Generation Y

3 June 2011

 GENERATION Y

They’re often unfairly stereotyped, the subject of countless studies, and in many ways they’re better placed than most Australians to achieve a bright financial future.

Generation Y those born between 1982 and 2000 can be well into their 20s. Some are looking to consolidate a career, settle down, buy or pay off a home, perhaps start a family. Others are still in party mode that may last into their 30s.

Some have already collected a nasty pile of consumer debt, and investing and superannuation are the last thing on their minds. After all, retirement is more than 30 or 40 years away.

However, such a long time frame gives Generation Y a great opportunity to bring their finances under control, use the superannuation system to their advantage and start a savings and investment plan that can eventually make them richer than their parents.

Here are 10 ways Gen Y can get its financial future on track.

1. MANAGING DEBT

Resi Mortgage Corporation chief executive Lisa Montgomery says simplifying debt is a must.

“Debt control is a key issue for some Gen Y-ers who have grown up in an era in which widespread credit-card use has become the norm,” she says.

“Their ready acceptance of credit facilities has characterised them as spenders.”

Club Financial Services general manager Andrew Clouston says that unlike previous generations, many Gen Ys are comfortable with debt, but they must be careful about how much debt they take on.

“Budgeting and debt consolidation can help make managing your debts easier, as well as potentially save you thousands in interest repayments and improve your credit rating,” he says.

People who get into trouble with multiple credit cards, store cards or personal loans can look at consolidating their debts into one loan or their mortgage if they have one. But this will only work if the other credit facilities are then cancelled to avoid sinking into the same situation again.

2. HECS HELP

Like a big black cloud hanging over the head of former university students, a HELP loan (the debt formerly known as HECS) is one of the first big financial issues young people face.

While this debt does not attract interest, its size increases each year, adjusted to inflation, and the amount of compulsory repayments depends on your income level.

Williamson says that making voluntary HELP repayments of $500 or more attracts a 10 per cent bonus.

3. LOAN ARRANGING

Williamson says Gen Ys who borrow to invest should remember to keep loans for different purposes separate. Combining a personal loan and a share portfolio loan can become a mess for you and your accountant at tax time.

Credit-card reward programs can be a trap. If you are not using the credit card enough, the cost of the program and higher interest rate are unlikely to be offset by any rewards.

Younger people may be better suited to a low-rate credit card.

4. SET GOALS

Clouston says your 20s is a great time to identify financial goals, which helps to create a map for the future.

“Short-term goals, five years or less, may include a wedding, honeymoon, furniture, new car or an investment property,” he says.

“Medium-term goals could include owning a home and financing children’s education; long-term goals may include retirement and travel.”

5. SAVINGS PLAN

It sounds boring and includes the dreaded “B” word budgeting but starting a savings plan early can deliver huge financial dividends in the future.

There are many budget planners available online or via your financial institution.

“A budgeting and savings tip is setting up auto allocations for fixed costs, savings and disposable income direct from payroll,” Clouston says.

Williamson says that if you automatically deduct money before you have a chance to spend it, you won’t miss what you don’t have.

“Most people live to their bank account,” she says.

6. PROTECT NUMBER ONE

Personal insurance is an area many young people don’t think about. While life insurance may not be vital if you’re yet to start a family, income protection insurance is a must as your future income is likely to be several million dollars.

Williamson says income protection is the most important insurance for Generation Y.

“The best and easiest time to get this insurance is when you are young and healthy, and premiums are tax-deductible,” she says.

7. INVEST IN FUTURE

Now’s the time to step into the world of investment. You can buy shares and managed funds in small amounts with regular monthly deposits.

“For some, money can be tight. However, it is still good to consider smaller investment options, which may amount to big returns in the long term,” Clouston says.

“Set aside a fixed percentage of your income say 10 or 20 per cent each week and put this into a high-interest account. You could be surprised how quickly this could make a great little deposit for a new car, overseas travel or your first property.”

8. PROPERTY THINKING

Speaking of property, real estate affordability is at crisis levels in Australia, with median house prices well above $400,000.

But young people should not give up on property, as it has historically doubled in value every 10 years or so, which means a big financial strain today won’t seem as painful down the track.

“It’s important to ensure you make yourself aware of any grants available to you, such as the first-home-buyer grant,” Clouston says.

Many lenders are offering new ways to help young people get their foot in the property door, such as parent guarantee loans and shared equity loans.

Resi’s Lisa Montgomery says getting a toehold in the property market is the major issue for Generation Y. “In order to do this, some will need to think outside the square,” she says.

“Looking at regional areas where there’s industry diversification, solid infrastructure and reliable long-term rental yields is likely to become more appealing for Gen Y investors.”

9. START NOW

“Our biggest tip for Gen Y is: the sooner you get started, the sooner you’ll be reaping the rewards,” Clouston says.

“It’s common for people in their late teens and 20s to still be living with their parents. With few outgoing costs, they often have quite a high disposable income, making it the ideal time to get a foot up on the property ladder.”

10. SUPER STRATEGIES

The power of compound interest makes superannuation strategies perfectly suited to young people, especially when there’s free money involved.

The Federal Government’s co-contribution scheme for low and middle-income earners matches dollar for dollar, up to $1000, money put into super.

Just one $1000 investment, which would be matched by another $1000 from Canberra, would grow to more than $30,000 over 40 years, based on 7 per cent investment growth.

  • By Anthony Keane

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