T oday’s 20-something generation — Gen Y, as they’re known — are renowned for being financially optimistic, and this attitude is partly attributable to the booming Australian economy they witnessed during their formative years.
However, Gen Ys tend to be financially uneducated and some of them are paralysed by debt.
Unlike past generations, credit has been all too readily available and Gen Y stands accused of failing to understand the ramifications of their spending and the potential impact of escalated debt levels, particularly given the effects of the global financial crisis.
The Gen Ys are undoubtedly the financial planning clients of tomorrow and advisers can engage them by implementing simple and effective strategies to consolidate debt, budget and invest, save for a home and understand super.
Debt consolidation and management
Reducing non-productive debt comes not only in the form of credit card consolidation but also from paying off any purchases on credit, including goods such as electronics that have an interest-free period or monthly payment terms. A repayment strategy coming straight from wages can help pay off debt more quickly.
Managing debt properly now helps when a Gen Y client applies for a mortgage or loan later in life, as a financial institution will view them favourably.
Education is costly and many Gen Ys will have a HECS-HELP debt from undergraduate studies or a FEE-HELP debt from postgraduate or other relevant studies. Compulsory debt repayments are based on income, however, voluntary payments can be made to reduce the amount owing. Whether such a strategy is appropriate will depend on an individual’s circumstances, including their cash flow.
Budgeting and financial education
In managing a cash flow situation, individuals should not spend more money than they earn, spending habits should be analysed to determine what their necessary expenditure is and what is considered discretionary or frivolous spending, as the ‘family ATM’ will not operate forever.
There is abundant help, whether it’s reading material or a seminar on budgeting. While this may seem basic, it promotes a solid understanding of the fundamentals and provides a benchmark for further financial planning.
Gen Y has its fair share of entrepreneurs and many have started, or are looking to start their own business. Basic business and accounting advice will be beneficial in this respect.
Savings and investment plan
Gen Y individuals are known to change jobs frequently and not be attracted to linear career paths. With varying incomes, such as a high paying job one year and a low paying job the next, the percentage savings method, where an individual breaks down their income and saves a certain percentage with each pay cheque, is often most appropriate.
After having the client prepare an initial budget and cash flow statement, an adviser can look at how much it is feasible for them to save. Saving into a high interest account, with regular payments or even automatic transfers, is a basic way to instil discipline into a Gen Y client.
There are many more options than simply placing money into cash. Investing into the other asset classes of fixed interest, property or shares should be considered, especially to satisfy long-term goals and objectives.
Although cash investments are less risky, given the present low interest rate environment, the return is also quite low. Where they have a medium to long-term timeframe, it may be appropriate for a Gen Y client to invest in other asset classes via a single sector or diversified managed fund.
Depending on the timeframe — equity funds, high yield funds, balanced funds, international share funds and property funds could be considered.
With share prices low and price earnings ratios at lower than average levels, many experts consider this a good opportunity to achieve exposure to equities, whether directly or through managed investments.
History suggests that eventually markets will recover, although we don’t know when this may be, and when they do there is the potential for significant gains. Hence this can be a good strategy to help accumulate wealth in the long term.
Housing
Gen Y generally need more help than previous generations to enter the property market.
It has been widely debated in the media that the property price rise over the past two decades was caused by the baby boomers.
Mum and dad investors who are cashed up, ready to downsize, or those who are just looking for another investment property, have helped to push up property prices to a level that Gen Y simply cannot afford.
For Gen Ys looking to buy, aside from tapping mum and dad on the shoulders for help with the deposit for their first home, there are a number of government incentives they could use, including the First Home Owner Grant, exemptions on stamp duty and the First Home Saver Account.
Superannuation
Many Gen Y individuals fail to pay attention to their superannuation funds, at times being members of several funds as a result of many jobs. An adviser can help by explaining to their Gen Y client about the simplicity of monitoring and consolidating. Finding lost super can be done via SuperSeeker on the Australian Taxation Office website, which requires only a tax file number to search for multiple super accounts.
Too many Gen Ys tick the default fund blindly and rely on super funds to decide where their money is being invested. For the savvy investor, it’s never too early to open a self-managed super fund (SMSF).
SMSFs enable the trustee to be actively involved with their investments, more so than a regular super fund.
Challenges for baby boomer parents
Analysis shows that for baby boomer parents, the continuous funding of their kid adults, or ‘kidults’ as they’re fast becoming known, is likely to significantly impact their lifestyle and financial ability.
While parents might want to help their children out for life’s big events, such as a deposit on a house, a wedding or as guarantor on a loan, all of this needs to be accounted for in their own financial plan.
With this in mind, there is clearly a place for advisers to initiate a joint planning session with Gen Y and their parents to discuss ways for Gen Y to manage their finances better, build on their wealth and, importantly, become financially independent.
Amlika Lal is a journalist at Kaplan Professional . This article is an excerpt from Kaplan Professional’s PD sessions and Ontrack programs.
