It's a common question—when should I become financially independent? In other words, when is the right time to stop asking for or accepting financial help from your parents or guardians?
In recent years, the answer to that question has changed, as the number of individuals who are considered financially independent—an assessment based on annual income—has declined. In 2018, 24% of young adults were financially independent by age 22 or younger. However in 1980, 32% were considered financially independent by that age range, according to an analysis from the Pew Research Center.
By the time you graduate college, it's important to be working toward reaching financial independence. Having a job that pays enough to support yourself and paying important bills like rent and utilities, and any debt payments like student loans, can get you there.
Learn when you should become financially independent, and some tips on how to get there.
What Is Financial Independence?
Financial independence can mean different things to different people. But the most common definition is that if you are financially independent, you are completely responsible for your own expenses, or no longer rely on your guardians to give you money or cover some of the bills. You are covering your daily expenses, planning for the future, and you are able to meet your basic needs.
Reaching financial independence will take longer for some than others, and will also depend on your own lifestyle and needs. For example, if someone is saving up funds to go to medical school, that individual may consider living at home for a while after receiving their undergraduate degree. In this case, financial independence would be a few years away.
Financial independence can also be the point where you no longer need to work in order to cover your daily expenses. Generally, this means that you have enough savings and investments to support yourself, and this won't occur until retirement.
When to Become Financially Independent
Ideally, you should become financially independent from your parents as soon as you graduate from college and secure a job. However, according to recent data, about 59% of parents with children ages 18 to 29 say they have given their kids at least some financial help in the past year.
Plus, as of July 2020, 52% of young adults were living with one or both parents—up from 47% in February of that same year. While many new college graduates live at home for a few months following graduation, it's important to set a goal for when you want to officially leave the nest.
Here's why: You can get used to having extra money each month since you likely aren't paying rent, buying groceries, or paying bills. This can lead to poor money management in the future, since you won't get the right budgeting practice from a young age. Relying too heavily on your parents or guardian for support can lead you to become too dependent, and also put you at risk if they are no longer able to support you.
Before you move out, be sure that you are complete ready mentally and financially to do so. Ensure you have enough savings to cover the first month's rent, as well as any security deposit, and consider building up an emergency fund of at least three months of living expenses.
How to Become Financially Independent
So you know when you should become financially independent, but how can you actually do it?
First, you'll need a reliable full-time job to support yourself. Ideally, you'll have a full-time job offer when you graduate college, or shortly thereafter. When you receive an offer, be sure to inquire about employee benefits, such as health insurance and retirement savings options such as a 401(k). Both having insurance and planning for retirement from a young age are key to reaching financial independence.
Once you start your job, give it a few months to make sure it's a good fit. It's OK to live with your parents while you are saving up for your own place and padding your emergency fund, as long as you have an end date in mind.
Many employers will offer to match your 401(k) contributions by a predetermined amount, and each organization will have its own matching formula. An employer’s 401(k) match is typically stated as a percentage of your contribution up to a maximum amount of your salary. One of the most common matches is a dollar-for-dollar match of up to 3% of an employee’s salary.
As you enter the workforce, it's important to create a workable budget that takes into account your new salary, living expenses, expected bills, debt payments, retirement contributions, and other savings goals. One of the more popular budgeting strategies for those just starting to manage their money is the 50/30/20 rule, which allocates your budget into three main categories: needs, wants, and financial goals.
Don't forget to include discretionary spending, as well as food and transportation costs. Once you have a budget, you will know how much you can spend on rent. If the amount is a small one, look for roommates to try to cut costs. And most importantly, before you move out, be sure you have an emergency fund in place.
Is It Ever OK to Accept Help?
If you feel as if you are struggling to get your footing financially on your own, don't be afraid to ask for help. Whether it be from your parents or guardian, friends, or a professional financial planner, as everyone has different perspective and insight on money habits. One example of when parents may consider pitching in is if a young-adult kid decides to purchase a home, the parents may lend funding for a down payment on their house. They may also help with things like car repairs or other big unexpected bills, all of which can be loaned and then repaid in the future.
There is no right answer on whether you should accept this type of help from your parents. But if you do, be sure that you don't make it a habit, expect the money, or inadvertently make your parents play the role of an emergency fund.
Everyone's path to financial success looks different; however, there are a few key things that every young adult should keep in mind:
- If you live with your parents but want to become financially independent, put an end date on when you will move out. It helps to work toward a solid goal.
- Stay on a budget that includes living expenses, saving, and investing.
- As soon as you can, get out of debt. The more you can save, the more quickly you can reach your goal. It may mean making real real sacrifices in your lifestyle so that you can reach your goals more quickly, but it will be worth it in the end.
- Don't forget about saving for retirement. You should begin saving for retirement as soon as you start your first job. The earlier you start saving, the less you will have to contribute, due to compound interest.
The Bottom Line
Remember, the money habits you start now will follow you into the future. It is important to start living within your means as quickly as possible. Your parents will not always be able to help you out, especially as they start to retire. So take these steps now to improve your financial situation and eventually become financially independent.