At some point in their late teens or early twenties, most people find themselves wondering, “can I afford to move out?” In this article, I’ll provide some tips for arriving at an accurate answer.
8 tips for deciding whether you can afford to move out
Many people move out long before they’ve satisfied every single criterion I’m about to share. Often, that’s because living on their own is a necessity.
Some parents simply don’t let their kids live with them past a certain age, for example. In other cases, people need to relocate for career reasons. Given how expensive life is, it’s understandable many people facing these scenarios technically can’t afford to move out yet do so anyway.
On the flip side, however, some people move out discretionarily. I’d argue doing so without meeting the affordability criteria in this article is incredibly reckless.
The goal should always be to make the most of your situation financially, whether that means minimizing the damage or aggressively getting ahead.
Whichever category you fall into, these tips will be helpful. If moving out isn’t optional, they’ll show you which financial hurdles you’ll need to overcome. If it is, you’ll learn how to enjoy the freedom of moving out without permanently damaging your finances.
1. Know the full tangible cost of moving out
In the process of moving out, you’ll incur many miscellaneous costs that push your early expenses far beyond merely the first month’s rent or mortgage payment.
If you’re renting, this includes things like:
- a security deposit (often one month’s rent)
- application fees (varies from less than $100 to $200 or more)
If you’re buying, costs may include:
Whether you plan on renting or buying, you also need to think about relocating your belongings, which can cost thousands of dollars according to Moving.com. Additionally, you may need new furniture and other household items.
Factor these expenses into the equation when deciding whether you can afford to move out. You should be able to cover the total cost without taking on debt or tapping into your emergency fund.
2. Define “afford”
Let’s say you net $2,500 per month and your budget upon settling into a new place would look like this:
- Rent: $1,500
- Food: $250
- Car-related expenses: $350
- Discretioniary spending: $300
- Total: $2,400
Can you afford to move out in this scenario? Many would say yes. That’s because people often define affordability as merely being capable of meeting monthly obligations.
My definition, on the other hand, entails being able to meet obligations and make progress towards long-term goals. You may find that second part difficult if your budget leaves just $100 to be saved or invested per month.
Later in this article, I’ll give you some pointers on deciding how much of your income to save.
“But buying a home builds equity!”
If you plan on buying rather than renting upon moving out, you may be tempted to view monthly housing costs as a form of saving. This isn’t entirely incorrect. A portion of every monthly mortgage payment will certainly build equity, which isn’t the case with rent.
However, many recurring homeownership costs don’t build equity, including:
- property taxes
- mortgage interest (which eats up a sizeable chunk of every payment)
- home insurance
- garbage pickup
These can amount to tens of thousands of dollars annually.
My point? Arguably, housing is consumption and should be budgeted for as such. Your home is not a substitute for long-term savings and investment accounts.
3. Determine whether your monthly housing costs would fall within conventional guidelines
Experts generally recommend spending no more than 30% of your take-home pay on rent or mortgage payments. This is one way to ensure your budget contains enough room for long-term savings and unexpected expenses.
Now, if your salary is on the low end, you may find this impractical.
Let’s say your gross pay is $30,000 annually. You may only bring home about $2,150 per month after taxes, which leaves just $645 for rent. Forget about a mortgage.
In most major North American cities, you could only afford to move out in this scenario by living with roommates. Even then, it’d often be a stretch finding somewhere that cheap.
Some people make it work by renting a subpar home or stretching housing costs beyond 30% of their income because they don’t have the option of living with their parents.
To reiterate my disclaimer, though, if moving out is optional, you may want to think twice about blowing past this guideline.
4. See where your other essential expenses fit into the picture
Of course, housing isn’t the only essential cost you’ll be fully responsible for upon moving out. You’ll also need to budget for food alongside other expenses you may already have such as debt repayments and car insurance.
According to the popular 50/30/20 rule, all essential expenses should comprise 50% of your income. That’s tough when you’re moving out on your own in an expensive region without a substantial income. If the numbers work, however, you can likely afford to move out.
5. Set a monthly savings goal and determine whether it’s compatible with your other living costs
According to the aforementioned 50/30/20 rule, you should save or invest 20% of your income.
However, this requires some personalization. Carefully consider your goals and how much you need to save per month to reach them.
If you want to retire early and live off your investment returns, for example, you’ll need a very large account balance (check out this post for some numbers). Unless you’re a particularly high earner, saving 20% of your income likely won’t get you there.
The same applies to many other extraordinary goals. If you’re an average earner, 20% may not cut it. Figure out what will then see if it fits comfortably into your budget before assuming you can afford to move out.
6. Make sure you have an emergency fund
An emergency fund is essential if you want to be truly self-sufficient after moving out. You’ll also sleep much better at night knowing job loss or a substantial unexpected expense won’t represent a total financial disaster.
Many financial experts recommend keeping an emergency fund capable of covering your expenses for three to six months. While others see this as overkill, I’d argue it doesn’t hurt to err on the side of caution when making a major life change like moving out for the first time.
If you don’t have an emergency fund, consider building one before moving out. It’s a key consideration when it comes to affordability.
7. Don’t forget to consider the opportunity costs
So far, we’ve discussed tangible costs – the amounts you’ll see leaving your bank account upon moving out.
Money isn’t that simple, though. The cost of spending goes far beyond what meets the eye.
You see, money spent on consumption can no longer be saved or invested. Accordingly, spending any amount entails giving up its future gains. In personal finance, we call this an opportunity cost.
Opportunity costs are especially high early in life when every dollar you invest for retirement will experience decades of compound growth.
Let’s say you’re exactly 24 years old.
An investment of $1,500 in assets producing 8% average annual returns (i.e. stocks) would be worth $33,693.72 by age 65 according to this compound growth calculator. That’s the opportunity cost of moving out and making just one $1,500 monthly rent payment at 24 when you don’t have to.
As you get closer to 65, this cost declines. At 30, an unnecessary $1,500 monthly rent payment’s opportunity cost would be $20,678.02. At 40, it drops to $8,772.71.
Am I saying you should live with your parents at 40 and beyond? Absolutely not. I’m simply saying you should be capable of withstanding the opportunity costs whenever you move out.
If they’ll leave you unable to cover living costs later on (i.e. in retirement), you may not be able to afford moving out. You might consider waiting until the opportunity cost falls or your salary rises to compensate for it before moving out.
“But my parents kicked me out and I have to live somewhere!”
Let me clarify something regarding opportunity costs.
I live with my parents in Toronto, which is Canada’s economic and industrial center. Because we’re all fine with this arrangement and there’s no practical incentive to relocate for career reasons, the opportunity cost of moving out would be my total related additional expenses (i.e. 100% of rent).
In other words, my choice is between paying full market rent elsewhere and investing that money while living at home instead. (Note: I do contribute to household bills but we’ll keep things simple and leave that out).
If you need to move out for some reason or another, though, the opportunity costs are entirely different. They’d be calculated based on whatever portion of your housing costs are discretionary.
For example, let’s say you spend an extra $200 per month to live in a specific neighborhood for no particular reason. Based on our previous assumptions (earning an annual 8% return in stocks and holding until 65), the opportunity cost of a single such payment at 24 would be $4,692.50.
Meanwhile, non-discretionary housing expenses would incur no real opportunity cost since shelter is essential. To phrase this another way, nobody lives on the street so they can invest. It’s not a practical alternative.
“But I’m buying, not renting!”
Buying rather than renting adds another layer of complexity when calculating opportunity costs.
It’s not too mind-bending, though. Your opportunity cost would simply be the difference between what you gained by building equity in a house and what you could have earned with that money elsewhere (i.e. the stock market).
Again, you’d need to determine which portion of your housing expenses were discretionary and leave the remainder out of any opportunity cost calculations.
Also, don’t forget to account for homeownership’s additional costs. Expenses like maintenance and property taxes are arguably discretionary since you could simply avoid them by renting.
In fact, one wealth manager speaking with CNBC suggests the opportunity costs of these additional expenses make homeownership a raw deal compared to renting and investing the difference.
Again, it’s not that you shouldn’t buy a house. It’s that you should be able to withstand the opportunity cost of doing so.
8. Consider how moving out would affect your career and salary prospects
Moving out can affect your career and earning potential in many ways.
If moving out means relocating to a better job market, this effect may be positive. You could double or triple your career earnings.
There are also potential negative impacts, though. With more responsibilities, you may be less inclined to take risks that could produce greater pay later on.
Of course, some people find the opposite is true. If living with your parents limits ambition and results in a sense of complacency, getting out may provide a swift kick in the pants.
It all depends on your career and personality. I fall into the first category, having experienced no lack of ambition living with my parents.
I’ve also been able to do things like taking a massive pay cut in exchange for a job that should pay better long-term. Check out my appearance on the BiggerPockets Money Podcast to learn more about that.
Whatever your situation may be, consider how moving out will affect your earning potential and whether the impact will be beneficial – or if it’s negative, surmountable.
What to do if you can’t afford to move out
If you read my previous points and discovered you can’t afford to move out, don’t feel bad. According to the Pew Research Center, 52% of young adults aged 18 to 29 live with their parents. Times are tough.
Consider the following tips. They’ll help you become financially capable of moving out on your own – or minimize the damage of leaving the nest before it’s affordable if you must.
Use money wisely while living with your parents
Living with your parents presents a great opportunity to save, invest, and eliminate debt far more aggressively than you’d otherwise be able to. Don’t squander it!
Remember, the opportunity cost of wasting money is quite high when you’re young. Get those dollars to work so even if you have to scale back upon eventually moving out, you’ll still be in a good spot.
While living with my parents, I’ve saved between 50% and 80% of my income. Consequently, I have enough invested that I could stop altogether for a few years and still remain on pace to retire early as my portfolio grows on its own.
Set a target date or age for moving out
Just because you can’t move out now doesn’t mean it’ll never happen. Set a target date and figure out what it would take to become financially independent from your parents by then. Specifically, consider details such as:
- where you’d like to live
- how much money you need to save
- whether you’d like to rent or buy
- what your income needs to be
Keeping these details in mind – and planning accordingly – will help you stay productive. You don’t want to be dependent on your parents indefinitely.
Increase your income
Budgeting will only help you so much if your income is on the low side. Eventually, you’ll need to start earning more.
There are many ways to go about this. For starters, you could consider changing careers. Check out this list of well-paying, recession-proof jobs. Many come with relatively relaxed educational requirements, meaning you may not even need to take on student debt!
You could also pick up a side hustle or two. There are so many ways to earn money quickly. Popular options include:
- freelance writing
- driving for Uber
- delivering food
With the right habits in place, even a few extra hundred dollars per month could help you move out sooner.
Make sure your income is sustainable before moving out, though. The last thing you want is for your side hustle to dry up and force you to move back in with mom and dad.
Consider working towards location independence
Another way to render yourself capable of moving out sooner rather than later involves achieving what’s known as location independence. This fancy-sounding term simply means work doesn’t tie you down to any particular location.
With the ability to work remotely, you could relocate to a much cheaper location where housing costs fit neatly into your budget. Some people take this to the extreme and become digital nomads lounging around in exotic locations where living costs are negligible.
Even if you’re just moving to a different state or province, though, achieving location independence could be a game-changer.
If you’re going (or need) to move out anyway, minimize the damage
As I’ve mentioned several times throughout this article, moving out before you can afford to is a terrible idea financially. You’ll set yourself back quite a bit.
If you decide to move anyway (out of necessity or a desire for freedom), however, at least minimize the damage.
For starters, don’t buy or rent more house than you can afford. Keep your housing costs as close as possible to that 30% guideline I mentioned earlier.
Second, save something – even if $50 is all you can come up with per month. While that won’t make you rich (or even help you retire), those monthly contributions will help you get in the habit of paying yourself first. As your income increases, so will your motivation to save.
Why I still live with my parents
While I was still in college, I started making $80,000 per year co-managing a digital marketing agency. I didn’t move out, though. That was a strategic decision based on the following factors.
My parents of from Guyana. In that culture, it’s customary for children to live with their parents until marriage. Will I follow that rule to a tee? No, when I’m ready to move out I’ll do it regardless of my relationship status.
However, this cultural tradition means living at home has never been unusual in my world. My slice of Toronto is filled with first-generation Canadians like myself doing exactly that. We aren’t all bums mooching off our parents. It’s a completely normal, culturally-accepted living arrangement.
While some people inherit lots of money, I’m inheriting the opportunity to save and invest
My parents are not rich. In their own words, they have “nothing to give me except the opportunity to save and invest most of my income while living with them.”
Now, to be clear, that’s one hell of an opportunity. Since I started working, I’ve been able to save and invest a six-figure sum that should be worth millions by the time I’m in my fifties. My view is that I’d be crazy to squander this opportunity by moving out before I have to.
I’d rather contribute to my household and leave my parents in a good spot before moving out
Because I can afford to move out (aka I’m not living with my parents out of necessity), I can also contribute to my household. This is my opportunity to support mom and dad as they approach retirement.
The alternative would be to give a landlord or mortgage lender my money and support their financial ambitions. That just doesn’t make sense to me.
Many wealthy people I know live with their parents
In North America, members of the middle class generally have this weird obsession with appearing self-made. We often want rags-to-riches backstories and are willing to live in cockroach-infested apartments eating ramen noodles to get them.
Conversely, every smart and wealthy person I know simply plays their cards right. In several cases, that means living with their parents, keeping wealth in the family, and becoming even richer as a result.
Believe me, these people can more than afford to move out. They don’t because it doesn’t make practical sense.
I do plan on moving out by 30, though. That’s just a deadline I’ve imposed on myself. I know millionaires living at home in their forties but I’d rather not. Still, I feel no shame following their lead at 24.
Moving out is a massive step. It’s crucial that you evaluate your finances before doing it, whether you plan on buying or renting a home. I hope this article has given you some valuable food for thought.
For more helpful personal finance planning tips, check out some related articles here.