There’s a lot of talk about how difficult it is for young people to get into the market.
Many beginners seem to be paralyzed about what they should do.
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Kevin: There are several options for young people to get into the market.
Maybe we can just have a look at a few of those and give us your impressions about what they can do.
Michael: There are lots of stories about how the younger generation currently – Gen Y’s and the Millennials below them – are having difficulty getting a foot on the property ladder.
It’s a combination of higher prices, more difficulty getting finance and, in my mind, maybe a little bit of lack of financial discipline with young people not saving up a deposit to get going.
But, there’s nothing different from when we were young.
It was even harder to get a bank loan.
You had to go to the bank and sit with the bank manager. You had to wear a suit. You had to put on your tie.
You had to prove a savings record and save a reasonable deposit.
And if you were married, they wouldn’t take your wife’s income to account, either.
Kevin: That made it very, very difficult.
They actually discouraged you from actually having an investment philosophy by making you sell one property before you moved to another one.
Michael: Yes it was much harder then.
Also, our expectations were a bit lower.
To start off with, we were happy to get involved in any sort of property, buy anything, and in the future, eventuall buy our dream home.
But today, the younger generation seems to want to have all the modern conveniences that it took their parents 30 or 40 years to get.
Having said that, it still is difficult, so let’s discuss a couple of ways to make it easier.
Kevin: Let’s do that.
Michael: Interestingly, Finder.com.au has done a survey showing how many young families are now turning to the bank of mum and dad to start getting a deposit.
The problem is today you need 5%, 10%, and sometimes even 20% deposit before the bank with lend you the rest.
That’s the bit that people are having difficulty with, and in my mind, you can either turn to the bank of mum and dad or you can become self-reliant and actually have some financial discipline.
Kevin: What other advice would you have for them?
Michael: The first thing I would recommend is to spend less than you earn.
In other words, you’ll never save for a deposit if you spend more than you earn and owe other people money.
So, shrink some of your expenses, have a budget.
Now, I know the “B” word – the “budget” word – is a dirty word, but look for areas where you can minimise expenses.
Have a look at where you can save things. See what you don’t have to spend impulsively.
There’s a really clever way of doing things.
Just before you click the checkout box online when you buy the next doodad or whatever you buy online, just keep it in the shopping cart for 48 hours.
And if you still feel you really need it a day or two or three later, then click “Okay,” and go ahead and buy it.
We all suffer a little bit from this impulsive spending, and sometimes, you don’t need to buy those things.
Kevin: That’s good advice.
Michael: Then what you should do once you have some savings is park your money in a high-interest bearing account.
Now, unfortunately, today “high interest” isn’t the high interest we enjoyed many years ago.
But put it somewhere, where you can’t take it out.
Get an automatic transfer so you pay yourself first.
Put that savings into that high-interest account, or if you have bad debt, use it to pay off your bad debt first.
But automatically take 10% or more of your earnings out before you spend it.
Now, some people say, “But I don’t have 10% to give away,” but interestingly five or six years ago, you probably earned 10% or 20% less and you still managed to survive!
Don’t buy anything on a credit card or a store card that you can’t pay off at the end of the month.
I buy lots of things on credit cards, I love frequent flyer points, but I’ve never bought anything I haven’t been able to pay off at the end of the month.
The next thing is invest in yourself.
Learn about financial fluency.
Understand the difference between and asset and a liability, an expense and an outgoing.
Understand what good debt / bad debt is.
If you do that, sure, you can still rely on the bank of mum and dad to get you started, but if they gift you a deposit, if suddenly you get a windfall and you don’t have financial discipline, odds are you’re not going to be able to use it effectively.
You’ll probably blow it away.
Kevin: The key thing there is your message about credit cards.
It’s great to use them, but just make sure that you can actually pay them off so that you’re not accumulating the debt, because it’s very expensive.
Michael: Normal debt is at 4.5% or 5% – or even with a 3 at the front of it for a home loan – but credit card interest rates are double-digit and often in the high teens.
So you’re actually taking money out of the future to live today and paying somebody a high interest rate to have that privilege.
Kevin: Michael, thank you very much for your time.
Michael: My pleasure, Kevin.
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