Young Americans Are Moving Back Home. This Is How Much They Can Save
New research from the Pew Research Center paints a unique picture of the nation’s young people. According to the data, some 52% of 18- to 29-year-olds currently live with one or both parents. The share of young adults living with their parents is at a point not seen since the Great Depression. However, there are upsides to living with one’s parents.
The decision for young people to move back home usually comes down to finances. People in this age range are saddled with a crushing debt load and job prospects that have been negatively impacted by the pandemic. A 2019 study by Northwestern Mutual found the average 23- to 38-year-old has nearly $28,000 in debt.
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A separate Pew report found that roughly a third of adults aged 18 to 29 have outstanding student loan debt. The numbers don’t look good, but by moving back home, young people in this situation can reduce debt and save money, which can help them increase their savings and ultimately pay off debt.
How much money could a 20-something save by living at home?
A typical student loan payment is between $200 to $300 a month, and the average rent for a one-bedroom apartment runs $1,000 to $1,300 a month. Utilities can cost an additional $160 a month.
When you put all this together, it’s not surprising to learn that nearly 60% of 22- to 38-year-olds surveyed by Insider and Morning Consult report having less than $5,000 in savings. Moving back home may feel strange, but it has the potential to save you at least $1,000 a month.
“Long-term, this [moving back home] should allow young people the chance to save more money and eventually put this toward a down payment on a home, repay student loans quicker or pay off other costly debts to help them get ahead faster,” said Riley Adams, a senior financial analyst with Google.
A long-term mindset
For young Americans that haven’t started thinking about the future, now is the time. Living at home can be a great way to save for a house down payment. Homes are often a person’s most significant investment and largest source of wealth, so it’s important not to delay the transition from living at home to owning your own home for too long. If you do, you’ll be missing out on the potential for building homeownership wealth.
“The most common asset families use to store and grow wealth is through homeownership,” said Adams. “Fewer buyers means fewer young adults who own homes to build wealth in the long term.”
The trick will be figuring out how much you can reasonably expect to set aside each month to save for a down payment while also paying your bills. Most lenders want a buyer to put down 20% of the sale price. Failure to do so means higher monthly payments and paying for private mortgage insurance.
5 ways young adults can manage their savings during the pandemic
Although the pandemic has proven to be a great opportunity for young adults who have moved back home to save, it’s also important to clearly understand the best practices for successful budgeting.
1. Save every penny
Most young adults have a savings account, but they may not be getting much in the way of returns. The average savings account interest rate is in the neighborhood of 0.09%. Shop around. Look for high-yield savings accounts. Online banks tend to offer higher rates, so it might be worth looking into this option.
2. Work on your credit
A credit score is arguably the most important number in your life. Credit scores impact everything from whether you’ll get approved for a loan to what interest rate you’ll be charged. Say you have $35,000 in student loan debt. A person with a “fair” credit score of 580 to 669 could end up paying nearly $5,000 more over the life of the loan than someone with a “very good” score of 740 to 799. This same scenario plays out with credit card debt and mortgages.
3. Pay off debt
Paying off debt and working on your credit go hand in hand. Paying on time and in regular installments will help boost your credit score. Are you able to make more than the minimum payment? Doing so will limit the amount you end up paying in interest. Also, think strategically about your debts. Prioritize those with higher interest rates and small bills that you can get out of the way, freeing up more money that can be used to pay down other debts.
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4. Build a budget
Reducing debt starts with knowing what comes in every month and what goes out. Fortunately, there are a host of budgeting apps out there to help. PocketGuard sets a budget based on your spending habits and sends an alert when your bills are paid, and you have money left over. Mint is the gold standard when it comes to personal finance software. The app includes a range of tools like automatic syncing and an investment account tracker.
5. Start investing
You’ve paid down your debt and are looking for ways to start building wealth. An Individual Retirement Account (IRA) is a good option. There are different types of IRAs, but the big draw with IRAs is they can grow tax-free and may only be taxed when a person takes money out. Mutual funds are also a good advantage for those who are interested in letting money accumulate over time.
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