Class of 2019: Low Rent Key to Survival
The first and arguably most important decision a new graduate will make is how much to pay for rent.
If it’s too high, the rent – on top of those annoying student loans – will push out other priorities necessary to prevent financial trouble down the road.
Rick Epple, a certified financial planner in Minnesota’s Twin Cities area, counsels his daughter’s friends and clients’ children entering the labor force to keep their rent at around 20 percent of their income.
“Nobody ever talks about what they should spend,” he said. He worries about young adults who pay a third of their income – the standard recommendation – for an apartment. If the rent blows a hole in the budget, paying student loans every month and on time becomes a much bigger challenge.
A paycheck, Epple said, “just goes quick.”
A manageable rental payment also leaves room to prepare for the inevitable unexpected expense – and, yes, retirement.
Epple counsels young adults to set money aside in an emergency fund in case life throws a curve ball. “It’s good to have that cushion” when a car breaks down or a better job offer requires relocating, he said. Retirement is years away but shouldn’t be sacrificed for rent either. Most major, and many smaller, employers will put money into a 401(k) on a worker’s behalf if he contributes a small, designated amount, say 6 percent of his gross pay, to the 401(k). Epple recommends doing what’s required to get the employer’s match, because it’s essentially free money.
Emergency fund or 401(k)? Since there isn’t a lot of money to go around, he recommends doing a little of both.
A low rent payment will make this possible.
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The emergency fund should always come first; otherwise, you'll be tempted to borrow from your 401k when an emergency comes along and that is never a good strategy.
Admirable goal, but where is the young person supposed to find this low-rent apartment?I've watched the young people I know struggle to find a decent (not fancy) apartment for a reasonable rent. Clean and somewhat safe comes at a considerable cost.When you take into consideration that most young people starting out don't make that much money, limiting them to 20% is a nearly impossible goal, especially since most start their careers in cities, where the jobs are.
My wife and I are empty nesters. Our youngest son and his fiance lived with us for 4 years and contributed a bit of money to the household expenses. In America, we have single family homes and drive single-person car. Some cultures have been more open to extended families and multiple incomes. Perhaps this is due to shared housing that reduces personal costs on two of the most expensive items: Shelter and mobility. If you can share housing costs you can free up more more for emergency funds, annual home repairs, auto repairs, 401Ks, cash savings, retirement savings.We have a 4 bedroom house with one bedroom, small living space and a large bathroom that go largely unused. And we've considered renting the room. Perhaps this is a retirement topic: cohabitating and understanding the liabilities. It may be a viable way for some retirees to supplement retirement costs?