The Office for National Statistics (ONS) recently released a few interesting figures on the financial situations of 18- to 29-year-olds in the UK.
I knew it wouldn’t be pretty. After all, I also was once 26 in London. Yet, I was quite shocked at what I read. Financial stability is far from a given for anyone. As for 18- to 29-year-olds, achieving stability – let alone financial freedom – has become more difficult over time.
Home ownership is almost impossible
According to the ONS, those aged 22 to 29 years are less likely to own a home. The proportion of homeowners has fallen by 10 percentage points between 2008 and 2017 – from 37% to 27%.
As house prices skyrocketed and stricter lending criteria were introduced, it became harder for people to save a sufficiently large down payment to get on the property ladder. One could hope that people in their 20s have been continuously saving to get closer to home ownership. Although you may not quite be there in terms of required down payment, at least you should have substantial savings (as you are building that down payment). Well, think again.
Those in their 20s have almost no savings
According to the ONS’ research, 18- to 29-year-olds are less likely to have money set aside: over half (53%) have no money saved in a savings account or an ISA during the period 2014 to 2016, compared with 41% for the 2008 to 2010 period. Those who managed to save only had a meager £1,600, which was up from £900.
£1,600 is slightly over half the minimum amount I recommended to set up an Emergency Fund. And as you know, an Emergency Fund is only the beginning of a long journey towards financial freedom.
18- to 29-year-olds are less likely to be in debt
There is a bright spot. People in their 20s are less likely to be in financial debt. And that’s great news. According to the ONS, 37% had financial debt, down from 49% in 2008 to 2010. However, those in debt owned slightly more on average (£1,900) than in 2008 to 2010 (£1,800). If you account for inflation, that increase is not too worrisome.
There is, however, one enormous caveat to those statistics. Those figures do not include student loans. I find it misleading to say that people in their 20s are less likely to be in financial debt when the main source of debt is not even taken into account.
Student loans are out-of-control
Student debt exceeds £100 billion at the end of 2017-2018. Two years ago, that figure was still below £80 billion. Soaring university fees and higher rent contributed to the increase of student debt. University fees dramatically increased as universities now compete globally. British universities continued to invest in modern campuses and infrastructures to compete with their American counterparts while also attempting to retain talent. In the meantime, due to austerity, the Government withdrew the limited funding is provided. To keep the books balanced, tuition fees had to increase. As their parents’ wages were not increasing as fast, those in their 20s had little choice to take on debt and pick up the tab.
Last year alone, over £5 billion worth of student loans were taken out by students. Note the change of geographical scope. From 2006, the numbers only reflect England. That number should have been lower as the geographical scope was reduced. Yet, as of 2009, the number of loans being taken out in England alone had surpassed the amount taken out across the United Kingdom in 2006.
Inequalities are growing among people in their 20s
Statistics are imperfect because the initial picture they give us may hide contrasting realities.
One persistent issue is the growing wealth gap among people in their 20s:
- Salary: the highest-earning 10% of those in their 20s were paid at least 4.3 times as much per week as the lowest earners for the year 2017.
- Savings: the top 10% of 18- to 29-year-olds savers had at least £15,000 set aside for the period 2014 to 2016. In the meantime, the bottom 10% had saved less than £100.
- Debt: the 10% most indebted owed at least £14,200 for the period 2014 to 2016, while the 10% least indebted owed £100 or less.
If you are in your 20s, the ONS provides an interactive calculator to compare yourself with the rest of peers. You can find the calculator here.
As a hint, if aged between 22 and 29, the median salary is £20,563 and 98% of those in this age range earn less than £60,000.
59% of 18 to 29-year-olds have no savings.
So are young people screwed?
I want to highlight three recent phenomena that might bring some hope to people in their 20s.
Wage growth has been a constant disappointment for a long time. That trend may be shifting: during the second quarter of 2018, wage cost growth reached 3.5%, the second highest rate since 2009. Wage costs per hour may be finally creeping back up towards pre-crisis growth rates.
In the meantime, house prices in London continue to (slowly) fall due to affordability constraints and stamp duty changes. According to Nationwide, in the third quarter, the average price of a home in London fell by 0.7% compared with the same period last year to £468,544. It followed a 1.9% drop in the second quarter. As buy-to-let investors are being punished by tax and regulatory changes, the Prime Minister announced an additional stamp duty charge applicable to foreign buyers. There is no momentum in the London housing market at this time.
Finally, it is my belief that young people are getting smarter. Encouraged by bloggers and the FIRE movement, people are more than aware of the imperative to save and not take on debt other than for buying a house. Generating side income should be a priority for everyone. No side income will be passive at the beginning. It will take work whether you are starting a blog, studying stocks or managing tenants who just moved in. But you will get better at it, and the passive nature of that side income should increase over time. While the macro-trend is not nearly as favorable as it was for baby-boomers, people who just don’t ride the wave and actively pursue side gigs have a better chance of hitting it big.
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