the calender year.

20 bucks a week – is that all?!

The effect of long-term compounding returns should never be overlooked and will do all the heavy lifting for you.

I wouldn’t suggest it be all you do as unfortunately it has been pared back from a maximum contribution of $1,500 to $1,000 but if all you did at an early stage is make use of the Government’s co-contribution scheme on top of the current 9% your employer tips in, your super account should look very healthy by your late-30s.

Keep in mind that the maximum cut out is $61,920 for the 2009 – 2010
financial year and this will be indexed with the AWOTE. To receive the maximum for this financial year you need to earn $31,920 or under and this will reduce by 3.333 cents for every dollar of income over this amount.

Setting aside a mere $20 (or $19.24 to be closer) from your post tax weekly wage is the easiest way to get the contribution organised and will hardly be missed.

Lack of interest in the insurance salesman pitch

Like all of us who have come before Gen Y I have been reminded previously of the insurance salesman pitch tag, and note the apparent solid disinterest and rising ‘tune-out’ ratio of listeners and appreciate the severe lack of interest.

Well if it results in me saying ‘see I told you so’ later then I am happy to wear it, because it is so seriously overlooked. Like everyone else out there Gen Y can succumb to an array of illnesses and injury which doesn’t even necessarily have to relate to work.

Income protection is priority number one on my list, this will cover 75% of your income for many things such as Ross River Fever, Chronic Fatigue Syndrome (something I personally suffered for many years when a 26 year old) and even depression.

Say if you’re on $80,000 a year, have an income protection policy for 75% of this, get chronic fatigue syndrome for five to 10 years (some cases last 25 years plus) you’ll miss out on $300,000 to $600,000 in payments to cover the mortgage, car and those said massive credit card bills, etc.
Premiums for this will depend on your chosen profession but they are generally very cheap for Gen Ys.

Life and TPD insurance will cover debts as well and if affordability is an issue these may be held in your super policy although you must understand that insurance premiums are taken from the super fund on top of other fees and this will affect your final balance.

Health insurance for those earning over $73,000* should be a serious consideration to avoid the Medicare levy surcharge of 1% on top of the 1.5% up to that level.

Phew, there is so much more to cover that’s just the tip of the iceberg…

*A Medicare surcharge applies for singles with income including any reportable fringe benefits, total net investment losses and reportable super contributions (eg. salary sacrifice and deductible super contributions) over $73,000 ($146,000 for couples, 2009/10), who do not have adequate private health cover.

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.