A guide to the financial issues facing young people and what they can do about them
Tue, May 8, 2018, 06:00, Fiona Reddan, www.irishtimes.com
It has become much more difficult for today’s 20-somethings to buy their first home.
“Generation rent”, the “lost generation”, or wasters who throw away their money on avocado toast: accurate descriptions of today’s 20-somethings or media hyperbole? The truth, perhaps, is somewhere in between.
Eoin Magee, a financial adviser with Prosperous Financial Planning, has buckets of sympathy for this age cohort. “I’d say people in their 20s have been dealt the worst cards possible,” he says, “It’s a very difficult environment to be starting out your life in.”
Magee points to the lower salaries of many 20-somethings as being a key challenge.
“When they came out of college, jobs weren’t freely or readily available, so they took whatever job they could get, but started on a lower salary than they would have otherwise done.
So while someone could have previously expected to start on 30,000, they might have started on €25,000. “And you don’t make up that gap again,” says Magee.
At the same time, house prices and rents started running away from them.
“They have got caught in a perfect storm,” he says, noting that the generation behind them might have it a bit easier. They will have auto-enrolment in their favour for one, which will help with retirement planning, and perhaps a different view of the property market.
“People in their 20s, they’ve seen house prices being decimated, so they may not work hard to save a deposit because they have a different perception of what normality is,” he notes.
But just because things are tough doesn’t mean 20-somethings should shy away from doing what they can to make their own circumstances that little bit better. The huge advantage 20-somethings have is their age though this only works in their favour if they take some steps now. So what are the typical mistakes you might make?
Not paying yourself first
How you establish your savings habits in your 20s is going to have a huge impact on your future financial health. Do you put whatever you’ve left over at the end of the month into a separate savings account? Or do you just leave whatever is left resting in your current account?
Maybe you’ve agreed a savings plan with a parent, whereby you cough up some rent and they save on your behalf. Whatever approach you take, the critical point is that this money goes into your savings when you get paid – and not at the end of the month when your accounts may have been decimated.
Magee suggests you target a figure of 20 per cent of your income, including pension savings.
“My priority is that you start to build a savings pot and you’re very disciplined in doing so,” he says, noting that this will then give you options, and can be allocated to a deposit on a house, or a masters, or whatever financial goals you may have.
Going the other route of planning a budget and trying to live by it over the month can prove challenging.
“I don’t believe in budgets” says Magee, likening them to a calorie-controlled diet – and we all know how well they work for most of us. Yes, we’re good for five days of the week and then splurge and ruin all our progress.
Relying too much on deposits
But if how you save is important, so too is where your money is saved. With savings rates on the floor – and nearly underneath it – earning less than 0.5 per cent a year can make saving an almost joyless experience.
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“You can’t save for more than five years in a bank account, as you won’t even beat inflation,” advises Magee, saying if you don’t invest in a well-diversified equity portfolio, “you’re going to have to save harder”. And that may be just too much for people already strapped for cash.
Moreover learning about investing, funds, shares, exchange-traded funds, etc, at a young age – even if you make the occasional mis-step – will undoubtedly improve your financial health over time.
Not talking to friends/family about money
One of the best financial resources you have is the people that you know. Carty gives example of people locking their savings away in notice accounts so they can’t access them – with one 20-something taking it so far as to put their savings in a credit union 20km away so it’ll be difficult to withdraw.
Magee has another tip for parents and live-at-home children alike; parents could charge the market rent to their offspring – less any savings they contribute. So if it would cost them €500 to rent a room, charge them €300 if they can put away €200 a month, and so on.
However, Carty notes that while 20-somethings might share their life on social media, they can still be shy when it comes to talking about money.
“It’s a bit of misnomer that they share so much,” he says.
But try and shrug this off as you’ll pick up some great tips long the way.
Thinking pensions are for later on
OK, so your 20s may not be the time to get in deep with pensions. But if you can do one thing, make sure you’re maximising contributions from your employer. If they match your contributions, try and put in the most you can to get the maximum contribution from them. It’s (almost) free money.
Not planning to buy a home – well in advance
As the resident financial planner on RTÉ’s Crowded House, which aims to help 20- and 30-somethings move out from home, Magee is keenly aware of the challenges facing today’s younger generation.
Whereas their predecessors may have bought their first home during this decade, it has become much more difficult for today’s 20-somethings to do so. A recent study from the UK-based thinktank Resolution Foundation found that about a third of millennials will never own their own home.
So if you want to be in the 66 per cent that do, it may require considered planning. “You may never want to buy a house; but you don’t want to wake up at 29 years of age and think ‘I definitely want to buy a house’ and have done nothing about it,” warns Magee.
Magee has crunched the numbers and found that it will take nine years for someone on the average income to save a deposit to buy the average house in Dublin, or seven years in Galway.
“So if you’re 21 years of age today, and if you’re not saving for a deposit for a house, you won’t be buying in your 20s,” he says.
Some 20-somethings are well ahead of the curve in this regard; Rory Carty, head of youth banking with Bank of Ireland, has fielded questions from second and third year college students about how they can save to buy.
“They are quite savvy and are saving quite early,” he says. And for people fearful of a preparatory chat with a lender about getting a mortgage, Carty says “don’t be”.
“People should come in and speak openly around their financial situation and get advice,” he says.
Thinking renting – and not saving – is viable
Maybe you’ll never own your own home; maybe you don’t want to. And don’t worry, never owning a home can be a legitimate financial decision. Look at the example of Germany, or France, where people are content to rent forever. Just 14 per cent of those living in Berlin, for example, own their own home.
However, years of experience have meant that these take a different view; yes they’re not forking out €4,000 to upgrade the boiler, but they are also aware that in retirement, unlike a homeowner, they will always have rent to pay on their home. So they take the money they would otherwise have spent on maintaining a property and save it for this eventuality.
And as Magee notes, while renting long-term can make sense, “you need absolute discipline for that”.
Spending what you don’t have
There are always temptations to spend more, but Magee is clear: “Don’t spend more than you earn”.
Given the proliferation of easy credit, such as through credit cards or car loans, urging us to upgrade our lifestyle, this can be more difficult than it sounds – particularly when it comes to the temptation of a shiny new (ish) car.
“There is no doubt that 20-year-olds are getting caught up with it ([extended purchase arrangements like] PCPs), and are driving better cars than they would have otherwise,” notes Magee.
He also cautions against saving, while you have a considerable balance on your credit card. Saving at 0.4 per cent while owing €1,000 on a credit card at 20 per cent, doesn’t make sense. If you use your savings to clear this debt, you can still fall back on the credit card should an emergency arise before you get a chance to rebuild your rainy day fund.
Allowing your lifestyle to inflate
This can be a major danger – or opportunity – to how your life is going to be. If you’ve just started work, you won’t be used to earning €400-€700 a week for example.
“So don’t get used to it,” Magee advises, urging 20-year-olds to try to put away 20 per cent of their net savings (this includes pension savings) each month. “And if you’ve never gotten used to spending a certain amount of money, you won’t miss it either. You’ll be just as content a person,” he says.
Not only that, but he wants you to bring this lesson with you through life.
“If you get a pay rise, don’t get used to it,” he says, cautioning against “lifestyle inflation”, whereby your lifestyle expands to fit your income. This is the biggest thing they can to help themselves financially,” he says of 20-somethings.
The challenges facing today’s 20-somethings
Soaring rents: Average Dublin city centre two-bed is €2,000
Priced out of the property market: Average age of first-time buyer 2006: 29 Average age today: 34
Unaffordability: Average house: average income 1995: 2.5 (national); 3 (Dublin) Average house: average income 2016: 4.7 (national); 6.6 (Dublin)