Save up for homeownership while you are young

Jürg Zulliger

Dreaming of homeownership? – For young Generation X or Generation Z (born after 1995) other things matter in life than for older people. The focus is on training and education. Some dream of a stay abroad. They want to get ahead in their careers, yet live flexibly. Others get married at an early age and start a family.

With regard to living in a home the dreams have been similar across the generations. A majority do not want to live long as renters but want to be able to afford their own house or apartment one day.

Money and Savings Tips for Life

On the way to your “Homeownership Dream” three principles are helpful:

• Draw up your own, individual budget. Once you enter working life a thorough analysis and planning of earnings and costs is worth it.  How much can you save monthly or annually? Resist the temptations of the consumer world. Think twice about high leasing installments or the five-star vacation. Instead, try to consistently allocate some of your income to savings.
• Savings goal: Make concrete plans! How high is the amount you will need? In some regions such as Zurich or in the vicinity of Lake Geneva, purchase prices are high. Here you will need a scale of 150,000 or 200,000 Swiss Francs in equity (normally 20 percent of the purchase price). Everywhere where purchases prices are lower, the target can be achieved with less money.
• Involve your family, friends and relatives! Even with good income, a period of five or six years, for example, is too short to get anywhere. A gift or advancement of inheritance are actually a welcome financial booster. But be advised that the money from your parents, good old Uncle Fred or Auntie Mabel is only deductible as equity under specific conditions (non-repayable, interest-free loan without any time limit). Ask your bank.

Saving- But How?

«In general, pay-ins in Column 3a are a popular savings instrument,” says Florian Schubiger of Vermögenspartner in Zurich.  The advantage: The annual pay-ins are fully tax deductible (tax saving). Normally, you also get higher returns than with account deposits. Column 3-1- deposits can also be invested in securities depending on the bank and provider (especially in the case of a longer-term investment horizon).   The law permits the retirement savings bound to Column 3a to be used later for a home (before retirement, of course).

However, if you rely on Column 3 a, the “Homeownership Dream” needs to be the focus. Withdrawals for further education or a trip around the world are not permitted!

Less suitable for the younger generation (Generation Z and Generation Y) are savings measures via the pension fund. Pension money paid into the fund may be used for homeownership, but the funds are tied to a specific purpose over a longer period of time. On top of that, future benefits from the pension system are no longer as well secured as before. Voluntary payments to the pension fund make more sense after the age of 55, but not at a younger age.

Saving with Securities-But Long-term

If you really want to save ambitiously you should draft a plan with securities. According to statistics by Pictet, Swiss securities produce the best results by far with a return or performance of 8 to 10 percent per year. But, caution: As stock prices fluctuate strongly, you should have an investment horizon of at least ten years.

However, some investment experts are not sure that high returns are possible with Swiss securities as they once were.

Daniel Mewes, Head of Investment Solutions and member of the Board of PostFinance, recommends a very broad diversification with securities. «We believe that a share of 35-45% of Swiss securities is acceptable. The remainder should be investments in international stocks”, Mewes of PostFinance advises.

According to expert Schubiger planning is what counts with regard to securities: «You need to settle on a strategy and a plan. Then, you need to invest in stocks regularly». But when it comes down to individual securities on the exchange, many people are befuddled. Do they want to buy stocks from multinationals such as Novartis, Roche or Nestlé? Or rather Swisscom, Logitech or smaller stock corporations?

Homeownership Dream: Moving Patiently Toward Your Goal

Nowadays, there are many alternatives to the purchase of individual securities. The best thing is to ask your bank or investment partner for a savings plan on the basis of index products (ETF). At Postfinance a savings plan is already possible with amounts starting from 20 Swiss Francs. You pay the fixed amount monthly or annually. Depending on your account balance or savings plan, the amount is continuously invested. Constancy is important. On the road to your “homeownership dream” you have to be steadfast and carry on every year. You should consistently continue to pursue your goal in bull (good) and in bear (bad) markets. If you invest when there is a bear market, you profit from the lower stock prices.

Nowadays there are very few alternative investment possibilities which promise significant interest. The coupons on bonds are so low nowadays that commission and bank fees more or less “eat up” the interest. So, it is not that easy to deposit money which you do not or cannot invest in stocks for risk-related reasons. Caution: If you have liquid money or bank deposits for three or four years you might even lose. This happens when inflation is greater than the interest.

Up to a specific age some banks or fund managers offer a young people’s savings account with priority interest. If you look, you can still find other alternatives. These include branch offices of cooperatives. But almost everywhere it is the same: You cannot expect more than mini-interest with your bank deposit.

Compare Savings Offers

When young people visualize their “homeownership dream”, they will usually start out on a small scale. If you are young, were not born a millionaire or won the lottery, banks will not be welcoming you with open arms. So, do some research yourself. Thanks to the Internet and comparison services there is much more transparency nowadays regarding interest, Column 3-a accounts, bank fees, etc.  Especially looking at it over several years, fees that are too high are restricting. If your bank or fund manager syphons off 1 to 1.5 percent in fees that is simply too expensive.