Posts Tagged‘Finance’

Maybe I’m Answering the Wrong Questions About Gen Y’s and Property.

I’ve long been of the opinion that many of my fellow Generation Ys are suffering from a crisis of desire in regards to the Australian property market. It’s an understandable phenomenon as most of us grew up in what are now quite nice suburbs, central to a lot of services and now considered to be an extremely desirable place to live. It then comes as no surprise that our generation would want to replicate this with their first home purchase and regrettably this leads many to believe that the property market is unaffordable, which at that level it most certainly is. Buying out in the mortgage belt, like most of their parents did back when the time came for them to do so, has been my solution to the issue for quite some time now but some recent reading has pointed me towards http://fhareversemortgagecalculator.com/ which in turn pointed me in another direction, one that I hadn’t considered previously.

To give you some background on where this thought came from I’ll point you in the direction of a really solid article from The Atlantic on the drastic change in spending habits between Gen Y’s and their predecessors. In it Thompson lays out the idea that perhaps Generation Y has replaced the home and car as the most desirable objects with modern technology like smart phones. This is coupled with an increasing tendency towards sharing those same goods (called collaborative consumption) that have such a high capital cost which means total ownership plummets whilst use sky rockets. It’s an interesting idea and I was wondering if the trend translated across to Australia.

Turns out part of it does.

Whilst I couldn’t find any good information around car ownership with Australia being a country that’s heavily focused on property ownership there was a lot to dig through in regards to Gen Ys attitude towards property. Shockingly, at least for me, the vast majority of Generation Ys do intend to buy, somewhere on the order of 77% which is actually above previously generations. Faced with the decision of not being able to get the home they own many will consider a cheaper investment property initially in order to be able to leverage it later into the property they actually want. That’s not the interesting part though, what I found out is that 72% of Australian Gen Ys would buy a house with a friend or family member. Whilst I’ve known people who’ve done this I had no idea that it would be so common and that’s an intriguing insight.

I’ve long held the position that the median house price on a single income is unaffordable in Australia and it appears that Gen Y is aware of that, at least on some level. Collaborative consumption of the housing resource then is our way of reacting to this, in effect shrinking the affordability gap by spreading the pain around a bit. Indeed I did something very similar to this when we bought our first house in Canberra by renting out two of the rooms to friends for the first year. The experiences from others are similar as well with the sharing arrangement usually only being temporary (on the order of years, not decades) before they’re able to part ways into a home of their own.

This means my hammering away at the point that Gen Y is suffering under a crisis of desire (they still are, at least in my opinion) probably isn’t going to help them change their minds. What I should probably be focusing on instead is the ways in which to structure these kinds of sharing arrangements in order to make the desired property more affordable or what strategies they can use in order to get themselves into a position to make it affordable. As you can probably tell I’m still wrestling with the best way to approach this and the ultimate idea will have to be a post for another day.

Financial Fallacies.

Let’s face it, the global economy isn’t in the greatest shape due in no small part to some magical hand-waving and corporate greed. With the scale so large there isn’t much your average go can do to sway the global markets one way or the other. It would seem that right now the best thing to do is batton down the hatches, make sure you’ve got a secure job and pay down all that debt that you’ve gorged yourself on in the past decade. Sounds sensible right?

For the majority it is. Many of the people I catch in financial trouble have racked up giant credit card debts and think that the monthly repayment is enough to get them through. It takes a little stern talking to get them to realise that they’ll be paying off that new widget¹ for the next 5 years, without being able to use that credit card again. Anyone who talks to me about financial planning usually walks away with a gift bag filled with a budget, a pair of scissors (to cut up their credit card) and a note telling them I won’t lend them any money.

However there are quite a number of people who have the potential to make good in the current economic turmoil and are still skittish about investing for exactly the same reasons now as they were 2 years ago. In particular I point the finger directly at the media and people like Steven Keen who, whilst ensuring his statements are very well researched, are focused on spreading a healthy dose of doom and gloom with nary a scant of what we could do to either avoid economic meltdown or soften the blow. Steve has even posted about that point:

Hi TommyT,

That raises the vexed topic of the theory of comparative advantage–a notion that almost all economists agree with, which should tell you there’s something wrong with it.

I think in the washup to this crisis governments will be forced to reconsider this one too–it’s all very well to have economists telling you it’s bad to promote domestic industry, but when you have 20% unemployment (and the need to retrain hundreds of thousands of financial advisers so that they can do something useful) it’ll be rather harder to avoid the public clamour.

At that point it might be time to attack this shibboleth, but taking it on as well now might be suicidal to the issues I’m raising on debt. If you want to see why comparative advantage–the theory of free trade–is a load of nonsense, check out this blog by Dani Rodrik, the leading (non orthodox of course!) economist developing what he calls New Trade Theory.

Funnily enough he would rather wait for the world to fall in on itself and then he might suggest a way around it. But anyway, I digress.

What spurred this post was someone who was decently well off and was considering buying a new house was told:

Buying a house now to get the First Home Owner’s grant is like having a baby for the baby bonus.

If you’re financially inclined you’ll see this non-sequitur for what it is. I’ll humor the notion that both of the things are big life decisions and will change the way you live your life for a long time to come. What I will not humor however, is the fact that someone is comparing a child to a house in the context of financial gain. Whilst I can appreciate that there are some unscrupulous people who have done such a thing I can’t entertain the thought of comparing the two. For one, if you decide 10 years down the track that you just can’t afford the house, you can sell it. I hate to see what would happen to you if you attempted the same with a child.

The point I’m trying to drive home here is that whilst this world is facing some of the most difficult economic times it has ever seen that does not mean you can’t make the best of this bad situation. Years ago I formulated a plan for growing my own wealth and the crisis has done nothing to change that. Take whatever people are telling you with a grain of salt and make sure you do your own research. If you can grow your wealth in times like these you will prosper even greater when the times improve.

¹ I just want to make a point here that I detest anyone who says that “plasma TVs” or any consumer goods are responsible for all our consumer debt. It is not the fault of a particular product that someone has bad spending habits, they are just another desirable item that financial analysts love to bash. I feel widget is more appropriate here, since it can dictate any non-descript item and places the focus back on the person doing the spending, not the item being bought.

Financial Minimums and the Global Financial Crisis.

With the Global Financial Crisis savaging our world’s trade and capital markets people are looking for more ways to scrimp and save in order to whether these tough times. This got me thinking; what are the financial minimums that are required for a person or family to maintain a reasonable level of living whilst still being able to save for times such as these? Of course the government has figures on this since that is what many of the welfare payments of this country are based on, but they don’t really provide any insight into what the makeup of that payment is.

For this blog post I will attempt to explore the minimum costs involved in living as a single person, and then as a typical 2 parent 2 child Australian family. I will draw the majority of my figures from online sources of public information so that there’s as little guesswork as possible.

So let’s tackle the easy one first, the single bachelor/bachelorette, what do they need? I will for the moment assume that they have most things like furniture and appliances, but I will show what would be needed if they don’t:

  • Shelter: Since they’re single we can assume that a 1 bedroom 1 bathroom apartment will do. A quick search on Allhomes reveals this property for $150 a week. We can assume this is about average, as many people can share accommodation for around this much (3 bedroom for $450 a week would net them something quite a bit better, if they’re willing to share).
  • Food: Estimates of average daily intake for an adult peg it somewhere between 1940 (for women) and 2550 (for men). Let’s make it easy and put it at 2200 so we get an average. Breaking this down into 3 average meals a day could be done with: Breakfast: 2 weet bix or similar, milk coffee (300 calories)Lunch: 2 Sandwiches, salad or left overs (950 calories) Dinner: Meat, pasta and vegetables with premade sauce (950 calories). Plugging this all into an online shopping website gives a weekly cost of about $91, but I’d probably bump that up to $110 just to be on the safe side.
  • Clothing: I could take the easy route here and say that they could go to the local op-shop and clothe themselves for $20 per year but that’s just not typical. For myself I’ll usually end up buying 1 set of work clothes (2 pairs of pants, 5 shirts, 1 set of shoes) and various casual clothes (5+ shirts, 2 pairs of pants, 1 set of shoes). If we go cheap then that comes to about $830 a year, or $16 a week.
  • Transport: I’m going to assume they have a job of some sort and will have to travel to get there. If they grab a monthly bus ticket their travel costs come to about $21 a week for unlimited travel on the buses.
  • Entertainment: As much as all the financial experts will like you to cut out things like this I know that most people won’t, and so it doesn’t get left out of the calculations. Whilst I can’t speak for everyone on this (since it is so subjective) I’ll put in a rough $50 a week on this. That could be movies, a night out with friends or just a couple drinks at home.
  • Utilities: My house, with 3 people in it, averages around $42 a week in electricity, $5 in phone and $25 in internet. Cut this down to single person size and you have a grand total of $24 a week.
  • Necessities: Just to make things interesting let’s also assume this single person is just starting out and doesn’t have all the required furniture to live. If we budget around $5,000 for this and say they get one of those interest free deals (which are fine if repaid before the interest free period is up) and repay it over 3 years we’re looking at another $33 a week or so.

Putting this all together gives us a total of $371 or $404 if they are just starting out. If we want to save about $50 a week this means their yearly income will have to come to somewhere between $25,000 and $30,000 a year. This does not take into consideration unexpected things like medical bills, which would put that further up the scale to $35,000.

Looking towards the family we can take that yearly income and double it just for starters (2 adults). A child costs about AUD$800,000 to raise from 0 to 17. Putting a weekly figure on a weekly basis is a whopping $980 a week, or almost $2000 for the 2 kids. I’m going to scale that figure back to about $700 since there are savings to be made on housing, clothing and food in a family situation. It is still a phenomenal cost, which brings the family income up to a required $150,000 per year, or $75,000 per parent. It’s no wonder that Australians on the average wage with a family will be doing it tough.

I’ll be honest and say that I wasn’t too surprised by the single people figures, but the family ones really blew me away. I’m fairly well off, but if my fiance wasn’t working because she had a child we’d be below my required income threshold, putting us in an awkward position. It’s really quite telling about the current economic situation as the ones who are losing their jobs are the least likely to have savings, due to the costs they incur just to survive.

Taking this into consideration I believe that a portion of the economic stimulus package should be used in either increasing the minimum wage or cutting tax for just the lower to middle income brackets (of which I’m not a part of, so there’s no vested interest there). Whilst I don’t need to explain what tax cuts would do for the lower income brackets I should mention what I mean by raising the minimum wage.

The government could provide subsidiaries or incentives for minimum wage earners. This could come as a payment to both the employer and employee, along the lines of Newstart allowance. This could even be done with a reform to the current welfare system, changing the income thresholds for wage earners who are on Newstart allowance or similar.

Whilst I don’t believe that all of the stimulus package is going in the wrong places I do believe that its target is a little fuzzy. Sure some of it is well placed (aligning with my objectives pretty closely) however there’s a lot of places where money is going and no tangible benefit is being projected. Whilst I can understand that such legislation has probably be done a little hastily you’re still talking a good $42 billion of Australia’s dollars, which requires a little more then 2 months thought into spending.

Why you shouldn’t hire me.

In today’s rough and unforgiving economic climate many companies are seeking to reduce costs and improve their return on all previous investments that they’ve made. This, combined with several reports from market experts (Gershwin being a good example), has lead to an overall decrease in the amount of temporary workers hired and a push to bring a lot of talent in house. It would seem that the best option would be to secure employment now and skill up during these hard times and cash it all in when times come good again. You’d be crazy not to do it.

That is, unless you’re like me. I’m an IT contractor, and businesses will look at me first for the chop.

But what does trimming the contractors actually net for my employer? In my current position I’m doing what a contractor is supposed to be doing, filling a skill gap for either a temporary vacancy whilst they find a full time employee or bringing in additional skills required to implement various projects. Reducing your numbers of people like myself isn’t a bad thing, but it will reduce your capability to deliver on required projects. It would seem however that there are some places that are content to use contractors as full-time replacements. Using contractors in such a way is going to cost you much more than it would to properly fund the rightly skilled full time employee. However short term budgeting will show a cost saving with the contractor, since you’re not going to have to pay things like superannuation and insurance.

So what should employers be doing in order to whether these tough times? The answer isn’t what most employers want to hear, since they’ll be looking to reduce costs in the short term in the hopes that everything will come good. However, these are the factors that I have seen grab and retain exceptionally skilled people:

  • Attractive salary packages: The old saying “Pay peanuts, get monkeys” is appropriate here. Too many times I’ve seen employees with great skill and corporate knowledge walk out the door for something as small as $5,000 a year more at another company. On average it will cost your employer 1.5x your yearly salary to let you go. Grabbing someone early with a higher wage will keep them interested for longer, save any workplace issues.
  • Clear career paths: This was the reason I left most of my previous jobs. I always made it clear where I wanted to be heading with my superiors. However when it came time to make good on a described career path I always hit a dead end. It was at that point I would start looking for another job, since it was obvious that they made promises that they couldn’t keep.
  • Flexible working arrangements: Nothing says you trust your employees more than allowing them to work from home a day or two a week. We place an extremely large value on face-time with each other and that’s not a bad thing. However options such as working remotely can be a huge benefit to your employees, and will more then likely have them staying on for longer. As long as you establish clear deliverables for your employees does it really matter whether they complete them whilst at work or at home?

All these things will cost the employer something but in return they will get an employee who is loyal and willing to go that extra step for the company. I’ve seen many places with just one of the 3 above and they think that will keep their employees going. It will for a time but eventually they will start to desire more of these options, and if they’re determined they’ll find it.

I think this is why the Australian Public Service has a track record for keeping people for large periods of time. Whilst the salaries might not be the greatest (although they are pretty amazing for entry level workers) the flexible working arrangements and very clear career paths tend to keep people on for many years. I was a public servant for almost 3 years before I turned to private industry, and I couldn’t of done uni and full time work without the arrangements they had available.

After all this, if you still want to hire me remember this: I’m not a permanent replacement and I work for the highest bidder. It’s capitalism in its purest form, but I’ll be sure that you get your moneys worth.

I can’t guarntee that from all contractors though 🙂