What do most young people worry about? University, travelling, drinking and parties? What most young people don’t think enough about is long term financial planning and being financially responsible. A survey by the National Financial Educators Council found that 51% of respondents between 18 and 24 believed money management would be the high school course that would benefit them the most (Financial Literacy Statistics, Data and Results, n.d.).
Why should people care though?
Well, there are two main reasons that it is never too early have have a financial plan:
- The younger you start saving, the more the effect of compounding interest helps.
- Generation Y is facing some of the most challenging financial times in history. Wages are stagnating and housing prices are at an all-time high, among other things.
The earlier you start saving, the bigger the advantage you get from the effect of compounding interest. Every year you have savings, the longer those savings can be works for you (and those earning work for you).
The graph below shows the savings of three people saving money, with all three people saving $100 a month at 6% interest. The difference between the individuals starting at 25 vs 35 is over $100 000 when they reach retirement age! The difference between 20 vs 25 is over $80,000.
As you can see, the earlier you can start saving, the more you can take advantage of the exponential nature of compounding interest.
Young Australians face trying to buy a property when we have some of the highest housing prices in the world. The 2016 Demographia Housing Affordability Survey found that in cities with over 1 million people, house prices were 6.4 times higher than median household income, as opposed to 3.7 in the US and 4.6 in the UK. Sydney has housing prices 12.2 times higher than median household income (Scutt, 2016).
It is hard to imagine how people would be able to buy a house if they don’t start saving young and have a clear financial plan. This is coupled with the fact that wage growth is at 0.5%, the slowest since the ABS started keeping track of it in 1998. (Letts, 2016)
There is no demographic which stands to benefit more from financial planning with a financial planner than today’s Gen Y and Z.
Financial planning can’t guarantee financial success and freedom, but it can certainly help you.