Increase savings target
The average savings rate across the population in 2019 was about 4.1 per cent. But for a young person intending to save a house deposit, the savings rate will need to be much higher, with many likely to adopt the broadly used ’20:30:50’ rule, with 20 per cent of income saved, 30 per cent for ‘wants’ and 50 per cent spent on ‘needs’. EY analysis shows that if they can reach a savings target of 25 per cent, it would equate to an extra $28,000 saved over a decade. That in turn would increase their borrowing capacity to buy a home by $141,000. The higher savings target does however translate to a hit to consumer spending with holidays, clothing and entertainment being forsaken in favour of making up the gap. However, whether this group is ready to curb discretionary spending is yet to be seen. The latest EY Future Consumer Index survey taken in early June, suggests that one in five people aged 18 to 25 still plan to increase discretionary spending in the next six months.
Change roles to increase job-skills match
Young Australians will benefit from having a proactive attitude towards career progression to find a better job-skill match, upskill themselves via additional tertiary education courses, improve their financial literacy and chase higher salaries. According to the Reserve Bank of Australia a person can boost their income by up to 5 per cent when they change jobs. Our above analysis already factors in the number of promotions and job changes that the average 21 year old would have had over the 10 year period. But, if we add an additional move in the fourth year of employment that provides a 3 per cent pay bump, the person would have caught up to non-recessionary income levels within seven, rather than ten years.
This means business should expect to see a rise in the number of job applicants coming from non-traditional areas and with lower skills-job matches, or who have changed jobs more frequently than expected. Hiring managers will benefit from being flexible about applicant tenure length and value broader experience, in short casting the recruitment net wide. The question for organisations more broadly becomes about how they can best retain talented staff over the next few years, especially if cost controls make pay increases difficult. Flexibility, diversity of opportunity (secondments), or additional training, are some ideas. Workforce planning and mapping skills to future roles will also be important if businesses want to attract and identify the best talent.
Governments have a role to play to help this cohort, by boosting financial literacy, focusing on the compounding benefit of tax effective superannuation savings, and talking more about the different avenues to build wealth beyond home ownership (as we discussed in our ‘Is Renting Dead Money’ Report, April 2019). This group of young Australians is also likely to benefit from the shift toward micro-credentialing, as they seek to improve job opportunities and find a strong job-skill match in tough economic times.
Ultimately, proactivity is going to be key for young Australians entering the workforce in a recession. Our analysis shows that the recession affected workforce will be characterised by a Driver-Passenger dynamic based on the level of proactivity demonstrated in the face of fewer job opportunities and subdued economic conditions. These conditions are expected to pull down income growth over the next ten years, but EY analysis shows that a few changes can have a positive impact on the long-term economic health of young Australians.