There was a story I posted about last week – research from MOZO that shows that the ‘Bank of Mum and Dad’ is now Australia’s 5th biggest lender.

But here’s the rub. New research now shows there’s a big pitfall in this particular banking system too.

Let me explain. While the ‘Bank of Mum and Dad’ provides easy access to finance, and in many cases with no interest and / or no expectation of repayment terms, which are just what some young Aussies need to get into the property market, research released by the Reserve Bank’s Economic Research Department also shows that those who do borrow this way, are TWICE as likely to encounter financial stress down the track.

Key findings:

  • 30 per cent of people who needed help from their parents to pay for a home deposit later found themselves in financial stress.
  • More than 15 per cent who received help from their parents later struggled to cover power bills, compared to 10 per cent of those who paid their deposit independently.

There’s a lot of rhetoric and theory being thrown around about this. However, in my view, it simply comes down to the fact that young Australians are missing a vital piece of education – financial management.

Life is expensive, and those kids who grow up learning to appreciate the value of a dollar and more likely to spend it wisely. Whereas, those who’ve been fortunate enough to have a lot of financial support from their parents, are probably more cavalier towards finance, OR (and this is more likely the case) less likely to understand exactly what things cost.

We now live in a time where the older generations (mostly because of property value increases over time) are wealthy enough to help their kids. And that’s wonderful. Many of these young people need a ‘leg up’ considering that deposits are hard to scrape together and homes are expensive.

But… And it’s a big BUT. We’re not doing our kids any favours if we don’t teach them how money works. Especially where significant sums and interest rates are involved.

Teaching kids budgeting was much easier in the days of cash – you had it, you spent it, it was gone. But these days when it’s so easy to ‘swipe’ a purchase, we all tend to think less about the dollar amount.

As a society, we have a much less tangible relationship with money.

What’s more, finance has become more complex as a result of these new ways to pay – there are fees and charges which a lot of people don’t understand. Similarly, credit cards, hire-purchase schemes, rent-to-own – all easy traps to fall into.

This is also true of eating out, entertainment, internet shopping … it’s all so accessible, it’s considered the ‘norm’…

Most of the young people I work with, really haven’t got a true and accurate handle on what they spend and what they earn. When we get into the nitty gritty of a mortgage application we figure it out, but it often takes many questions to get there, and it’s where we can really add value to the process.

That’s why it’s critical that we teach young people finance, which goes further than budgeting and gets into the details of wise money management, particularly when you’re taking on a mortgage.

A mortgage is a long-term commitment. Property is a fantastic investment, if you give it careful attention.

In my view, it’s critical that we work to address this, so that we can fully equip the young to live well, create financially secure lives for themselves and avoid getting themselves into financial duress.

If you want to understand your finances better, contact us. Our simple value proposition is to provide you with the highest quality advice – to put it simply, WE SIMPLIFY!