Why enjoying the high life can come back to haunt you

Unrealistic expectations will put younger people £250,000 in debt by the age of 50, says Maria Scott

Twenty and thirtysomethings would need to double their current salaries to afford the lifestyles they aspire to, and will face debts of nearly £250,000 by the age of 50 if they don't control their spending, according to a new study.

Many young people have wildly unrealistic ideas of the lifestyle they will be able to afford, according to financial services group ING Direct's Money Forum Study, undertaken in conjunction with the Centre for Future Studies and Professor Paul Webley of Exeter University.

The study found that people aged 21-35 are hoping for lifestyles in their forties that would cost them nearly £500,000 over 10 years. That means they would have to double their salaries, but current statistics indicate that they can expect to earn only an average of 1.3 times their current pay in future.

'Someone currently earning £20,000 a year would have to earn £50,000 during their forties to pay for their lifestyle, when realistically they can expect to earn in the region of £26,000. By the time they hit 50, today's young adults will be £240,000 short of funds,' the report says.

The statistics, which do not allow for inflation, show that young people expect to spend £13,750 more on cars over a decade than they can realistically expect to afford, £5,000 more on holidays, £9,500 more on domestic help, such as cleaners, gardeners and nannies, and £1,000 more on grooming, such as beauty therapy.

The study surveyed 2,300 people and asked for detailed information about how they expected to live in future. ING concludes that today's young adults are heading for a rude awakening and that their aspirations contrast with those of their parents. People aged 51-65 had comparatively modest hopes when starting out, and 80 per cent have achieved their expectations.

Today's young adults will face tough choices. 'Spending on credit may well mean that they experience a shortfall, both in short-term disposable income and, later, in pensions provision,' the report says. 'Alternatively, they could face up to the realities now and weigh up the merits of spending for immediate gratification, compared with saving for larger, longer-term goals.'

According to the Office for National Statistics, average household spending in Britain during 2004-05 was £434.40 a week, while average gross household income was £601 a week. Allowing for tax on the gross income, this indicates that people should be just about making ends meet.

But the increasing number of people seeking help from debt counsellors belies this assumption; the Consumer Credit Counselling Service (CCCS) took some 20,000 calls last year, 20 per cent more than in 2004.

So how can you get your spending - and expectations - under control? Philippa Gee, of independent financial adviser Torquil Clark, says if you want to stay out of financial difficulty, free up money to save or pay off debt, you will need to work on your budget.

'Whatever your salary, budgeting is an essential tool, and one that should be revisited every 12 months, as it is easy to get out of shape. Identify all sources of household income and check recent bank statements for regular payments. Keep an eye out for direct debits or standing orders that are no longer valid, such as a subscription to a magazine you don't read or membership of a gym you never visit. Once you have worked out your essential outgoings, keep a money diary for the next week to cover all your spending, no matter how small.'

This advice may sound elementary, but Jayne Bellis, a managing counsellor for the CCCS, says that many clients are shocked when they are forced to analyse their outgoings and compare them with income: 'For a lot of them, it is the first time in their lives that they have ever done it. It's an eye-opener.'

The easy availability of credit has, she believes, removed the necessity to budget, and modern life is stretching many budgets to the limit. Bellis says clients may be paying £100 a month for cable and satellite television subscriptions. Telephone costs are also high. 'Everyone seems to have a landline, a mobile and broadband.' Ten years ago, Bellis recalls, typical telephone costs, for a landline, were averaging about £40 a month. 'Now we rarely see telecoms costs below £80 and often [they are] over £100. For young people it is often higher.'

Another big expense is lunch. At £5 a day, that can work out at £100 a month. The cost of regular sporting and leisure activities for children is also high in many family homes. Clothing, haircuts and beauty treatments are also major items for those who are expected to dress to certain standards at work. Bellis says smoking is also a huge expense: a 20-a-day habit may cost £160 a month.

Cutting back on costs is an easy and instant way to reshape finances, much easier than trying to increase income. Bellis, who keeps a regular spending diary herself, advocates making savings that seem realistic, such as cutting back on cable and satellite television packages, lunches and cigarettes.

'I don't expect people to live in sackcloth and ashes, but even for people in dire financial straits there can be resentment. They feel their lifestyle is being denied them. They feel that they work hard and society sends out the message that you can have it all.'