Why Gen Y is broke: $2.6B lent to friends

Why Gen Y is broke $2.6B lent to friends

Jack Han investigates the borrowing bubble Generation Y has blown.

October 21, 2009

Generation Y is struggling to manage their finances, with the vast majority resorting to borrowing and lending informally between friends and peers, a St George Bank survey has found. This begs the question to a generation of credit-savvy spenders – just what will it take to learn the savings lesson?

The survey of 1000 Australians aged 18-29 years has found that 87 percent admit to using the ‘informal bank’ of their friends by paying their dinner, drinks, entertainment needs, and bills, with the expectation that the favour will be returned.

With the average Gen Y respondent borrowing and lending $31.92 per week, St George estimates that about $2.6 billion is changing hands in the form of IOUs between the Gen Ys each year. What’s even more concerning is that the report found one in four Gen Ys have never tried budgeting or saving in their lives.

This could be due to their reputation as the ‘credit card generation’. With Australia’s credit balance of $45 billion across over 14 million accounts, the average card has $3,131 of debt accruing interest by the month. On interest rates of 18 percent for standard cards, Gen Y will be losing $617 a year unless their credit debts are controlled.

For example, if Jen wanted to buy a $3,000 computer, instead of purchasing it on credit, she could consider saving towards her goal with a high interest savings account earning up to 5.21 percent p.a. By making a plan to save just $200 a week, Jen can afford her laptop with $495 left over in just four months, and save hundreds in interest payments from avoiding credit card debt.

Of course, the point of credit is that we can buy whatever we want, whenever we want it. This is where a few handy tips can help you avoid treating your friends like walking teller machines.

  • If you’re already in the habit of borrowing cash from other wallets, tell your friends that you plan to stop. They can ease your temptation simply by closing their banks.
  • You also need to close your lending services. The more you lend, the more that you’ll expect to be paid, which will just continue the spending trend.
  • Self control can come in the form of direct transfers, which will funnel a fixed amount from one of your accounts to the other. By knowing that you have to put away a certain amount per week or month, you’ll begin to adapt your spending around a tighter budget.
  • And make your savings plans public, so that you’ll be even more motivated to stick to it. And start comparing savings accounts online for the best rates so you can start earning money, with your own money.

 

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Learn more about savings accounts

How to make money with a savings account?

Savings accounts make you money by earning interest on your savings. The more money you deposit, the longer you leave it in the account, and the higher the account’s interest rate, the more interest you’ll be paid by the bank or financial institution, and the more your wealth will grow.

To make sure your savings account makes money and doesn’t lose money, it’s important to maintain a large enough minimum balance that the annual interest earned exceeds any annual fees charged on the account.

Can you set up a savings account online?

Yes. Several large and small banks offer online applications for savings accounts, and there are also online-only financial institutions to consider.

Online-only savings accounts are often less expensive than other savings accounts, though they may not offer the same flexibility, features, or face-to-face service as more traditional savings accounts.

What is the interest rate on savings accounts?

As banks frequently change their rates, the most accurate way to look at interest rates on savings accounts is to use a savings accounts comparison tool. When you look at the savings rate check what the maximum and minimum rates are. Often banks will offer you a promotional rate for the first few months which is competitive, but then revert back to a base rate which can sometimes be less than inflation. Ongoing bonus rates are often a safer bet as they will keep rewarding you with the maximum rate, provided you meet their criteria

How does interest work on savings accounts?

The type of interest savings accounts accrues is called compound interest. Compound interest is interest paid on the initial deposit amount, as well as the accumulated interest on money you have. This is different from simple interest where interest is paid at the end of a specified term. Compound interest allows you to earn interest on interest at a higher frequency. 

Example: John deposits $10,000 into a savings account with an interest rate of 5 per cent that he leaves untouched for 10 years. At the end of the first year he will have $10,512 in savings. After ten years, he will have saved $16,470.

Can you set up direct debits from a savings account?

It’s not usually possible to set up a direct debit from your savings account to cover ongoing expenses or bills, as savings accounts are structured around growing your wealth by earning interest on regular deposits, and discouraging withdrawals.

Some transaction accounts allow you to set up direct debits and also earn interest, though you may not enjoy as much flexibility as a dedicated transaction account, or get as high an interest rate as a dedicated savings account.

How much money should I have in my savings account?

A good rule of thumb when working out a minimum balance for your savings account is to make sure that you’ll earn more in annual interest on your savings than what you’ll be charged in annual fees.

If you’re saving with a specific goal in mind, prepare a budget so the interest you earn on your deposits will help you efficiently reach this goal. Online financial calculators may be helpful here.

How to open a savings account for my child?

Some banks and financial institutions allow parents to open a bank account for their child as soon as it is born, and start depositing funds to go towards the child’s future.

Children’s savings accounts generally don’t have fees, and are structured to help develop positive financial habits by limiting withdrawals, encouraging regular deposits, and earning interest on the savings, similarly to standard savings accounts.

Can you have a joint savings account?

Yes. Joint savings accounts can be useful for two or more people wanting to combine their savings to meet shared financial goals, including spouses, flatmates and business partners.

Some joint savings accounts require all parties to sign before they can access the money. While less convenient, this extra security can help encourage all parties to meet their shared financial goals.

Other joint savings accounts allow any of the account holders to access the money. These accounts can be convenient for financially responsible couples that trust one another implicitly. 

How can I get a $4000 loan approved?

While personal loans and medium amount loans don’t offer guaranteed approval, there are steps you can take to help increase the likelihood of your application being approved, including:

  • Fulfilling the eligibility criteria (providing ID, proof of residency, proof of income etc.)
  • Checking your credit history (you can order one free copy of your credit file per year, and make sure that there aren’t any errors that may be bringing down your credit score)
  • Comparing carefully before applying (making multiple loan applications can mean having your credit checked multiple times, which can look bad to some lenders and reduce your chances of being approved by them)

How do I open a savings account?

Opening a savings account is a relatively simple process. If you’ve found an account with a suitable interest rate, you’ll just need to get in contact with your chosen lender via a branch, phone call or hop online to begin the process. 

You may be required to provide:

  • Personal details, including identification (driver’s license, passport etc.)
  • Tax file number
  • Employment details

What is a good interest rate for a savings account?

A good rule of thumb to keep in mind with savings accounts is to look for a rate that is higher than the CPI inflation rate. This number is constantly changing, so check the Reserve Bank of Australia’s page. If you aren’t earning interest above this then the value of your money will go backwards over time.

Who has the highest interest rates for savings accounts?

As banks frequently change their rates, the most accurate way to know who currently has the highest interest rate is to use a savings account comparison tool.

Can you direct deposit to a savings account?

Yes. You can make one off payments or set up regular direct deposits into a savings account. This can be organised easily through online banking or by making deposits in a branch. Talk to your lender to find out the easiest way for you to set up direct deposits.

What is a savings account?

A savings account is a type of bank account in which you earn interest on the money you deposit. This makes it one of the easiest and safest investment tools.