You’d think that this confusing cocktail of market volatility (we’ve got that in spades!), inflation (we’re all feeling the pinch) and interest rates hikes would cause us young lot to shy away from the market. Oh, and not to mention a war looming in the East! That we’d simply quit, cut our losses and move on. But that’s not what we’re doing. And that’s a good thing! Being invested over a long stretch of time is way better than trying to time anything. But what we’re seeing now is no small thing.
My gen (Gen Z) is facing something quite extraordinary. Covid to us is what ’08 was to millennials. An event that changed everything, causing our realities to flip on their heads. We’re now grappling with higher levels of debt and taxes. Oh, and asset prices just so happen to be at all-time highs. Aka bubble territory! Yippee. It’s become so tricky to invest in such circumstances. Finance professionals, who’ve been in the field for years and years and years, are saying they haven’t seen anything like this but they all say that the risk of not being invested will hurt us more than being invested. So that’s what we’re doing. We’re staying invested. We’re hanging on. Still.
Debt, Taxes And Bubbles Brewing
In the US, the level of student loan debt hit $1.8 trillion as of December last year. Oh, and I bet these numbers are climbing. As we speak. Right now, 44.7 million Americans have the burden of student loans hanging over their head. Here in the UK, students entering the workforce face higher taxes and a frozen threshold meaning that we need to start paying back our loans at £27,295 rather than having this figure rise by inflation. Oh, and this is without even mentioning the hike in National Insurance (NI). According to the handy-dandy UK Income Tax Calculator UK, people earning £100,000 will pay 7% of their overall salary to NI – the same as those on £20,000! Crazy if you ask me. But those earning between £30,000 and £50,000 will be hit the hardest, by the 1.25 per cent NI hike, meaning that they’ll pay 9% and 10% of their salary towards NI respectively. Yowch. All this will leave us with fewer precious £££s in our pocket which means less money to fund our future.
But it doesn’t end here. Not only have we been slammed with higher taxes and higher levels of (student) debt than ever before, but we’ve also got a lovely asset bubble that’s been quietly brewing for some years that’s kindly pushed property prices way, way up. As if they weren’t high enough already. And for many, this will mean that a property will simply be out of their reach. Average house prices in the UK rose by £34,000 this past year alone, a sum more than the average salary! Add this all up and you get one big mess, with house prices smack bang in the middle of it all. And one that I bet is causing the most heartache.
Pessimistic, Realistic Or Optimistic?
I’ve been hearing people say that the struggle of buying a property for us lot is not quite so bad. That we can move to cheaper areas, up North perhaps. And then all our problems will be solved? But where are our jobs? For many, it’s in the City. In London. Course we can move to a cheaper area and commute for 2+ hours a day but who wants to do that! We want to be able to live in a neighbourhood (near our friends and family) and one that doesn’t suck the life out of us when we’re having to get to work each day. The other option is remote work but that’s not for everyone.
Yet despite all this, I believe that getting onto that property ladder is possible. It’ll take work, sure. And like many of you, I’ve just begun the journey of planning, and saving for my deposit but with enough determination and grit anything is possible. I know someone who was earning £18k a year and was able afford to buy a place of her own (before the age of 25!). All without accessing the Bank of Mum and Dad. If there’s a will, there’s a way. Take on extra jobs and stretch your money. Like a rubber band, or silly putty. Stretch it out. It’s all about your mindset and your spending habits.
Think that saving £1 here and there won’t make a difference. That’s where you’re wrong. It all adds up and if you invest that £1 it could become £2 and so on. Think of the bigger picture and the magic of compounding. If you think ditching your 5th subscription won’t make a difference, then you’re wrong. Despite what seems to be the prevailing opinion. With an open mind and an optimistic view, you can do anything. Don’t let anyone or anything (ahem, the news!) tell you otherwise.
Saving and investing for a deposit is as much about reducing your spending as it is about having more money. I don’t own a car or have more than one subscription at any given point. I honestly can’t stand direct debits. On the car front I bet I’m saving a few hundred pound each month, leaving me with a few grand spare each year! And not having excessive amounts of subscriptions means I save £60+ per month. Cut something out and you’ll notice you’ll have more money left over.
But it’s not just saving that’ll get you far, it’s investing that’ll give your money the mojo it needs. And Gen Zers seem to be staying put. It seems like we’re riding these wild waves and hanging on. But we’re not hanging on to every asset…
High On Risk
Right now, we’re at a point in time where equities (cough, cough US) are at some of their highest levels. Ever. Not to mention the fact that we’ve got slow wage growth with a double helping of inflation. This has meant that the 60:40 portfolio (having 60% in equities, 40% in bonds) is broken. Read here why that it is and what the alternative might look like for you. Bonds are pretty useless if you’re looking to grow your capital over and above inflation since their real value will get gobbled up by inflation leaving you with less than you had put in! No Bueno. And for many Gen Zers, the answer to their prayers has been to pile their money into riskier and riskier assets. And young ones too: crypto. Here in the UK, more than 1 million adults have either bought or increased their holdings of such high-risk assets. Even more conservative investors have had to move into riskier areas than they’d perhaps have liked. Do or die, right?
I personally think that crypto and blockchain are here to stay. But all these new coins that keep cropping up all the time, can they all survive? My guess is as good as yours! But before you dive right into the depths of crypto, and buy what all your friends are buying, it’s best to start by doing some research. This way, you’ll have mustered up some conviction that when your holdings fall, you won’t be tempted to cash out so soon. And that’s the crucial bit. Seeing as everyone chases news stories, hypes and media moguls (Elon Musk!!), they jump on all sorts of things from Dogecoin to the Squid Game coin! Mental stuff. And this kinda stuff has ZERO use. Apart from it being super entertaining. So best not to follow the crowd, it’ll just get you hurt. And you do not wanna be the one left holding the bag. No way.
Bitcoin, the primal crypto, has been on a wild ride. It crashed by 40% in a matter of weeks and seems to have been on a roller-coaster ever since its inception. If this kind of volatility makes you feel sick, then stay away!! I have a teeny tiny bit in crypto. So little that if it were to go to zero tomorrow, my overall portfolio would barely budge. But many of my uni friends are heavily invested in this asset class. We’re talking 20-30% of their portfolio. And they don’t mind this volatility. In fact, they love it! And they hope that it’ll help them climb on the property ladder. That it’ll give them a fighting chance instead of investing in overpriced assets. Fair enough.
I actually recently went down the Bitcoin rabbit hole. Try it. It’s really fun. You’ll most likely learn something new and have your opinion changed. At least for me, that was the case! Read and listen to what’s going on in the space and why Bitcoin was created in the first place. What problems it solves and how it can be part of a diversified portfolio. Not on its own! So if you’re one of those who are thinking of gaining exposure to this asset class, build a strategy and start small. Keep adding to your portfolio each month to take advantage of pound-cost averaging which basically means that you’re buying the average price rather than a high/low. We obviously all want the lows but you just can’t time markets!
Dandy Deposits are Getting Dearer
The thing is, saving for a deposit is not what it used to be. I know that and you know that. Property prices across the world have been soaring in value and it looks like us young ‘uns are priced out. Though be grateful you aren’t looking to buy a condo in Tel Aviv since prices over there have risen by the most in the world! Average prices there are a cool $832,934! But here’s the thing, no one knows where prices are heading. Though there are signs they’re already cooling down. With rising interest rates, they’re hoping to take some steam out of the economy, and this means that house prices will slowly start to cool off since rising interest rates means it’ll become way more expensive for people to service mortgages.
The Bank of England has already raised rates twice since March 2020. Now, rates are at 0.5%. Still pretty low but they’ve just doubled from 0.25%! Our central bank (as do others) know that inflation is getting out of control and that interest rates are a way of cooling that down to (hopefully) get things back to a somewhat normal level. And this could be great news for us. Since house buying is at least a couple years away, we may be able to buy prices on the cheap(er). But here’s the thing, don’t keep waiting for a market crash to buy. Buy when you’re ready and when you have the money. When my parents were looking to buy back in ’97, all their friends told them that prices will come down. That property prices will eventually crash. That they can’t go on like that. But guess what? Prices kept on climbing until 2006 and then it all came crashing down in ’08. So don’t wait around too long. Forget what others are telling you. Make the move when you’re ready. Not when the market is.
It Can’t Go On Forever
But be warned: this era of cheap, no-strings-attached money cannot go on forever. Governments have run up massive deficits. In the US, 1 in every 5 dollars sloshing around were created during the pandemic! All this spending won’t pay for itself. And some reckon that inflation will do that for them; eroding the value of their debt by keeping the level of inflation above the rate of interest. A plausible theory but whichever way you look at it, inflation was getting too out of hand that caused them to act. And my guess is they’ll continue raising rates till inflation is somewhat on-target. Maybe not 2% but certainly not 7%! Anything can happen but one thing’s certain: this money printer has very well ran out of ink. So don’t be expecting stimi checks no more. Not that we Brits received them!
Diversification, as boring as it sounds, is the surest way to protect your capital against large losses. The kind that you probably want to avoid. It’s the only free lunch in finance! So pile it on. It’ll reduce your risk and give you peace of mind that you and your portfolio will be prepared for any eventuality. High inflation, low inflation, high rates, low rates. Take your pick. Sure, own risky assets, own crypto, but be sure that you’ve also got some safe stuff stashed in there. Like real estate, commodities, healthcare and so on. Read here how to diversify your portfolio and what things you should look out for. Because when the tide turns, those things will be your umbrella.Â
So, while the picture may look rather grim for us lot, don’t be dismayed. Don’t let it get you down. You can do whatever you set your mind to. Pessimism never got anyone anywhere. Most of the news is made up of pure fear mongering. Ignore it. Block the noise out and do your thing. Invest and save as much as you can and with a bit of luck, you’ll get that dream deposit.
Happy ladder-climbing! You got this!
Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.
Knead Your Dough 