2/6/2013 2:15 PM ET|
'Boomerang' kids: Moving out again
If you’re a young adult striking out on your own again, these tips can help prepare you for your new life away from the folks’ house.
The boomerang generation is throwing itself back out of the nest.
Until recently, a bad economy had been squashing the rate at which Americans set up new households. The so-called household formation rate fell by more than half, with just 650,000 new households annually between 2008 and 2011, compared with an average of 1.5 million a year between 1997 and 2007. Lousy job prospects meant fewer young people leaving home to strike out on their own.
That trend reversed last year, with nearly 950,000 new households formed, according to the U.S. Census Bureau. The number had been on track to top 1 million, but the economy slowed unexpectedly in the fourth quarter. Still, economists for Goldman Sachs predict 1.2 million new households in 2013 and 1.3 million annually in 2014 through 2016.
If you're one of those about to launch, or you're a parent sending your kid out the door, here's what you need to know to have a successful transition:
Figure out what you can afford. Pile up too many obligations, and you'll wind up back in Mom and Dad's basement. Be conservative about the rent and loan payments you take on.
Here's one method that may help: Look at the gross income you earned on your last paycheck and subtract the taxes you paid (including federal and state withholding and FICA, which covers Social Security and Medicare). Multiply that after-tax figure by the number of paychecks you get in a year, and divide that sum by 12 to get your monthly after-tax income.
Now divide that figure in half. You don't want to spend more than about 50% of your after-tax income on essentials, such as rent, utilities, transportation, food, insurance and minimum loan payments. That will leave you enough money to have a little fun (30%) while still being able to save and pay down debt (20%).
Keep track of your finances. Forget to take out the trash and Mom gets cranky. Forget to pay a bill, and it's your credit that will be trash. Mark due dates on your calendar, and consider using an online aggregator such as Mint.com to help you keep track of account balances, as well as due dates. Set up alerts with your financial companies so you're notified by text or email if your checking account is on fumes or your card balance creeps above the limit you set. Automatic payments are a great way to make sure you never forget a bill or pay a late fee.
Build those credit scores. If you're under 35, you're more likely to use debit cards or cash as your main payment method. Only 20% of people under 35 use credit cards for most purchases, according to a report by Auriemma Consulting Group. That compares with 29% of those ages 35 to 54 and 34% of those 55 and over. But eschewing credit cards entirely can prevent you from building good credit scores, which you will need in order to rent a decent apartment, get a car loan or land a mortgage someday. Don't believe the myth that you have to be in debt or carry a credit card balance to have good scores. You just need to have -- and use -- credit accounts.
Start saving for retirement. It's never too early to start, and pretty soon it will be too late. If you have a 401k or other workplace retirement plan, you should be contributing something to it -- at least enough to get any employer match, and ideally much more than that. If you don't have a plan at work, you can contribute up to $5,500 a year to a tax-deductible IRA.
Boost your emergency fund. In an ideal world, you'd have at least three months' worth of expenses saved before you leave your parents' house. Saving that much can take a couple of years, though. But you needn't delay your departure. A few hundred dollars initially is all you need to keep most minor setbacks from sending you back home.
Get the right insurance. You need health insurance to protect you from catastrophic medical bills if you get sick or injured. If your employer doesn't offer coverage and you're under 26, you can still be included on your folks' plan, even if you don't live at home. You also should get renters and disability insurance if you can. Finally, consider buying more than the minimum liability coverage if you have auto insurance. Now that you have a job, you have something to lose, and boosting the coverage to $100,000 shouldn't be prohibitively expensive.
Say thank you. Maybe this isn't strictly required, but it would be nice to take your parents out for a good meal as a thank-you for putting you up (and putting up with you) while you got on your financial feet. May it be the last time you need their help.
Join the conversation and send in your financial questions on my Facebook fan page.
Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.
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