There has been much talk recently about the greater impact of inflation, and the high interest rates to control it, on young people compared to older people. Inflation widens the gap between those who own assets, even if financed by debt, and those who don’t.
As older people own more assets than young people, inflation is increasing the financial gap between them and younger generations. To keep up, young people need to save and invest more when inflation is high.
Our inflation is gradual but consider an extreme example: if inflation was 100 per cent. The prices of everything would double every year, not only food and daily needs but also properties and shares. If you didn’t own assets before, you certainly wouldn’t be able to afford them at twice the price.
Fortunately we don’t have 100 per cent inflation, only 6 per cent. However the principle is the same. We still need to be aware of what it is doing, and respond.
In the 1980’s and 1990’s we worried about high inflation eroding the real values of investments. Even up to the 2008 GFC we knew we needed some capital growth. Then inflation fell to almost nothing and interest rates were ultra-low. We forgot we need to be wary.
Now inflation is back. We must buy investments that will keep up with it – property and share based. Their values are variable but long term they will grow faster than inflation. They demonstrated that in the high inflation 1980’s and 1990’s.
Younger people seeking to accumulate wealth and avoid being left behind in the financial stakes can buy an investment property with borrowings. Two essential elements are required. First they must have reasonably good, reliable incomes, with a surplus over spending.
Secondly, they need some level of deposit, ideally twenty per cent. This can be either cash savings or equity in their own home that can be used as security for the investment property loan.
Another method of wealth accumulation is buying shares in good quality companies that are well established, proven and reliable. Examples include BHP, Rio Tinto, the four major banks and Macquarie Bank, CSL and Wesfarmers. Purchases can be made regularly in small parcels, from around $2,000.
The easiest way to start accumulating wealth is with managed funds investing in property and shares. A young person can open an account with $2,000 and attach a regular monthly contribution from $100 up. Over several years this will accumulate a considerable sum.
The monthly contributions are automatically debited from a bank account and the fund managers decide which property or share investments to buy.