How to future-proof your finances as a renter
A home isn't the only thing you can invest in. Here's how some younger Australians are safeguarding their financial future.
If you've basically given up on the prospect of owning a home, you're not alone.
37% of Australians who don't currently own property think they'll never be able to afford a house. If current trends continue, almost half of today's younger Australians will be renting by the time they're 54.
Like me, you may have made peace with the prospect of renting forever. Unfortunately though, you're much less likely to retire in financial comfort when you rent, according to a Grattan Institute report.
Younger Australians looking for alternatives
In the past, home ownership has helped ensure we can live quite comfortably in retirement and leave our loved ones with some kind of inheritance.
Intergenerational wealth (the Bank of Mum and Dad) has also played a big role in helping young Australians get on the market.
For many though, that's simply not an option.
"I wasn't born into money and while I could probably afford mortgage repayments now, it all comes down to saving up that deposit," says Finder's global reviews editor, Tegan Jones.
"I got to my career as a journalist really late. Before then, I was trying to make it happen but that meant a lot of odd jobs, being on Centrelink at times and for a lot of years, struggling to make ends meet."
"When you're in that position, it really doesn't feel like you can actually adequately save – especially when you haven't been taught anything about financial literacy," admits Jones.
"It wasn't the sort of knowledge that was passed down to me at school or from my parents. I had to do it myself."
For many young Australians like Jones, saving for a deposit is probably the biggest barrier to home ownership.
"Investing in the property market requires a substantial amount of capital," says Finder's senior investments editor, Kylie Purcell. Stocks do not.
"With stocks, you can start investing from as little as a few dollars at a time. You can sell out of your investments as you need and fees these days are comparatively minimal," says Purcell.
If you're looking for a long-term investment, a diversified shares strategy is a good place to start.
"Exchange traded funds (ETFs) are a good place to start because they allow you to buy an entire basket of stocks in a single transaction," says Finder's investments writer, Cameron Micallef.
"It might not be the most exciting way to invest in shares but it's a great way to accumulate wealth."
It can also be a beneficial form of investment for younger Australians. "With the rest of your working life to save and invest, you don't really need to take on a huge amount of risk," says Micallef.
Diversifying your portfolio
If you do decide to buy individual shares, both Micallef and Purell emphasise the importance of a diversified portfolio.
"The last thing you want is to have shares in a company and for it to go broke at the end of your working life," says Micallef. "If you're going to buy individual shares, make sure you understand the ins and outs of what you own and that you buy enough to diversify against any adverse situations."
"What I do now every time I get paid is put 30% aside. Some of that will just go into a savings account and other parts of it I put into certain investments," says Tegan Jones. "I'll put it into things such as ETFs, some apps like Spaceship, as well as some crypto and some individual stocks."
High interest savings accounts
There's not much value in just letting your money sit in a regular transaction account, particularly at the moment. As the cost of living goes up, the value of your cash is going down.
One of the safest ways to earn more is a high interest savings account.
"Even though rates aren't very high at the moment, savings accounts offer a great safety net for your cash," says Finder's banking and superannuation editor, Alison Banney.
"Your deposit of up to $250,000 is protected by the government, which isn't the case when you're investing in shares, property or crypto."
While rates are still lower than inflation, compound interest, where you earn interest on the interest you've already earned, is key. If you're under 30, you can also take advantage of some better rates.
If you don't own property when you retire, a healthy superannuation balance is probably the next best thing you can do to be financially secure.
"The Association of Superannuation Funds of Australia (ASFA) says you'll need $45,962 a year in retirement to live a comfortable lifestyle, or $64,771 for couples," says Banney.
"However, this is under the assumption that you'll own your own home in retirement. If you're renting, you'll need a fair bit more than this."
"It's a good idea to make additional voluntary super contributions on top of what your employer is legally required to pay you," says Banney. "The easiest way to do this is via salary sacrifice, which is an easy process to set up by speaking with your employer or payroll department.
"You can choose how much of your pre-tax income you want to send to your super fund instead of your bank account.
"That money will then be taxed at the lower super rate of 15% instead of your standard income tax rate, plus you'll be lowering your taxable income too.
"Small, frequent contributions into your super fund can make a big difference to your balance when you're retired. If you're going to be renting in retirement, you'll be glad that you made those small contributions throughout your working life."
If you live in a bigger city where you can't afford to buy, you've possibly considered buying an investment property somewhere cheaper.
While there are advantages with an investment property – such as capital growth, good tax deductions and a relatively stable asset value – there are downsides, especially for younger Australians.
Investment properties tend to drive up prices in regional areas, locking out local buyers and increasing prices for renters.
As Purcell points out, "They also still require high upfront and ongoing costs, such as stamp duty, insurance, council fees and strata."
One of the greatest benefits of home ownership is that it allows you to leave your family with an inheritance.
For many younger Australians unable to buy property, that won't be the case.
Life insurance can go some way to solving that problem. Most direct policies can pay out around $1 million to your family when you die.
I recently took out a life insurance policy for this reason and got rid of the cover that's automatically included inside my super to maximise my savings.
Policies also generally won't expire until you're 99. There's a very high chance it will pay out – the average claims acceptance rate in Australia is 90%.
Yes, it's another expense but policies are affordable if you're relatively young and healthy. For example, a 40-year-old female earning an annual income of $80,000 is likely to pay $17.94 based on our calculations.
It's easy to feel demoralised if you feel locked out of the housing market in Australia. But there are alternatives. Start sorting out your finances today.