Financial independence: How to break up with your parents
Let’s face it: Adulting isn’t always easy. Managing credit cards, paying off student debt and budgeting—all without help from mom and dad—can be overwhelming. Yet in a recent Bank of America/USA Today survey, nearly 40 percent of young people said it’s financial independence—such as paying rent and having your own health insurance—that really makes you feel like an adult. Luckily, you don’t have to go full grown-up right away. You can get there step by step.
Create a student loan game plan
Whether you live with your parents or just tag onto their cell phone plan, many millennials who rely on their parents for financial help say student loans are the reason. So how do you get them under control? First, know your options for repayment and consolidation, which could reduce your payments. You may be able to pay off your loans over a longer period, or you may qualify for an income-based repayment plan, both of which could also lower monthly payments. After doing some research, you may find it makes financial sense to accept help from your parents for a bit longer, if they’re willing. Just be sure to consider their expectations, as well as any quality-of-life implications, in your decision.
Average student loan debt
Source: Federal Reserve, 2016
Tip: Don’t let stress about paying off student loans derail other areas of your finances. Balance your loans with other priorities, like saving for retirement or paying off credit card debt.
Build your credit (and eventually ditch mom’s card)
A good credit score can help you with everything from renting an apartment to landing a job, and since a longer credit history is generally better, it’s good to start building credit early. Ideally, you want to have your own card so you can be totally in control of the purchases and payments.
If you don’t yet have a credit card, consider applying for a secured credit card, which uses a security deposit as collateral. This can help you build credit. Sharing a card with your parents can do that, too. If you’re a joint cardholder, the card becomes part of your credit history. If you’re an authorized user, the card may or may not be reported on your history—it depends on the issuer. If your parents have good credit card habits, this can help you qualify for your own card.
Prepare to move out
Gear up to pay rent by depositing a rent-like amount into a savings account each month. This helps you get used to the line item in your budget, and you can put the money toward a security deposit, or even a down payment, when you’re ready to live on your own. If you already pay rent to your parents, see whether they’ll consider using the money to help you get on your feet by contributing to a savings fund or helping with student debt.
Tip: Remember to budget for all of the extra costs that come with renting your place.
Get your own bank account
If you, as a teen, opened a bank account with your parents, you may still share it. Now that you’re paying your own bills, it can help to have your own account. Removing someone from a joint account can require planning—generally, both parties must be at a branch in person to sign paperwork. An alternative is to open a new account just for you and eventually close the one you shared. If you’re navigating two accounts, be sure to keep your parents informed, especially if you plan to transfer money from your shared account into your solo one.
Learn about health insurance options
You have a few options for health care coverage when you’re starting out:
If you’re under 26, you can stay on your parents’ plan. You can use this time to learn the ins and outs of health insurance without too much pressure. You may also be able to get health insurance through your employer, though you’ll likely need to pay a share of the cost. Other options include coverage through a spouse or buying insurance through the federal or your state’s exchange.
Wherever you get coverage, make sure you find out what your monthly premium will be and what the plan covers so you can estimate additional costs.
Figure out transportation
Millennials may be driving less than previous generations, but 77 percent still drive to work or school, according to the U.S. Public Interest Research Group. If you are borrowing your parents’ wheels for now, find out what they pay each month, including gas and insurance—then consider contributing. This can help you start budgeting for transportation costs. When you plan to buy your own car, you may be able to save money by buying used.
Or, if you’d rather ditch the car entirely, public transportation, cycling and carpooling are great ways to be mobile on a budget. Plus, a host of rideshare apps have popped up, letting you search for potential carpool buddies.
Remember: Some family ties make financial sense
Financial independence doesn’t mean you have to cut all monetary ties to your parents. It may benefit everyone to share expenses such as family vacations, subscriptions or joint gifts. In addition, many experts think family cell phone plans are a good idea since they are generally cheaper per person than individual contracts. That doesn’t mean you should expect your parents to pay the whole bill, though. Try to chip in for your portion.
of 22- to 26-year-olds pay their own cell phone bills.
Source: Bank of America/USA Today “Young Americans & Money” report, 2016