Put down the smashed avocado! Or should you?
11 July, 2017
Chat to some Babyboomers and you’d think that all a millennial had to do was give up their daily Chai latte and in a few years they’d be buying property in Notting Hill. Millennials take a different view – so inflated is the UK housing market, they argue, that giving up avocado toast isn’t going to make a whole lot of difference. With that in mind, they might as well forget it, live free and enjoy their edible flowers.
There is a small amount of right on both sides. Chai Lattes are expensive (£3.20). If you’re having three of them a day, that’s £9.60 or £288 a month. £288 a month, invested over 10 years at a compound rate of 5% gives you a pot of £45,381 – that elusive house deposit. However I’ve yet to meet a millennial that drinks three Chai Lattes a day, and, given that they’ve usually got no or very little cash, the occasional fancy drink can feel a lot better than putting an extra £3.20 away against an average London house deposit of £92,833 (https://www.independent.co.uk/news/business/news/uk-house-prices-first-time-buyers-london-average-deposit-mortgage-a8363736.html).
Life is certainly more expensive for millennials than it was for their parents at the same age. After six decades of rising property prices, the average house now costs 7.6x the average salary. The average price paid for a home was 259% higher in 2016 over 1997, while earnings were just 68% higher. That means millennials are spending around 3x as much on housing as the pre-war generation did at the same age (source: Resolution Foundation). At the same time, jobs are less secure, with people working longer hours for less pay.
Fight the apathy!
However, Kay Ingram, director of public policy at LEBC Group, believes that millennials need to fight the urge to say ‘what’s the point’: “This is a widespread problem, particularly in the big cities where property costs are high. Often, we find, people feel they can’t afford to buy a house so they might as well not save at all. As a result, anything they have left over goes on impulse buys.”
She believes the younger generation needs to work out what they need for essentials, reducing where possible and try to save their rest, even if it’s £10 a week – at the end of a year, it’s still £520 you wouldn’t have had. More importantly, she says, it’s £520 you don’t have to borrow at expensive rates should your car need fixing, or the roof leak.
Saving any cash you make from ‘side hustles’ can also help. Around a third of millennials have an additional source of income – be that eBay trading, Airbnb or casual gardening. You can make £1000 before you have to start paying tax on it.
Ingram adds: “Just start somewhere, getting a little benefit of compound interest and not paying higher interest rates. You can always start to save more as your salary goes up. We see too many people who just look at the size of the deposit they need and decide it’s not worth doing anything.”
Save what you don't use
Laura Suter, personal finance analyst at AJ Bell (https://www.boringmoney.co.uk/isas-pensions/aj-bell-youinvest/), says that there are areas where millennials can save on some of their outgoings: “First, they should check what subscriptions they are signed up to. There has been a boom in subscription services in recent years, from Amazon Prime, to gym membership, beauty boxes sent to your door, or entertainment streaming, like Spotify and Netflix.
“However, many people are paying for subscriptions that they either don’t use or don’t even realise they are paying for. Research from charity Citizens Advice found that the average person is paying out £50 a month in subscriptions they struggle to cancel. Many companies use continuous payment authority, which is a recurring payment straight from your bank account that is often fiendishly difficult to cancel. If you try to cancel the subscription and the company proves tricky to deal with, you can request that your bank cancels the recurring payment.
In trying to find money for savings, Suter also suggests millennials make use of bank account switching offers. While banks are paying low interest rates, many will offer incentives to switch your current account: “Some of these come in the form of vouchers, while others pay cold hard cash, which is more useful for many savers. For example, Halifax at the moment pays a £75 joining bonus and then £3 a month, based on meeting some criteria. There’s nothing to stop you switching multiple times, if you have the time and inclination.” Another option is to get an account that offers cashback, such as the Santander 123 or NatWest Reward account.
The banking apps can also be useful. Apps such as Revolut (https://www.revolut.com/) have an option whereby purchases are rounded up and the extra put in a savings scheme. This may only be a few pounds each time but can add up if you use the card a lot.
If you’ve found the £50 a month, you then have a choice on where to put it. Ingram recommends not running before you can walk and starting by building up a cash reserve. If you’re saving for a house deposit, you could look at a Lifetime ISA (https://www.boringmoney.co.uk/learn/investing-guides/product-guides/lifetime-isa/), though if you don’t buy a house with the cash, you can’t access it until you’re 60 (without penalties), so you need to be sure that’s what you want. The Government will pay up a 25% bonus on any deposits up to the value of £4,000 a year.
Suter adds: “The best route for young people is just to get into the habit of saving each month. Even if that’s putting away £30 or £50 a month to start with, they will get used to setting aside something and accumulating a small pot…It can seem daunting to invest for the first time, but by starting with a small sum and investing monthly millennials can get in the habit and build up their confidence. Those who are not comfortable enough to select their own investments can pick from a range of all-in-one funds, or ready-made portfolios, many of which use low-cost passive investments to track markets.”
Even small sums can build up pretty quickly - £50 a month, with average investment returns of 5% a year, would mean almost £3,500 in savings after five years, while after 10 years this would have grown to almost £8,000. In other words, give up the avocado and you will only make a small dent. Rather, look at the regular outgoings you don’t actually use.
Don’t look at the amount you have to raise, but just do it out of habit. You may not end up with a house deposit but you’ll end up with something worthwhile – and as you get older and earn more, those habits will serve you well once you’re able to save more substantial amounts.
What to read next: Should you rent or buy? We do the maths (https://www.boringmoney.co.uk/learn/articles/millennials-take-on-rent-or-buy/#)