{"id":746,"date":"2013-08-12T20:04:53","date_gmt":"2013-08-13T00:04:53","guid":{"rendered":"https:\/\/www.cashflownavigator.com\/blog\/?p=746"},"modified":"2018-08-13T19:23:59","modified_gmt":"2018-08-13T23:23:59","slug":"get-ahead-when-youre-young-part-1-share-an-apartment","status":"publish","type":"post","link":"https:\/\/www.cashflownavigator.com\/blog\/2013\/08\/get-ahead-when-youre-young-part-1-share-an-apartment\/","title":{"rendered":"Get Ahead When You\u2019re Young, Part 1: Share an Apartment"},"content":{"rendered":"

Reduce Your Biggest Early Cash Flow Drag and Put the Extra Savings to Good Use<\/em><\/strong><\/p>\n

If you\u2019re in your 20s you\u2019re probably facing a number of unique economic challenges.\u00a0\u00a0 Through no fault of your own you\u2019ve been hit with the proverbial double-whammy: a deep recession that just won\u2019t quit AND a major restructuring of the U.S. economy as we try to adjust to an increasingly competitive world.\u00a0\u00a0 As a result, good jobs are in short supply.\u00a0 And wages are low.\u00a0 Oh yes, and benefits are shrinking as companies exploit every opportunity to cut costs.<\/p>\n

To make matters worse, with a projected average of 11 job changes by age 42,* job security appears to be a thing of the past.\u00a0 \u00a0As are defined benefit pension programs.\u00a0 So unfortunately, when it comes to financial security you (and the next generation or two) just have to fend for yourselves.<\/p>\n

As if that weren\u2019t enough, if you have education debt (the average is now $25,000) you face years of sacrifice just to get back to break-even.<\/p>\n

Okay, now that you\u2019re sufficiently depressed, what can you do about it?\u00a0 Fight back, that\u2019s what.\u00a0 You can still overcome these challenges \u2013 by working not just harder but SMARTER.<\/p>\n

Start by keeping in mind your longer term goal: financial independence.\u00a0 \u00a0You want to get there as soon as possible \u2013 and you can\u2026maybe even as early as your 40s or 50s.\u00a0 But doing so requires squeezing out as much monthly savings as possible, especially when you\u2019re young.\u00a0 How? \u00a0This is where doing things smarter comes in.<\/p>\n

Don\u2019t accept the norm, challenge it<\/b><\/p>\n

Alright, you want to maximize your savings.\u00a0 You can do that by increasing your income or reducing your expenses (or both).\u00a0 For now let\u2019s focus on the expenses.<\/p>\n

A common savings approach involves micromanaging every expense.\u00a0 That can work, but it isn\u2019t the most efficient use of your time and effort because it doesn\u2019t establish any priorities. \u00a0Alternatively, you can employ the \u201c80\/20 rule\u201d to identify the relatively few expenses that inflict the greatest cash flow damage, and explore some creative ways to slash them significantly.\u00a0\u00a0 That\u2019s the smart way to go.<\/p>\n

What\u2019s the biggest of the big? Housing.<\/p>\n

Whether you rent or buy a home,<\/b><\/p>\n

your cash outlay in just 5 years<\/b><\/p>\n

can be as much as $60,000 to $100,000 \u2013 <\/b><\/p>\n

unless you outsmart the system<\/b><\/p>\n

Option 1:\u00a0 Rent<\/b><\/p>\n

If you rent an apartment or house at, say, $800 per month plus another $200 for utilities, after 5 years your total cash outlay will be a whopping $60,000.\u00a0 Ouch! \u00a0\u00a0And not a penny goes towards building wealth.\u00a0 Talk about a double-whammy\u2026a massive negative cash flow together with zero wealth accumulation.<\/p>\n

Wealth Outcome<\/span>: $0 (no asset acquired)<\/p>\n

Cash Flow Outcome<\/span>: $1,000 per month negative cash flow; $60,000 total 5-year outlay<\/p>\n

Option 2: Buy a house<\/b><\/p>\n

Alternatively, you could buy a house.\u00a0 Let\u2019s see what that does to your wealth and cash flow.\u00a0 A $150,000 house would set you back $30,000 for the down payment.\u00a0 Hmm\u2026where\u2019s that coming from?<\/p>\n

In addition to the down payment you need to make monthly housing payments.\u00a0 Assuming a 4.4% 30-year mortgage ($600 per month) plus $400 per month for property taxes and $100 per month for insurance, then your monthly housing cost will be $1,100. \u00a0The 5-year total cash outlay?\u00a0 \u00a0$101,000 ($35,000 down payment + $66,000 mortgage\/taxes\/insurance).<\/p>\n

That\u2019s a substantially larger cash flow loss \u2013 $41,000 larger \u2013 than renting, but at least you\u2019d be accumulating some wealth in the form of equity (partial ownership of the real estate asset).\u00a0 This is why a house is only a \u201c2nd<\/sup> Best\u201d asset; it appreciates in value over time but it also generates negative cash flow, and lots of it. \u00a0Because of the large negative cash flow, Option 2 is still far from an ideal solution.<\/p>\n

Wealth Outcome<\/span>: $35,000 equity in home<\/p>\n

Cash Flow Outcome<\/span>: $1,200 per month negative cash flow; $107,000 total 5-year outlay<\/p>\n

But you still need a place to live.\u00a0 So how can you do so while minimizing the cash flow drain?\u00a0 Answer:\u00a0 Share.<\/p>\n

Option 3: Share a rental<\/b><\/p>\n

A 2-bedroom apartment will be a little costlier than a 1-bedroom \u2013 let\u2019s say $1,200 per month vs. $1,000.\u00a0 But if you share the apartment and split the cost down the middle you\u2019re monthly rent falls to only $600.\u00a0 That savings can really add up over time. \u00a0(And into <\/i>savings is exactly where the money should go, by the way.)<\/p>\n

Wealth Outcome<\/span>: $0 (no asset acquired)<\/p>\n

Cash Flow Outcome<\/span>: $600 per month negative cash flow; $36,000 total 5-year outlay<\/p>\n

Sharing a rental still yields a negative cash flow, but compared to the other options it is clearly the least negative<\/i>.<\/p>\n

But what about wealth creation?\u00a0 Be patient, you\u2019re working on it.\u00a0 Here\u2019s how: \u00a0Over 5 years you will have accumulated $24,000 in savings.\u00a0 That\u2019s almost enough for a down payment on a house.\u00a0 (See our \u201cGet Ahead of Vehicle Debt by Staggering Purchases\u201d article for savings ideas to get you all the way there.)\u00a0 Your wealth will come from a house, but not just any house — one that also creates a positive cash flow opportunity.<\/p>\n

Your next step: Leverage housing to build both wealth and cash flow<\/b><\/p>\n

In Part 2 we\u2019ll discuss how you can get even farther ahead on the path to financial independence by increasing your housing wealth while also moving your cash flow from negative to positive.<\/p>\n

 <\/p>\n

*\u00a0 Source: U.S. Bureau of Labor Statistics<\/p>\n","protected":false},"excerpt":{"rendered":"

Reduce Your Biggest Early Cash Flow Drag and Put the Extra Savings to Good Use If you\u2019re in your 20s you\u2019re probably facing a number of unique economic challenges.\u00a0\u00a0 Through no fault of your own you\u2019ve been hit with the proverbial double-whammy: a deep recession that just won\u2019t quit AND a major restructuring of the […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[19,10,9,45,20,17,3,12,1,46,21],"tags":[24,25,123,91,76,122],"class_list":["post-746","post","type-post","status-publish","format-standard","hentry","category-asset-accumulation","category-assets","category-cash-flow","category-debt-2","category-debt-reduction","category-financial-independence","category-financial-planning","category-savings","category-uncategorized","category-wealth","category-wealth-accumulation","tag-cash-flow-2","tag-financial-independence-2","tag-get-ahead","tag-keith-whelan","tag-savings-2","tag-young"],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/www.cashflownavigator.com\/blog\/wp-json\/wp\/v2\/posts\/746","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.cashflownavigator.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.cashflownavigator.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.cashflownavigator.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.cashflownavigator.com\/blog\/wp-json\/wp\/v2\/comments?post=746"}],"version-history":[{"count":18,"href":"https:\/\/www.cashflownavigator.com\/blog\/wp-json\/wp\/v2\/posts\/746\/revisions"}],"predecessor-version":[{"id":944,"href":"https:\/\/www.cashflownavigator.com\/blog\/wp-json\/wp\/v2\/posts\/746\/revisions\/944"}],"wp:attachment":[{"href":"https:\/\/www.cashflownavigator.com\/blog\/wp-json\/wp\/v2\/media?parent=746"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.cashflownavigator.com\/blog\/wp-json\/wp\/v2\/categories?post=746"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.cashflownavigator.com\/blog\/wp-json\/wp\/v2\/tags?post=746"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}