Finding the Right Fit: Selecting the Right Financial Role Model for You

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

Each of our lives is comprised of elements that create a story. Our financial lives are no different – the elements include our bank accounts, retirement accounts, mortgages, car loans, student loans, investment accounts, stock options at work, life insurance policies, credit cards, etc. When most people think of their financial life, they think of these elements but have trouble contextualizing them in their overall financial story. All of these elements are simply tools that either help or deter us from our goals. Before analyzing the tools, it’s important to understand why you’re using them and the goals and priorities that create the story which requires them.

One way people analyze these tools is by researching investment returns. Before delving into the world of returns, think about why you are investing in the first place. Your investments should reflect your overall financial priorities. If the risk tolerance in your investment appropriately reflects the time-frame you plan on needing the money, then worrying about investment returns day-to-day can be more of a headache than it’s worth. For example, if you are 35 years old saving for retirement at 60 – you should be aggressively invested if you’re comfortable with that. Because you have 25 years before you plan on using the money, short-term fluctuations in the market shouldn’t really concern you. In fact, if the market does go down and you are still contributing to your retirement, you are technically “buying on sale” – getting more shares for the same dollar value. Contributing to your retirement in up-and-down markets is called “dollar-cost-averaging” – meaning you average out the cost/share of an investment by contributing consistently rather than trying to time the market and invest when you are “buying low”.

There are many benchmarks in the financial industry to compare your investments to and track performance. Some examples include the S&P500 and the Dow Jones Industrial Average for large-cap stocks, the Barclays US Aggregate Bond Index for bonds, and the MSCI Index for international investments. It’s important to understand how your investments are doing in relation to the overall market – it keeps you abreast of what you are investing in and prompts questions you may not ask otherwise – such as what fees you are paying, who’s helping you decide what to invest in, and how much risk you’re taking on compared to the benchmarks you’re using as a comparison. However, the benchmark you should habitually pay more attention to than any other is your particular goal with each investment and your overall goals in terms of building wealth.

Focusing on investment returns only paints half of the picture when tracking progress because it is completely out of your control. If you can confidently say your investments are well diversified and invested according to a risk-tolerance you are comfortable with, there is a much more important benchmark to track than returns. Instead of relying on your investment vehicles to do all the heavy-lifting, you should use your investment behavior as the ultimate indicator to determine if you’re making progress or need more work. What are the financial goals you have in mind? To retire by 55? To save for a second down payment on a house? To pay off your mortgage? Help your children pay for their college tuition? Protect your investments and family in case of a long-term illness? Reduce credit cards and student loans? Build emergency savings?

When you are focused on goal-based financial planning, there are a lot of benchmarks to concern yourself with other than the hype involved in investment performance. Are you saving more this year than you were last year? Did you increase your savings rate when you received a raise? Does the money you are spending appropriately reflect the values and priorities that are most important to you? Are you using extra income to increase investments and decrease liabilities? By focusing on why you’re investing in the first place and the priorities that matter to you, it’s easier to ask the right questions and monitor progress. Once you know what you’re shooting for, a Decision Coach can help you understand the appropriate tools to get there.

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.

The Bloomberg Barclays U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.

The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI EAFE Index consists of the following developed country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the UK.

Each index is an unmanaged index which cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. Past performance is no guarantee of future results.