What Information Do You Really Need to Stay Financially Savvy?

Whether we attribute it to a decline in marriage rates, poor job prospects, student loan debt, technological improvements, or generational shifts, times have certainly changed for young adults. One major topic which my clients bring up centers around their adult children moving back home. While this was not a common conversation ten years ago, I come across this topic more often nowadays. I’ve heard statistics such as “a third of young people, or 24 million of those aged 18 to 34, lived under their parents’ roof in 2015”, and look at it as my job as an advisor to provide advice on how to best navigate through this new landscape.(1)

Within this topic, a common question that I try to help my clients answer is this: Should I charge my adult children rent if they move back home? What I’ve found is that every situation is different, so what may work for one family, may not work for another. However, in this article, I hope to provide a framework to consider when trying to answer the question.

Setting Expectations

Depending on your own experiences and values as parents, as well as the specific circumstance of your adult child, you may insist that they live at home rent-free. For example, if your adult child is being responsible by saving a good share of his/her paycheck for a house down payment and you want to reward that responsible behavior by letting him/her live at home rent-free, there’s absolutely nothing wrong with that. For other parents, such an assistance for an adult child does not make sense, and no matter what the circumstances, would believe it only right to charge for rent if living at home.

No matter where you fall on this spectrum, it is important to set expectations with your adult child. For instance, if you decide that it is out of your comfort zone to charge your child rent for living at home, then what other mechanisms can you put into place to make sure he/she does not get too comfortable? In my experience, I’ve seen parents create timelines and goals, as well as make it crystal clear that the adult child must still pitch in, in other ways such as chores or errands. While it may be a tough conversation initially, imagine the alternative. What if your child gets too comfortable living at home and would rather stay at your “hotel” rather than spread their wings in the real world!

Whether rent is being paid or not, the adult child will have a particular reason as to why they want to or need to live back at home. If they are simply being lazy and are not making an effort towards adulthood, it is crucially important to provide clear expectations. As parents, you want to always help and support, but you never want to enable. Therefore, in this example of being lazy, a parent could set expectations of applying for X number of jobs per week, or something similar.

How Much To Charge For Rent

If you do decide that it makes sense to charge your adult child rent, how much should you charge? In my experience, parents usually charge well below market rates. As parents, you want to help your child out, but you also want to build up their personal finance awareness. How much you charge will also be highly correlated to what your daughter or son can afford, and could change over their time living with you. By having an open conversation and being clear about why you will be charging them, it should not be hard to fall on a number that makes sense for your family.

Alternatives

There are also other ways in which your adult child could pitch in that could be alternatives to paying rent. Such alternatives could be household chores or errands, cooking meals, or even helping parents with their own work. In addition, it could make more sense to have your adult child pay for other household expenses (instead of rent), such as internet, tv, or groceries.

Another alternative could be to make their stay at your home contingent on them depositing money into their own retirement account. This way, you are teaching them how to save and plan for the future.

Finally, if you want to help them grow personally, you can make their stay at your home contingent on community service or volunteering. This is a win-win as well!

Budgeting

This experience can also be thought of as a great teaching moment for your child. Specifically, parents in this situation are in a unique position to extol the virtues of budgeting and personal finance when their child needs it most. If the adult child in your household has to pay you rent and decide how to allocate their small-to-no income, they will quickly learn how to budget. As a parent, you may decide to get creative and instead of using the rent money for expenses, stash it (and maybe even match it) into a savings account for your child. They will be happily surprised with a small nest egg to leave home with!

Other Considerations

Other considerations that I make sure clients consider is their own budget and retirement goals. If your adult child is going to come back home and live there, you’ll want to make sure that adding another adult to the household does not negatively affect your own goals. Because you’d anticipate that household expenses will go up, you must make sure you budget for them, based on your expectations and timeline with your adult child. Again, by having an open conversation with your adult child, I am confident that a reasonable game plan can be implemented with success.

Having this conversation is not always an easy one, but I hope that the considerations above help provide better ways to think about it. If you’d like to discuss your situation further, call my office at (949) 221-8105 x 2128, or email me at michael.loo@lpl.com.

• https://www.census.gov/library/stories/2017/08/young-adults.html

It’s graduation season, and there’s an excitement in the air about starting a new chapter. Mixed in with this excitement is an element of stress to make the right decisions: decisions on how things should be done, when they should be done and where they should be done. All these decisions are common, but they often distract from the purpose of what comes after high school.

We need to remember that higher education has a purpose. It’s more than an experience. The purpose of a college degree is employment. It is an investment, and as with any other investment, you should be calculating the return on that investment.  Spending $100,000 for a degree that secures a job with an annual salary of $40,000 is not the best rate of return.

There are plenty of creative ways to get a great college education without breaking the bank. Parents can start a 529 plan, the earlier the better, to help cover costs. Students can begin their higher education at a community college or secure college credit via Advance Placement (AP) exams. Additionally, students need to be sure that the field they are spending their time and energy on is going to reciprocate by providing solid career opportunities.

Making the wrong decision is not simply an unwise financial move. It can have lasting implications. Recent figures show that outstanding student loan debt has reached $1.5 trillion[i]. Our younger generation is not only struggling under this debt, they are also pushing off other personal and financial milestones, such as purchasing a house[ii], getting married or starting a family[iii]. These decisions can have long-lasting and far-reaching consequences.

Lastly, let’s not forget the countless parents who put their path to financial independence on hold to financially assist their struggling children. While wanting to financially help your loved ones is admirable, it helps no one to offer assistance at the expense of your own security. Just like when traveling by airplane, you need to put your own oxygen mask on and secure your safety first before aiding others. There are no scholarships for retirement, and you won’t have a financial safety net for the future if you don’t work towards creating it now.

College is truly an exciting time. Our young adults are learning who they are, where they want to go and how they intend to get there. At the same time, we cannot forget that college is a fleeting moment, one that is meant to arm the student with the tools needed to create a brighter and more successful future. Be sure to chat with your students to ensure that this experience does just that, rather than straddle these students with debt and stress.

[i] https://www.marketwatch.com/story/student-debt-just-hit-15-trillion-2018-05-08

[ii] https://www.businessinsider.com/student-debt-preventing-the-us-from-having-normal-housing-market-2019-5

[iii] https://www.bankrate.com/loans/student-loans/student-loans-survey-february-2019/

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.

Disclaimer:

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Stock investing involves risk including loss of principal.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

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The principal value of a target fund is not guaranteed at any time, including at the target date. The target date is the approximate date when investors plan to start withdrawing their money.

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