How to make a budget for living alone

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living alone

Thinking about moving out of your parents’ home? You’re in good company: so are 1 in 3 other millennials ages 18-34. Not living alone throughout young adulthood is often laden with judgements about one’s financial responsibility, independence, and even character.

However, the insidious trifecta of soaring student loans, rental costs, and stagnant income is postponing the milestone of independent living for more young folks than ever before.

Whether it’s your first or tenth attempt at leaving the nest, let us offer some tips to ease the transition. Tune out any judgments you’ve heard, take a breath, and make your financial game plan.

Making a budget for living alone

Defining a realistic budget is one of the most important ways to save money. One practical method is the 50-30-20 budget strategy. According to this strategy, about half of your budget should be reserved for life’s essentials (food, insurance, shelter, and healthcare), around 30% to flexible spending (hobbies, fun activities, and non-essential clothes, products, and treats), and 20% to your personal financial goals (investing, saving, and paying off debts).

Make a complete list of your essential investments: rent, insurance(s), taxes, utilities, phone, trash collection, transportation fees, groceries, family, clothing, debt payments, savings …and, your Fun Fund. Don’t neglect things that will make you happy (ex. seeing friends) and support your future goals (ex. graduate school).

Allocating money from an abundance mindset supports your goals and rewarding yourself can help keep you on track. 

Outsource decision-making

Even once you have an investment plan for living alone happily within your means, bringing it into fruition can be challenging. Your enlightened, abundance-minded self knows that the last $20 in your checking account are for your water bill — but at 5pm on a Friday, your ravenous, wild animal alter ego might decide that money is actually for Ben & Jerry’s and takeout.

When your hungry inner Ben & Jerry’s monster rears its ugly head, what do you do? 

Willpower, according to the American Psychological Association, is a limited resource. Like a muscle, we can build its strength. But when it comes to fear-ridden, complex topics like personal finance, it may be better to avoid temptation altogether by outsourcing important financing decisions as much as possible.

Have a phone bill? Need to pay your rent? Is a student loan payment due? Make the transfers automatic. 

Living alone equals quicksand money

Did you play “the floor is quicksand” as a child? Essentially, you pretend the floor has transformed into quicksand, and you’re not allowed to touch it. It’s advisable to magically transform a portion of your income into “quicksand money,” too.

It is advisable that young folks save before spending because of compound interest. Saving in young adulthood is important because interest can compound over time. In other words, if you start saving $100/month at 25 years old vs. 45 years old, not only will you have two decades more of savings, but the money you initially saved will be worth more because of years of compounding interest. 

Saving may seem daunting when contemplating moving out and living alone. However, remember that our lifestyles tend to adjust to our income. We can reduce the pain of saving for some foggy vision of our future selves by automating the decision to save. Funneling money into an emergency, retirement, or investment fund can be as easy as setting up an automatic monthly transfer. 

We know that we should save, but how much? This is difficult to determine, especially if we don’t have much disposable income or are paying off debt. Many experts suggest that we should aim to save 10-15% of our salary, but saving even just 2% is a good start. When it comes to savings, remember: something is better than nothing. 

Prioritizing debt vs. savings

When deciding whether to pay off debt or save, there is no simple, universal answer. This choice depends on a number of factors (interest rates, emergency funds, savings goals, etc.) and can play a big role in determining if you’ll be able to live independently in the short and long term. 

Before plunging from your nest, it’s vital that you consider how much of an emergency fund you need. Do you have health insurance in the event of a medical emergency? Would a loved one lend a hand if your car broke down? Having a financial cushion is crucial to planning big life decisions like moving out because, well, the primary underlying goal of living alone is survival. 

Next, consider your debts and their respective interest rates. Balance your savings and debt payments such that you’re not paying more interest than you’re earning or defaulting on any loans. This often means paying off credit cards first, considering personal loans, and refinancing student loans.  Remember that debt can include hidden costs in the form of interest rates over time.

Add additional streams of income

Perhaps the greatest barrier to moving out is financial security. Over the past 50 years, income growth has not kept pace with rent cost. Apartment List reported that inflation-adjusted rent jumped by 64% from 1960 – 2014, while household income rose by just 18%. 

Add additional sources of income. Consider getting a side hustle. It’s common for workers of all ages to engage in side hustles on a part or full-time basis. Freelancing can help pay off debt, complement income and savings, boost investment funds, or earn a treat. Over time, investing is another way to add additional streams of income. 

Leaving the nest is both a daunting and exciting idea. But remember, if you’ve crunched the numbers and it doesn’t work out yet, that’s okay, too. Living alone can be a marker of adulthood, but having the forethought to delay something you want until it’s wise is an even more important milestone!

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