"Millenials are more dependent on their parents than any generation before them," says Joseph Templin, author of The Financial Mistakes of New College Grads and The Psychology of the Millennial Client. He explains that young adults have come to rely on parents not just for a place to live, but also as the source of funding for their phone bills, car insurance, health care, student loan debt and a slew of other miscellaneous expenses that prevent them from developing any real sense of how much it costs to live these days.
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| The current job market doesn't make it easy for young adults to start out on sound financial footing. |
The severe (and at times, subconscious) financial attachment may have a lot to do with the relationship parents have with their own mom and dad.
According to Laura Scharr-Bykowsky, a certified financial planner with Ascend Financial Planning, the parents of Generation Y were largely raised by people who grew up during the Great Depression. Well aware of financial struggles, these grandparents were more likely to require their children to work for what they wanted. But the pendulum has swung the other way.
"Baby boomers had an adversarial relationship with their parents," Templin agrees. "To compensate, they've become much friendlier with their children and also more protective."
This altered mindset, coupled with advancements in technology that have turned luxuries such as TVs and cellphones into household staples, has made young adults used to an ever-present monetary safety net that has prevented them from learning some valuable life lessons.
"Many parents bubble-wrapped their children," Templin says, adding that when it comes to their finances, "they haven't learned to fall down and get scrapes."
But while it's certainly easy to rely on a parent to pay the bills, it's also a recipe for long-term financial failure. Study after study has indicated that most Americans are woefully underfunded for retirement, including this one that found 20-year-olds were experiencing serious trepidation about their own long-term financial investments (or lack thereof). At the same time,another study has suggested that young people are not nearly as worried as they should be about their debt.
With all of these factors at play, we consulted some personal experts to find out the best ways young adults can wean themselves off the Bank of Mom and Dad, once and for all.
Set a budget
Nobody looking to assert financial independence will ever be able to if he or she has no idea what the monthly expenses actually cost. Rett Dean, a certified financial planner with Riverchase Financial Planning in Lewisville, Tx. suggests usingbudgeting software, websites or even an Microsoft(MSFT) Excel spreadsheet to add up all your expenses so that you can compare it to what you clear on you bimonthly paychecks.
"Most young adults spend more than their net income," he says, explaining that this is partially because they have a distorted perception of the cost of living. "You need to go into it with your eyes open."
Remember to save
Dean reiterates that being truly financially independent means being able to support yourself in worst-case scenarios, such as losing a job or falling victim to a disaster such as a fire.
"Young people today need to learn early how to pay themselves first," he says. "That means looking at what they are bringing home in income and determining what they can reasonably afford to put in savings, and doing that first and then living off the rest."
Scharr-Bykowsky says that new grads should be looking to put about 10% of each paycheck into a savings account or retirement fund.
One thing you shouldn't do is rely on credit cards as part of your available cash flow.
"This almost always ends with the person having a giant debt hole to dig out of later, and in some cases sadly the hole is just too deep, without credit ruining steps being necessary," Denn says.
Wean yourself slowly
Any young adult who tries to cut himself or herself off from mom and dad cold turkey is essentially setting his or herself up to fail. Dean compares it to going to the gym: "If you work out too hard on your first day, you'll be insanely sore and not want to go back again," he says. He recommends picking a small bill, such as your cellphone or auto insurance payments, to start paying on your own and then adding others to your budget over time as your salary allows.
The one item all experts agree you should not be in a rush to get rid of is health insurance.
"Health insurance is not something you want to play with," says Ornella Grosz, author of Moneylicious: A Financial Clue For Generation Y, noting that young adults should only get off their parent's health care if their job is providing them with their own.
Don't add new expenses until you can pay off old ones.
Recent grads may be in a rush to move out, but they should only do so if they can afford to pay all the other bills they rack up each month.
"Rent should almost come last," Scharr-Bykowsky says, explaining that you should be able to pay off your own phone bill, insurance bill, student loans, or even buy groceries before you head out looking for a swanky new pad.
Similarly, Grosz cautions against returning to graduate school just because you haven't found a job right away or without understanding what the cost associated with continuing your education will be. While she acknowledges that grad school could be the right choice for some, it does require taking on additional debt that can leave you in the same place later on.
"You might be almost 30 and forced to move back in with your parents," she says.
Keep your parents involved -- for now
The key is to not rush the process of financial independence, and one way to do this, Dean says, is to rely on parents ... as the middleman.
"Families can approach it as a joint venture," he says, suggesting that parents initially let their child pay them for their share of the monthly bills. Once the child has proven he or she can handle it, these bills can then be transferred to them in their name.
It's important that the child pay the parent directly to get a true sense of his or her financial obligations, though, Dean says.
"You can't just say 'I'll pay off my part' by buying some groceries this week," he says. "You need to physically write the check or move the money online from one account to the other."
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