Morgan Stanley Says Record Numbers of Young People Are Living With Parents

Living with your parents? These moves might make it easier.

One of the many ways that the COVID-19 pandemic, inflation woes, and economic uncertainty have impacted our lives is that more and more young people are living at home. According to a recent note from Morgan Stanley, almost half 18 to 29 year olds are living with their parents. It says we haven't seen those highs since the Great Depression around 90 years ago.

Why young adults are living with parents

The Morgan Stanley note chimes with research from the U.S. Census Bureau and Pew Research Center. Insider reported that several factors are contributing to the living-with-parents trend. These include:

• High cost of renting
• A desire to save money
• Getting married later in life
• Saving money during college

Given that a large percentage of young adults living with parents say they're doing so to save money, it may come as a surprise to learn that Morgan Stanley analysts think it's also driving an increase in spending on luxury goods. Some of the money saved on essentials like housing and food goes toward travel and high-end goods.

As with many statistics, that's only part of the picture. It wouldn't be fair to say that young adults who are living with their parents are spending all their money on vacations and extravagant lifestyles. The pandemic and its economic effects have hit younger generations hard, impacting their work prospects, savings, and living situations.

Let's not forget that the cost of living rose considerably in 2022, with November costs about 7% higher than they were a year before. Latest data from the Bureau of Labor statistics shows that price hikes are slowing, but housing costs in November were still 7% higher than in 2021 and food at home costs were up 12% over the year before.

Living with your parents? Here's how to make it work

It isn't easy to live at home as a young adult, especially after you've moved out and gotten used to doing things your way in your own space. That said, if you're all OK with the situation, there can be significant financial benefits. The trick is to manage things carefully, communicate well, and not fall back into old teenage habits.

1. Set clear financial goals

Clear financial goals can help both you and your folks understand why living at home is worthwhile and how long it might last. Rent, utilities, and food make up a sizable portion of most people's expenses, so if you're saving on those costs you can make a lot of progress toward other goals. For example, you might take this opportunity to build up an emergency fund with three to six months' of living expenses. Put it in a separate savings account so it doesn't get mixed up with the rest of your money.

If you don't set goals, the temptation to use all your disposable income on vacations and online shopping could override your good intentions. It's OK to spend some money on fun things, the trick is to also use this time to build solid financial foundations. Let's say you want to save for the down payment on a house. How much are you trying to save? What contribution can you make each month? And how long will it take you to reach your target?

If you're trying to pay off debt, make a debt pay-off plan. Be open with your parents about how much debt you need to pay down, how much you're putting toward that goal each month, and how you plan to become debt free. You can even celebrate with them when you meet specific milestones.

Another goal that could make a big difference in the future might be to start investing. The incredible thing about compound interest is that the earlier you start saving, the more that money will be worth when you reach old age. There are no guarantees, but historically investments on the S&P 500 have generated average returns of over 8%.

This example illustrates the difference time can make to your investments. If you invest $5,000 in the stock market when you're 25 and earn an 8% APY, it could be worth over $100,000 by the time you're 65. If you invest $5,000 under the same conditions when you're 45, it would only be worth around $25,000 when you reach 65.

2. Communicate and agree on house rules

There are lots of potential areas of friction when you move back in with your parents. You may need to agree on clear boundaries in terms of living space, eating together, and having guests. If you can have some open conversations about ground rules and expectations from the outset, you're less likely to run into trouble further down the road.

3. Pull your weight in terms of finances and chores

If you're working, agree on a reasonable amount you can contribute to the household finances. Perhaps you can pay a share of the food and utility bills, as well as some form of rent. Paying a small percentage of your monthly paycheck toward living costs will show you're not taking your parents for granted. It will also prepare you to eventually move out again and stand on your own two feet.

The same goes for housework. Offer to cook on certain nights, and help with other chores such as laundry, cleaning, and grocery shopping. If you're contributing financially and physically, it can ease any tensions with your parents and mean they're more likely to treat you as an adult.

Bottom line

Living with your parents can jump start your finances on several fronts. Set goals and be clear about what you're going to do with that extra cash. That way you'll be able to spend a set amount on fun things each month while also strengthening your financial foundations.