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Financial Advice & Planning

Under 40 and broke: Why young people need financial advice more than ever

12 October 2017

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Money & Life team

Money & Life contributors draw on their diverse range of experience to present you with insights and guidance that will help you manage your financial wellbeing, achieve your lifestyle goals and plan for your financial future.

With increasing debt and falling home ownership among the under 40s, their financial prospects are less than rosy.  If this trend is set to continue, young people are going to be needing financial advice more than ever to help them make the best choices for a secure future.

There’s been a lot of talk in recent years about how much better off baby boomers are than their kids or grandkids. But is there any truth in these reports? According to the latest HILDA (Household, Income and Labour Dynamics in Australia) survey report, the gap in net wealth across Australian generations is growing and it’s not looking good for the under 40s.

Since 2001, the HILDA survey has been following the fortunes of more than 17,000 people1. One of the latest findings from this cross-section of Australian households is a sharp decline in income growth across all age groups2.  But the potential downside for young people (aged 18 – 39) is even greater because they’re less likely to be benefiting from capital gains that come from home ownership.  And if they have been able to get their foot on the property ladder, the amount of debt they’re taking on with their mortgage is on the rise.

Less home ownership, more debt

In 2002, the HILDA survey reported 36% of people under 40 as homeowners. In the 12 years to 2014 that number has fallen to just 25%3. And that ‘lucky’ 25% are now grappling with more than double the average amount of mortgage debt, up from $167,385 in 2002 to $336,586 in 20144. They’re also quite likely to be increasing that debt after securing their initial home finance with more than 30% of younger home owners taking on a bigger mortgage from one year to the next without moving to a new property5. Given the recent slump in household incomes, this trend in taking on more debt to make ends meet isn’t surprising.  And while interest rates remain low, the decision to refinance to access more home equity may add up. When rates rise, their larger debts could leave this group vulnerable to an ever greater squeeze on their income.

The generation gap in net wealth

With more and more young people struggling to get on the property ladder, it’s no wonder they’re falling behind dramatically in their overall wealth position, compared with their parents and/or grandparents. While we certainly might expect older people to have more wealth – they’ve had more time to work, save and benefit from the ongoing property boom in Australia – they now have considerably more compared with young people than they used to. In 2002, people aged 65 and over had 2.2 times more wealth than those in the 25 to 34 aged group. In 2014 that ratio has risen to 4.5.[6]

The outlook for retirees in 2050

So what could these economic trends mean for our under 40 year-olds in the longer term? With incomes stagnating and mortgage debts growing, their prospects for a comfortable financial transition into retirement could be a cause for concern. As a growing number of people face a long-term future in the rental market, they could be continuing to pay for a roof over their head well into their retirement years. And that could be the case for the shrinking number of home owners in the same generation too. By increasing their home finance year-on-year instead of paying it off, they might find themselves drawing on retirement savings to finally say goodbye to that substantial mortgage.

Getting priorities in order with the right advice

Even though young people might feel they’re up against it financially, there are steps they can take to build wealth and plan for their personal goals. And when it comes to managing their household budget and taking on more debt, a CERTIFIED FINANCIAL PLANNER® professional can help them understand how this could affect their financial position in later years. And a planner may be able to give them other options for meeting their financial commitments and saving more for a secure future.

Whatever generation you were born into, a CERTIFIED FINANCIAL PLANNER® professional can offer valuable advice on making positive choices for a more secure financial future.

For more tips and tricks on how to manage your money, avoid mistakes that can derail your financial future, and secure your financial freedom, download our free eBook.

1 ABC News Young Australians hit by falling wages, surging house prices as wealth gap widens: HILDA report

Michael Janda, 2 August 2017, “Known as HILDA — the survey of Household Income and Labour Dynamics in Australia — it has been tracking the economic and social situation of more than 17,000 people since 2001.”

2 ABC News Young Australians hit by falling wages, surging house prices as wealth gap widens: HILDA report

Michael Janda, 2 August 2017, “”Household incomes have stopped growing — since 2012 we’ve actually had a slight decline in average household income,” said the report’s author, Professor Roger Wilkins from the Melbourne Institute.”

3 The Conversation Home ownership falling, debts rising – it’s looking grim for the under 40s Roger Wilkins 2 August 2017, “The survey shows the rate of home ownership among 18 to 39 year olds declined from 36% in 2002 to 25% in 2014.”

4 The New Daily, Young Australians Living at Home Longer: HILDA Survey, David Ross, 2 August 2017, “Average mortgage debt among 18-39 year olds jumped in real terms from $169,201 to $336,586 over the past 12 years.”

5 The Conversation Home ownership falling, debts rising – it’s looking grim for the under 40s Roger Wilkins 2 August 2017, “A surprisingly high proportion of young home owners (between 30% and 40%) actually increase their debt from one year to the next, despite most of them remaining in the same home.”

6 The Conversation Home ownership falling, debts rising – it’s looking grim for the under 40s Roger Wilkins 2 August 2017, “In 2002, median net wealth of those aged 65 and over was 2.8 times that of people aged 25 to 34. In 2014, this ratio had increased to 4.5.”