The higher cost of living is hitting many Australians hard but how they are reacting to it varies widely depending on their generational cohort, according to a new report by Fidelity International.  The “Next Generation” report found that Generations Z and Y are more likely to look for additional work instead of cutting back spending, compared to Generation X.

With over $3.5 trillion in wealth set to transfer between generations over the next few decades, Fidelity surveyed* over 1000 Australian consumers aged 18 to 59 years old to understand their evolving financial needs and behaviours. Respondents included Generation Z (aged 18 to 28), Generation Y or Millennials (aged 29 to 43), and Generation X (aged 44 to 59).

The research found that while Gen X are more likely to respond to cost-of-living pressures by reducing their spending on non-essentials, Gen Y and Gen Z are more likely to take on additional work hours, and least likely to reduce spending.

Lauren Jackson, head of wholesale, Australia, Fidelity International said this reflects the drive of younger generations to maintain their lifestyle ambitions.

“Our research shows that younger Australians are financially ambitious and confident and – perhaps contrary to common opinion – more willing to take on additional work in order to maintain their lifestyle. This might include side hustles, entrepreneurship or new investment opportunities. By contrast, Gen X Australians are more cautious and more likely to set themselves a budget and cut back on non-essentials in order to manage the rising cost of living,” she said.

The study also found that financial confidence among the next generations is generally high, with around one in five feeling very confident and a further one in two feeling somewhat confident in managing both day-to-day and broader financial matters. Three in five say they are confident evaluating investment opportunities, although Gen Z and Gen Y report even greater confidence than Gen X.

Younger investors are more likely to have a higher risk tolerance, which commensurate with their investment horizon but also possibly reflecting a degree of overconfidence. Around one in three Gen Z and Gen Y say they have a high or very high-risk tolerance compared to under one in five Gen X Australians.

The report also found that attitudes to making and managing money vary between generations, with younger people desiring quick financial gains compared to older Australians.  Gen Y and Gen Z are more likely to invest in areas such as cryptocurrencies and passive ETFs compared to Gen X who have significantly greater use of super and Australian shares.

In addition, one in five Gen Z are likely to consider information from ‘finfluencers’ or social media, compared to just over one in 10 Gen Y and only three per cent of Gen X.

Lauren Jackson comments: “Younger Australians - particularly Gen Z and Gen Y - are approaching financial management with different expectations and priorities compared to older generations. They have access to a multitude of information sources and often feel empowered to navigate investment opportunities, but this self-assuredness may mask a lack of deeper financial literacy and experience, particularly in areas like portfolio diversification. There is a risk that a ‘get rich quick’ mindset could push younger investors off track from achieving their financial goals, particularly with cryptocurrencies and finfluencers around every corner. A strong focus on financial education, highlighting the importance of disciplined, long-term investing, will be key to ensuring that their confidence doesn’t lead to poor decision-making.”

Financial goals

In terms of what they spend their money on, Gen Z are most likely to focus on buying a home or property (18 per cent) in the short term, along with growing investments (14 per cent), funding travel and lifestyle (11 per cent) and paying off debt (11 per cent).

Gen Y tend to prioritise paying off debt (22 per cent), buying a home or property (17 per cent), building an emergency fund (12 per cent) and achieving financial independence in the short term (10 per cent). Gen X are focused on paying off debt (27 per cent) followed by saving for retirement (15 per cent) which are also sustained as their longer term goals.

Emerging investing preferences and approaches

Active ETFs are increasingly appealing to younger generations. Close to one in two view active ETFs as an attractive investment option, with Gen Y the most likely to find them appealing, followed by Gen Z. Ease of monitoring, simplicity of transactions, lower minimum investment, and transparency, are considered the most attractive features.

When it comes to Australians’ investing habits, the study shows that alignment with personal values is becoming increasingly important. More than three in four of those surveyed feel that it is important to align their investments with their personal values. Around four in five say that a strong brand reputation is important when investing.  

Around one in five Gen Z and Gen Y are likely to make social and ethical investment considerations, compared to about half as many Gen X. One in two Gen Z and Gen Y are likely to consider ESG factors in future investments compared to around one in three Gen X.

The report also found the generations have differences in what they like to invest in as well as how they invest. Mobile trading apps are used by approximately two in five of the next generation with investments, and online brokerage accounts by one in four. Gen Z and Gen Y are more likely to use mobile trading apps than Gen X, with close to one in two using them compared to half as many Gen X.  The report also found that investing through a stockbroker is more common among Gen Z compared with Gen Y and particularly Gen X.

Lauren Jackson comments: “As part of the digital native generation, Gen Y are familiar with apps across all aspects of their life and expect the same kind of service when it comes to their investments. But they also have a desire for self-improvement and financial education. It is clear that younger investors are often looking for more control and flexibility in their portfolios, and they recognise that active ETFs have the potential to help them achieve their financial goals.”

“As an asset manager, we continually look to evolve to meet the needs of our clients. For instance, earlier this year we launched four actively managed exchange traded funds to give them easy access to some of our most popular funds in Australia.”