April 26, 2018
Photo by Jon Ly on Unsplash
The struggle is real for millennials. The number of young adults living with their parents is the highest it’s been in 75 years. But rather than look at living at home in your twenties as embarrassing or immature, what if we flipped the script and called it one of the most brilliant financial moves you can make?
Making Less While Everything Costs More
Millennials are earning 20% less than their parents did at the same age. Meanwhile, the cost of major monthly expenses has soared in recent years.
Housing is usually the largest fixed cost for an individual and a typical twenty-something is spending 45% of their income on rent. Comparatively, Baby Boomers had a much lower rent burden at just 36% of income. Crunching the numbers reveals that between the ages of 22 and 30, millennials will spend $92,600 on rent.
Another major monthly expense is student loan debt. Today 70% of college students graduate with loans — the average borrower leaving campus with $37,172 of debt. That balance is $20,000 higher than the average just 13 years ago. And the average monthly payment for a borrower in their twenties is $393.
Live At Home To Get A Head Start
Many parents and the media view having a degree, a job, and living on your own as “being successful.” So when millennials opt to live at home, they often get bashed for being lazy and for freeloading off of their helicopter parents.
But in reality, Gen Y has to deal with some terrible economic factors that no previous generation has had to deal with.
When sky-high rent and student loan payments gobble up more than 60% of your income, it’s hard not to struggle. And it’s even more difficult to do the things that make you financially secure, like establishing an emergency fund and paying off any credit card debt accumulated in college.
On the flipside, let’s say you opted to live at home for a few years after graduation and you did it in a responsible way. You could put the money you would have paid in rent towards paying off your student loans and building your savings.
By following this path and living at home, most twenty-somethings would be able to move out at 25, completely debt-free, and with a fully stocked emergency fund. And they would have even more discretionary income than their peers because they wouldn’t have to make that $393 student loan payment every month.
Those who could stick it out for an extra year or two could even save enough for a down payment and actually buy a home when it’s time to move out.
To many, being a debt-free homeowner by 28 is well worth a few extra years at home with mom and dad.
Automate To Do It Right
Living rent-free doesn’t come without temptation. The reason the scenario I’ve described doesn’t always play out is because graduates go home without a financial plan and end up spending their discretionary income rather than saving it.
That’s why I’m a big advocate for automation, whether you live at home or not, because every dollar you earn should have a job.
Divide your paycheck and automate those funds to go towards bills, goals, and choice spending.
For a client that does have housing expenses, I usually suggest putting 20% of their income towards goals. But if you’re living rent-free with your parents, that percentage should be higher because your bills are lower. Prioritize paying off any debt, building a strong emergency fund — and moving out before you’re 30.