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Why the cost of living crisis could trigger a step change in how future generations engage with financial services

Why the cost of living crisis could trigger a step change in how future generations engage with financial services

Why the cost of living crisis could trigger a step change in how future generations engage with financial servicesBy Sam North, Analyst, eToro 

78% of Gen Z say the cost-of-living crisis has made them more likely to talk about finances with their peers, but what headwinds do they face and what’s causing them to open up?

The cost-of-living crisis is really starting to bite. Prices are going up due to rampant inflation, which in turn is impacting how much disposable income we have to spend each month.

For many of us, when you see the strength of your pay packet diminishing each month, with less and less available for doing the things you love or for putting aside, it can be disheartening. This is especially true when you’re at the beginning of your career, when there is less of a buffer and every penny really does count.

This of course impacts how we interact with money, and shapes our future attitudes as to how we spend or save. According to our research in partnership with Samsung, Gen Z are now the generation most likely to talk about money, with the vast majority (78%) attributing this to the cost-of-living crisis. What’s more, it’s also impacting financial education, with 62% of Gen Zs saying the cost-of-living crisis has helped them to understand terms like inflation and recession – perhaps due to their prevalence in the media. Most tellingly, nearly four in five, 79%, say it’s made them more aware of their finances.

No matter which area of financial services you work in, these statistics matter. Why? Because it means younger people are getting financially savvier quicker, as the pressure on their pay packet is more intense than ever. Let’s take a look at some of the key drivers.

National Living Wage

For those Gen Zs who have not yet joined the workforce full-time, or have taken their first steps into a career in retail or foodservice, the rise in the National Living Wage will be a welcome boost. The hourly 92p increase, worth nearly £1,800 a year for those working a standard 40-hour week, arrives in April 2023 – and not a moment too soon for the workers battling increasing living costs due to rampant inflation.

Income tax

While the living wage is going up, overall wage stagnation remains an issue that many younger workers will have to contend with for at least the next few years. According to the Resolution Foundation, the economic outlook means that real wages are not expected to return to 2008 levels until 2027. Plus, with the freezing of tax bands dragging more and more workers into paying tax by 2028, the ‘squeezed middle’ of the UK workforce is set to become more saturated.

The impact of this ‘stealth’ tax increase is significant. We estimate the average UK earner with a salary of £33,000 in 2021/22 would pay a total amount of £28,944 in income tax over the next five years if the tax band thresholds were frozen for the whole period. This compares to £24,145 in income tax if the thresholds were linked to inflation over the same period. This is a big difference of 20%. For those starting out in their careers and trying to put money aside for their future, this tax raid not only slows earning power, but future wealth too.

Housing costs

While not many Gen Zs will be in a position to buy a house following years of rapid price growth (last year prices increased 9.5% alone), the Stamp Duty cut freeze will provide an incentive to try and put some money aside for a deposit. Nevertheless, with the average house now costing £295k, this will likely still be out of reach for many, and the average age of a first time buyer is now reaching 32.

Renting doesn’t provide a positive picture either. Rent in the UK overall has risen 12%, while in the capital it has increased by 18% year-on-year, according to Zoopla. Data from SpareRoom shows that even if you just want to rent a room in London, you’re looking at £857 per month, compared to an average of £554 elsewhere in the UK.

It’s clear that Gen Z is facing a combination of financial challenges as they enter the workforce. Considering the headwinds, it’s no wonder they’re opening up to their peers about their finances. We know from our data that Gen Z are most likely to learn about personal finance topics from friends (63%), parents (62%), traditional media (53%) and financial influencers (52%), as they look to balance rising costs with wages that can’t keep up.

The bad news is, it’s arguably going to get worse in 2023. Energy price support will end in April, and with rising interest rates likely impacting student loan repayments, it’s easy to see how costs can start spiraling. It’s good to see that young people are trying to sort out their financial future, even if it’s looking a little bleak currently. The best thing they can do is to keep learning. Look at ways to improve your financial footing and help your money grow – be that high-interest savings accounts, paying down debt, or investing regularly for the long term, even if it’s small amounts at a time.

Meanwhile, businesses must ensure that this shift in attitudes does not catch them unawares. Brits are traditionally tight lipped about their finances, so this is an excellent new opportunity for education.  Provide the information people want in simple yet concise formats. Engaging Gen Zs directly may also help firms get on the front foot, as people try to grapple with their finances themselves, instead of turning to experts to help them make returns.

Global Banking & Finance Review


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