Your Money

New kids on the block

Many baby boomer parents have two worries about their ageing Gen X and Gen Y children. The first is that they will find it hard to buy in cities and second – and this is related – they might never move out of home!

This is a serious problem for both the parents and the kids. The adult children need to act their age and stop playing the child while the parents needs to be hard to be kind.

They need to practice quality leadership. This starts with leading themselves first meaning they have to take themselves out of their comfort zone, show courage and confront the brutal truth.

I met someone the other day who had two children move back into home in their 20s and even complained when their 50-year old divorced mum decided to stay a few days at her partner’s home! When that was me, I threw a party when my parents were away for a night, but there was difference – I paid for it and I didn’t have a credit card.

I’m not saying all Gen Y and Gen X Australians are too parent- and credit card-dependent, but too many are. It’s bad for them and it’s bad for their parent’s income they need for retirement. The wicked irony is that the younger generations who are still tapping into their parent’s money have an emerging enemy called reverse mortgages.

Super surveys show all Australians neglect their super, they’re not sure of what they will have or need in retirement, and too many will get a rude shock. And because of this and years of never becoming responsible with their money, they will run out.

Some retired baby boomers will simply trade back with their homes, but this could mean moving to an area, which is cheaper but more remote. People as they age want to be near friends and family. They also often love their home and so the reverse mortgage will ride to their rescue, but the ageing kids won’t like it if they have lived a life of being parent-dependent.

Those who want to avoid this need to get real. The parents have to talk about their needs and simply stop picking up the tab for their lazy, irresponsible offspring. And these ‘fools to themselves’ Aussies need to step up to the plate and become adults.

If you can afford your home and you can buy in an up and coming suburb then that should be a goal. There is no capital gains tax on the property you live in and so lots of people have bought rough houses in suburbs on the improve, renovated them and made tidy profits.

Some stay put like those who moved into Paddington in Sydney and St Kilda in Melbourne when these suburbs were cheap. Others moved onward and upward. You have to be comfortable with renovator’s mess and tradespeople, but it is a path to wealth.

If you are easy to live with and you don’t bleed your parents, then staying at home and buying a rental property is a good play. Remember you get tax deductions when you become a landlord and this can cut your home loan repayments by very substantial amounts.

This technique is called negative gearing where your rent received is less than your interest expenses in being a landlord, but you take this loss and deduct it from your work income. This creates a tax refund, which you can be paid to you in small parts with your pay.

Some smarties buy a house they would want to live in when they are married and their income is higher and there are little ankle biters running around!

Another strategy, which has merit, is to buy a parcel of blue chip shares as these have a historical potential to return around 10-12 per cent on average over a five- or 10-year period. It doesn’t always work out because the timing can mean your return could be hurt by a big crash, but over time, the good years have outnumbered the bad years.

You can borrow for good shares and this, like a home, gives you a tax deduction and it means the taxman helps fund your wealth building. I like shares that pay good dividends, which is a stream of income that shareowners are paid as owners of the company. So you can make money out of the shares going up in price and through the dividends.

Someone who borrowed $100,000 bought shares and if they received 10 per cent a year on average could grow that money to $800,000 in 18 years. There would be tax along the way, but there would also be big tax deductions that reduce the tax slug.

Published on: Saturday, June 27, 2009