Adult Children Living at Home: How to Prepare Them for Financial Independence

In our own lives and the lives of our clients, we have regularly observed the trend of millennials—occasionally referred to as the “boomerang” generation—moving back in with their parents after college.  According to the Pew Research Center, 15 percent of 25- to 35-year olds in the U.S. were living in their parents’ home as of 2016—nearly twice the amount as in their parents’ generation—and they were staying for longer periods of time as well.  One initial catalyst for this trend was the lack of available jobs during and after the Great Recession, while mounting student loan debt has undoubtedly played a role as well.  Dartmouth Professor Jason Houle argues that an even bigger factor is college completion.  Young people who don’t finish college (in some cases due to rising tuition costs) are most likely to move back home.  Regardless of the reason, parents are faced with the question of how to best help their adult children to be financially prepared for the real world.

Charging Rent.  One significant issue is whether parents should charge rent to their adult children, and if so, how much should they charge.  In general, charging rent helps to prepare young adults for monthly housing payments, which they will enjoy for most of their adult lives.  It forces them to budget for eating out, entertainment, and other discretionary expenses in light of housing, possibly student loans, and other non-discretionary expenses.  For occupying only one old bedroom, it might not be fitting for parents to charge the same going-rate as apartments in the area, but the higher the family rate is, the easier it will be for adult children to transition to paying market rates when they do move out.  Of course, the appropriate rate depends on the circumstances of the parents and the child as well:

• If children are unemployed or underemployed, it may not seem fair or beneficial to charge rent.  However, if your child has low and/or variable income (such as participants in the “Uber economy”), one solution is to agree on a percentage of income that will be paid in rent—e.g. between 15 and 30 percent of monthly income.
• If parents are not able to comfortably support their child without some form of rent payment (at least to cover utilities) or are behind in retirement savings and could use the extra income to build up their nest egg, establishing a plan for charging rent regardless of a child’s current employment may make the situation more palatable and sustainable for everyone involved.  In the current economy (with less than 4 percent unemployment), most young adults should be able to find a job—even if it’s not their dream job—in order to pay some rent.
• If parents do not need the extra income, another possibility is to collect rent but set aside the monthly payments in a savings account.  When the child moves out or is preparing for a big expense (e.g. new car, graduate school, wedding, or first home), the parents can give the savings as a lump sum to the child for his or her use.  Alternatively, assuming the child has earned income, the parents could use the savings to make annual contributions to a Roth IRA in their child’s name, which could grow and eventually be withdrawn tax-free.
• Rent payments can also provide additional opportunities to teach adult children about the housing expenses they may face later in life.  As millennial finance expert Erin Lowry suggests, sitting down and sharing information about the monthly mortgage payment, utilities, grocery bills, and other home expenses—and how that rent payment offsets a portion of them—could really bolster your child’s understanding of these financial issues.

Household Responsibilities.  As an adult member of the household, children living at home benefit by sharing responsibilities for cooking, cleaning, and home maintenance accordingly.  Whether these responsibilities are set out in a written agreement (as some parents advocate) or just discussed as issues arise, this helps drive a positive experience for both parents and children.  It shows respect for the child, recognizing that they are capable of assuming adult responsibilities around the house, such as grocery shopping, cooking dinner, mowing the lawn, helping with home repairs, etc.  If they do not have experience in those areas, it again provides learning opportunities that will serve them well when they move out on their own.  We discussed household chores in a prior post, which focused on teaching younger children about money, and many of the same observations apply.  Chores that focus on the good of the family or household can give a sense of purpose and build self-reliance, though are often most effective when children are given control over the order, timing, or other aspects of how to complete them.  This is likely to be especially true in the case of adult children living at home.

There are many reasons for millennials needing or wanting to live with parents in adulthood, and hopefully with the right expectations and shared responsibilities, it can be a positive experience for everyone involved and can help the adult children to be even better prepared for managing their personal finances in the future.  Based on our observations at PFS, such situations can also provide an opportunity for parents to get to know their children better as adults, which can lay the groundwork or continue to foster close relationships between parents and children for decades to come.