Parents: whether you usually fight or always agree, there’s a good chance you still have a financial relationship with them. A September 2015 survey by American Consumer Credit Counseling, a Boston nonprofit, found about half of American households are paying at least some bills for an adult child over 24 years old.
While the situation is often borne out of necessity, it can be a detrimental arrangement for everyone. Many parents are seeing their retirement savings evaporate as they support adult children. At the same time, adult children may see their emotional relationship with their parents deteriorate as financial stressors creep in. There is usually a point where it’s best for everyone if you break up with mom and dad – financially, at least. But how? Get down to basics.
- What debts have to be paid?
Although student loans can be put into deferment, that is typically a short-term solution and can continue to haunt you. So, write down every debt that must be paid. Student loans and credit card debt are probably at the top of the list. While you may be able to negotiate interest rates, generally these amounts are pretty fixed. You need to pay them back, and you need to do it within the set amount of time.
- Look at income.
How much do you make? If you are working a part-time job, look for opportunities to get more hours, look for an additional job or pick up some “side hustle” income. The College Investor has a long list of ways to make additional money in your spare time. Or consider internships and contract work, as explained in this aftercollge blog post. You want to maximize your income as much as possible.
Now look at your income total. Is it significantly greater than the amount you have to pay in debt? If your debt payments eat up more than 36% of your income, you’re in a tough place. You will need to really focus on increasing your income as much as possible.
If your debt-to-income ratio is closer to 20%, you are in a better place to start minimizing costs and working toward financial independence from your family.
- Analyze expenses.
If you can easily manage debt payments on your salary, but still run a shortfall regularly, then it’s time to look at all your expenses. Start with basic living expenses.
- Rent
- Utilities (electricity, water, sewer, gas)
- Food (groceries)
- Car payment
- Car insurance
- Gas (or transportation costs)
- Medical insurance (include co-pays or other expected out of pocket costs)
Then, write down all your discretionary expenses. That includes:
- Cable
- Cell phone
- Entertainment (eating out, movies, bars)
- Travel (hotels, airfare, train)
- Personal care (makeup, skincare, hair cuts)
- Clothing (as well as shoes, accessories)
- Gifts
Now it’s time to question every amount you are spending. If you are paying rent already, can you find a cheaper rate? Can you live in a smaller space? Can you take on a roommate? If you are living at home, do exhaustive research of the housing market. What’s the most affordable option?
Can you shop around for a cheaper insurance policy? Can you live closer to work to decrease gas costs? Is public transportation a feasible option?
You get the idea. When it comes to discretionary spending, there’s a lot of cutting and minimizing that can be done.
- Set a budget and live with it.
If you are living at home with your parents, try to set aside the amount you’ve budgeted for any costs you don’t pay currently (rent, utilities, food, personal care and the like might fall into this category). Put the money into a savings account and try to pretend that you are spending it to support yourself. Using a tool like You Need A Budget can help you see when you are overspending in a certain area – like eating out.
If you don’t live with your parents, but they provide financial support, try to put their contribution in a savings account and live only on the money you’ve budgeted. If you are moderately successful in the first month, ask them to decrease their contribution and continue to challenge yourself to live within your means. Use the money from your parents only when extremely crucial.
- Set goals and plan for emergencies.
Once you are able to support yourself on the money you make, it will become important to set financial goals. They should be achievable goals – something like saving $100 each month might be a good starting point.
Alternatively, you could make larger debt payments. Or, you could increase your contribution to a retirement account by 1% every six months. Overall, you want your goals to either help support your financial progress in the short term (like cash savings or debt reduction) or long term (like retirement or saving for a home).
We have more advice on benchmarking costs and setting a budget in this infographic.
While depending on your parents financially might provide a better quality of life right now, you and your family will be better off in the long run by working toward financial independence and stability.
