Living with one’s parents can be a great way to save money and prepare for adulthood. And it’s more common than you might imagine. As Pew Research noted, some 15% of millennials ages 25 to 35 still lived with their parents as of 2016. Some statistics say it may be even double that. This is a new trend, with Generation Xers living at home at much lower rates at the same age.
But at some point, it comes time to leave the nest. That means taking the financial steps necessary to begin a new life of self-sufficiency and added expenses and responsibilities. Here is a checklist of the financial must-do’s as you prepare for moving out of your parents’ home:
Step No. 1: Establish a Credit History
It’s not too difficult to have a credit history in this day and age—all you have to do is get approved for a credit card or borrow money for a student loan and you’ll have a credit history already. But if you find yourself short on proof that you can pay rent, for example, you’ll want to have a credit history that demonstrates you’re capable with money. Here are some ways to do that most effectively:
- Pay all debts on time. Living rent-free at home makes more money available for paying off all debts—see step No. 2. Why is this so important? You can build a healthy credit history by paying off all your bills on time, even if it’s something as simple as paying off your entire credit card balance at the end of the month.
- Stack your rewards. Moving out of your parents’ home means you’ll need extra money for furniture, appliances, décor and all the rest. Try not to redeem any credit card cash rewards you’ve acquired while staying at home, because you’ll need them when making the transition.
Step No. 2: Pay Off Your Debts
The best way to unburden yourself as you adjust to a larger budget? Avoiding debt. Unfortunately, not everyone is following this rule. In December 2017, Americans owed nearly $1 trillion in credit card debt alone. Having interest payments accrue while debt builds up is no way to begin your life as a self-sufficient individual.
Paying off debt requires some commitment, especially as your debt levels rise. And with some 43% of Americans carrying credit card balances month over month, having debt sitting in an account means that your financial stressors will only add up over time. Make paying off debt a priority while you live at home.
Step No. 3: Begin Living with a Budget
It’s possible to get away without a budget when you don’t have to sack away 33% of your take-home pay toward rent. So why bother? Because building a budget is a habit that will have long-lasting implications on the rest of your financial future.
Most people hear “budget” and think about it in terms of a diet—that it’s intentionally restrictive. However, a budget is simply a way to track where your money goes, not how it goes. That means you can still spend to your heart’s desire—so long as you understand where the money is going throughout the month. This will help you make more informed financial decisions in the future. Here are some budget apps that might help:
- Personal Capital
- YNAB – You Need a Budget
Step No. 4: Create an Emergency Fund
If you’ve already paid off your debts and have built up the habit of a monthly budget, you’re ready to get to the next step: building up a cushion between yourself and the real world. Think of the emergency fund as a way of restoring the cushion you had at home—when worst came to worst, you still had financial support.
An emergency fund is self-funded financial support. Put money aside in a savings account and you’ll be ready for emergencies such as medical bills and car repairs—the sorts of events you might not plan for.
Step No. 5: Scout Out Locations That Won’t Break the Bank
You’re going to need a place to stay if you’re going to make the most of your credit card rewards and your good financial habits. What’s next? Look for a place to live that won’t cost more than 25%-33% of your take-home pay. Now that you’re responsible for your own rent, there’s no reason you should have to saddle yourself with a place that’s too expensive. Do your research on sites like Zillow and Apartments.com well in advance of moving out.
Moving out doesn’t have to be scary—especially with a financial plan in place. Make sure you follow these five steps to ensure a smooth transition to the next stage of your life.
About the Author: Joe Resendiz is a former investment banking analyst for Goldman Sachs, where he covered public sector and infrastructure financing. During his time on Wall Street, Joe worked closely with the debt capital markets team, which allowed him to gain unique insights into the credit market. Joe is currently a research analyst who covers credit cards and the payments industry. He earned a bachelor’s degree from the University of Texas at Austin, where he majored in finance.