How to Become Financially Independent From Parents

According to a recent article, almost half of the parents financially support their adult children. With the recent pandemic shutdowns and rampant inflation, the trend of young adults depending on their parents financially is on the rise.

It’s more challenging than ever to achieve independence. You can escape this cycle if you have the right knowledge and determination.

This article will guide you through the steps to to become financially independent from your parents.

Understanding the Current Situation

To start, it is imperative to evaluate the current situation. You might be surprised to find that many young adults still rely on their parents financially in various ways.

But hey, don’t feel alone – this is quite common, and understanding the situation is the first step towards making a change.

Common ways young adults rely on their parents financially

• Credit card payments: Many young adults have credit cards, but their parents help them pay off the balance, making it easy to fall into the habit of spending without accountability.
• Joint bank accounts: Young adults frequently have joint bank accounts with their parents, which reduces their independence and gives the parent more control over their finances.
• Allowances: Some parents continue to provide their adult children with a regular allowance, making it challenging for them to learn how to budget and manage their money independently.
• Cell phone plans: Many young adults are on a family cell phone plan, with their parents footing the bill.
• Insurance and subscription services: Some adult children remain on their parent’s health insurance, car insurance, or other subscription services, further delaying their financial independence.

Impact of financial dependency on parents and adult children

The financial dependency of young adults on their parents has a significant impact on both parties. Some of the consequences are:

• Delayed retirement for parents: As parents continue to provide financial support to their adult children, their own retirement may be postponed. 
• Parents struggling with their debts: Assisting adult children financially can lead to parents struggling with their own debts. They may have to redirect funds from their own financial obligations to support their children.
• Limited financial proficiency for young adults: Depending on parents for financial support may impede the acquisition of vital financial skills, such as budgeting, saving, and investing.
• Increased debt and dependency: As financial dependency increases, it may lead to a cycle of debt and reliance on parents, making it harder for young adults to establish their own financial footing.

The next sections cover the steps to achieve financial independence from your parents. You can confidently stride into your future, knowing you have the skills and knowledge to manage your finances like a pro!

Building Financial Literacy

Financial literacy is the building block for you to navigate the complexities of managing your finances.

It empowers you to make well-informed decisions and confidently take charge of your financial future.

Importance of financial literacy for young adults

• Informed decision-making: Having financial savvy is all about getting a handle on different areas of personal finance, like setting budgets, saving money, making smart investments, and managing debt. You can make wise financial decisions and steer clear of common pitfalls with the help of this knowledge.
• Building good habits: Financial literacy helps you develop responsible financial habits early on, setting you up for long-term success.
• Achieving financial goals: Financial literacy is crucial for achieving objectives such as saving for a home, eliminating student debt, or preparing for retirement.

Setting Up Your Own Bank Account

Taking that initial step towards more financial responsibility and independence from your parents involves opening your own bank accounts.

This gives you the autonomy to manage your own money and lays the foundation for building good financial habits.

Choosing the best bank for your needs

• Research: Start by researching different banks and credit unions in your area or online. Compare their account types, fees, interest rates, and auxiliary services to find the optimal match for your needs.
• Convenience: Consider factors such as branch and ATM locations, customer service, and the availability of online and mobile banking services.
• Account options: Look for banks that offer no-fee or low-fee checking and savings accounts, along with competitive interest rates.

Opening checking and savings accounts

• Gather required documents: To open an account, you’ll typically need identification (such as a driver’s license or passport), proof of address, and your social insurance number or equivalent.
• Checking account: This account serves as your main go-to for everyday financial dealings, like getting your paycheck, covering bills, and buying stuff.
• Savings account: A dedicated savings account makes it easier to stash away cash for both short-term and long-term goals. It may act as an emergency fund or a sinking fund for an upcoming expense.

Setting up online and app access for easy monitoring

• Online banking: The majority of banks provide online banking options. It allows you to check your account balances, move money around, and settle bills, all from the convenience of your computer or phone.
• Mobile banking app: Many banks provide dedicated mobile apps, allowing you to manage your finances on the go with ease. Be sure to download the app for your bank and sign up for mobile banking.
• Account alerts and notifications: Enable account alerts and notifications to stay informed about account activity, such as deposits, withdrawals, and low balances. This helps you monitor your finances more closely and avoid potential issues like overdrafts.

Obtaining Your Credit Card

As you continue on the path towards financial independence, obtaining your own credit card is an important milestone.

It provides not only a convenient mode of payment but also assists in the establishment of your credit history.

Tips for choosing the right credit card

• Annual fees: Look for a credit card with no or low annual fees, especially when you’re just starting to build credit.
• Interest rates: Compare interest rates among different credit cards, keeping in mind that a lower interest rate is generally more favorable.
• Rewards and benefits: Consider credit cards with rewards programs, such as cashback, travel points, or other perks that align with your spending habits and preferences.
• Credit limit: As a first-time credit card user, you may be given a lower credit limit. Use this opportunity to learn responsible credit card usage before seeking a higher limit.

Responsible credit card usage

• Pay on time: Always pay off the statement balance by the due date to avoid late fees and maintain a good credit score.
• Pay in full: Make sure to pay off your balance in full each month to avoid interest charges.
• Track your spending: Monitor your credit card transactions regularly to ensure you’re staying within your budget and to detect any fraudulent activity.
• Credit utilization: To maintain a healthy credit score, keep your credit utilization (the ratio of your credit card balance to your credit limit) below 30%.
• Avoid unnecessary debt: Use your credit card responsibly and avoid accumulating debt that could become difficult to manage.

Understanding and Managing Your Credit Score

It’s essential to understand the significance of your credit score and how to manage it effectively.

A good credit score can open doors to better financial opportunities and overall financial security and stability.

Importance of a good credit score

• Access to credit:  An impressive credit rating amplifies your likelihood of securing approvals for loans, credit cards, and various credit forms.
• Favorable terms: With a good credit score, you’ll likely qualify for lower interest rates and better repayment terms on loans and credit cards.
• Renting and employment: Landlords and employers often check credit scores as part of their evaluation process. A good credit score can improve your chances of securing a rental or job opportunity.

How to check your credit score

• Credit bureaus: In most countries, there are major credit bureaus (such as Equifax, Experian, and TransUnion) that maintain credit reports and calculate credit scores. You can request a copy of your credit report and score directly from these bureaus.
• Free credit score services: Many free online services and apps, such as Borrowell in Canada, offer access to your credit score, often with monthly updates and monitoring services.
• Financial institutions: Some banks and credit unions provide their clientele with complimentary access to their credit scores through online banking or mobile apps.

Tips for building and maintaining a good credit score

• Pay on time: Consistently make payments on time for loans, credit cards, and other bills.
• Maintain low credit utilization: Keep your credit utilization ratio (the percentage of your available credit that you’re using) below 30% to show responsible credit management.
• Monitor your credit report: Review your credit report regularly. Be on the lookout for errors or discrepancies and promptly report any issues to the relevant credit bureau.
• Limit hard inquiries: Avoid applying for multiple credit cards or loans within a short period, as each application results in a hard inquiry that can temporarily lower your credit score.

Creating and Managing a Personal Budget

A well-crafted budget will help you identify your spending habits, establish your financial priorities, save money and ensure you’re living within your means.

Assessing your current spending habits

• Track your expenses: Start by monitoring your spending for a month or two. List all purchases you make, no matter how small, and categorize them to understand where your money is going.
• Identify patterns: Look for patterns in your spending habits. Are you spending too much on eating out or impulse buying? Recognizing these patterns will help you set realistic goals for your budget.
• Determine needs vs. wants: Distinguish between your essential needs (like rent, groceries, and utilities) and your discretionary wants (such as entertainment, dining out, and shopping). This will help you prioritize your spending.

Tips for creating a realistic budget

• Set realistic goals: Based on your spending habits, set achievable goals for each spending category. Ensure that your budget is not overly restrictive, as this may lead to frustration and derail your progress.
• Allocate money for savings: Include a savings category in your budget to ensure you’re building an emergency fund and saving for future goals.
• Adjust for life changes: Modify your budget in response to changes in your financial circumstances, such as getting a new job, relocating, or undergoing a significant life event.

Strategies for sticking to your budget and avoiding overspending

• Use budgeting tools: Utilize budgeting applications, spreadsheets, or alternative tools to track your spending and maintain accountability.
• Establish spending limits: Set spending limits for each category in your budget, and commit to staying within those limits.
• Implement the 72-hour rule: When faced with a non-essential purchase, wait 72 hours before making a decision. This cooling-off period can help you avoid impulse buys and stick to your budget.
• Find creative ways to save: Look for opportunities to cut costs, such as preparing meals at home, using public transportation, or taking advantage of discounts and rewards programs.
• Regularly review your progress: Check in on your budget regularly to ensure you’re on track with your financial goals. Celebrate your successes and adjust your spending as needed to stay on course.

Separating Shared Expenses with Parents

Separate shared expenses with your parents and take responsibility for your own expenses and finances. This process not only helps you become more independent but also demonstrates respect and appreciation for your parents’ support.

Here are some steps to help you tackle shared living expenses and transition to financial autonomy.

Identifying shared expenses

• Make a list: Review your current financial arrangements and make a list of shared expenses with your parents. Common examples include cell phone plans, subscriptions (like Netflix, Spotify, or gym memberships), car or renter’s insurance, and utility bills.
• Analyze the costs: Determine the costs of each shared expense and how they are currently divided between you and your parents.

Allocating costs and paying your share

• Calculate your share: Based on your usage or agreed-upon arrangements, calculate your fair share of each expense. Take into consideration factors such as usage, the number of people on the plan, and any additional features or services you may be using.
• Communicate with your parents: Discuss your desire to take responsibility for your share of the expenses with your parents. This conversation demonstrates your commitment to financial independence and allows you to work together on a plan.
• Set up payments: Establish a system to pay your parents for paying your share of the expenses, either by transferring funds to your parents, paying the service providers directly, or setting up automatic payments from your bank account.

Considering alternative arrangements, if necessary

• Evaluate the benefits of shared plans: In some cases, shared plans may offer cost savings and convenience for everyone involved. In such a situation, have a chat with your parents about how you can continue to enjoy the perks of these plans while also contributing your part to the costs.
• Propose a trade-off: If you’re unable to cover your share of an expense, consider offering to trade services or responsibilities in exchange. For example, you could take on additional household chores or help your parents with tasks they find challenging.
• Explore individual options: If it makes more financial sense to separate from a shared plan, research individual options for services such as cell phone plans or subscriptions. Compare costs and benefits to find the best solution for your needs.

Managing and Reducing Debt

Managing and reducing debt is an essential aspect of securing a stable financial foundation.

By addressing your existing debts and adopting smart strategies, you can minimize the burden of debt and pave the way for a more secure future.

Here are some tips for managing and reducing debt on your journey to financial independence.

Identifying existing debts

• Make a list: Jot down all your current debts, such as student loans, credit card debt, personal loans, and any other financial obligations you might have. 
• Organize the information: For each debt, note the interest rate, monthly payment, outstanding balance, and loan term. This information will help you prioritize your debts and develop an effective repayment plan.

Strategies for paying down debt and avoiding high-interest loans

• Prioritize high-interest debts: Focus on paying down debts with the highest interest rates first, as they cost you the most over time. By allocating extra funds toward these debts, you can reduce the total amount of interest you pay.
• Create a debt repayment plan: Develop a monthly budget that includes debt payments, and stick to it. Consider using the debt snowball or debt avalanche method to accelerate your debt repayment progress.
• Avoid high-interest loans: Beware of high-interest borrowing options like payday loans or credit card cash advances, as they can pile on the debt and weigh you down. Instead of relying on these costly options, explore lower-interest alternatives like personal loans or balance transfer credit cards.

Final Thoughts

Achieving financial independence from your parents is an essential milestone in your journey toward adulthood and self-reliance. 

As a young adult, the prospect of managing finances can be daunting, but with grit and perseverance, you can conquer the hurdles and establish a secure financial footing.

Don’t hesitate to seek guidance from trusted sources, learn from your experiences, and celebrate your progress along the way.