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5

From Your Parents’ Basement to Your First Apartment

* Read this if you are planning to leave the family nest in the next 6 to 36 months, and you are looking forward to being independent and having a place of your own.

* Read this if you want to have a solid financial foundation as you embark on your own.

If you put your time and money to good use while living at home with your parents, you will begin life as a self-sufficient adult. Living at home offers you the time to increase your savings for your first apartment and pay down a large portion of student debt. Whether your income is from part-time work or your first full-time position, you will never have more disposable income than while living in the family home. This provides the perfect opportunity to save for your move to financial self-reliance.

If you are planning to move back into the family home, and you are working, offer to pay your parents a portion of your income toward the household operating costs. Paying your way is the first step to fiscal responsibility, and it will help you feel better about yourself. Tell your parents how long you expect to stay in the family home. Set a time limit for how long you will stay, and begin now to plan the steps you need to take to leave the family home for a place of your own.

1. Begin with a Savings Plan

Before you bolt out the door, you need to consider how much money you will need to get started. For example, landlords generally require a deposit equal to one or two months’ rent.

Prudent financial wisdom recommends that you have an emergency fund equal to three to six months’ income. An emergency fund will help you to meet unexpected future costs such as the loss of a job, or an expensive vehicle repair. You will also likely need a few dollars to purchase furniture and other items for your new home.

While you are still living in the family home, create a simple savings plan, which may look similar to this:

• 30 percent of your (after tax) income to your apartment fund and emergency fund.

• 30 percent toward your debt (student loans plus credit cards).

• 40 percent (the remainder) for your transportation, cell phone, Internet, clothing, entertainment, vacations, etc.

Now is the time to consider your starting point. What is the value of your assets? How much do you owe? The difference between these two numbers is your net worth.

How much money do you earn each month? What are your fixed monthly expenses? What is remaining? A cash flow statement can be used to show this information and will indicate if there is a surplus or a shortfall.

All of these topics will be explored in greater detail in Chapter 7, “Create a Budget”; and Chapter 8, “Calculate Your Net Worth.” After reading these chapters, you will be able to create a cash flow statement and a net worth statement of your own by using the templates provided.

Let’s go back to Cassie and see how she is doing after graduation. Cassie is hired as an editor’s assistant which pays $3,000 a month after taxes. Cassie needs to pay for her cell phone, transportation, and personal expenses such as clothing, gym membership, and dining out. She has promised to pay her parents $200 a month to help with the household operating costs. She has $950 in savings, but she owes $20,000 in student loans.

Cassie is determined to have a place of her own by this time next year, but before she moves, she wants to reduce her debt. She develops the following savings plan:

• Her student loan is due over a ten-year period with payments of $220 a month. She is anxious to quickly pay this loan so she tops up each payment by $400 a month for a total of $620.

• Cassie estimates her rent will be approximately $900 a month so she will need $1,800 to sign a lease. She begins a savings plan and adds $150 a month.

• In addition, Cassie needs an emergency fund. She saves $800 a month. One year from today she will have $9,600 in savings — enough to withstand an emergency.

While Cassie’s net worth statement a year later is still a negative number, she has made great progress and is only a few months away from having a positive net worth, and a few years away from clearing her student loan completely. One reason Cassie may choose to keep paying her student loan on a regular schedule, rather than pay it off in full, is the low interest rates available for this kind of debt. This will provide Cassie some flexibility when making other purchases on credit cards where the rate of interest charged is much higher. Cassie uses the remainder of $270 per month to buy clothing and furniture, and for entertainment, travel, and hobbies. See Samples 3 and 4 for Cassie’s Cash Flow Statement and Cassie’s Net Worth.

Sample 3: Cassie’s Cash Flow Statement

Sample 4: Cassie’s Net Worth

2. Selecting an Apartment

Finally: School is finished, you have a job, some money saved, and you are ready for your first apartment. Now what?

The first step is to create a budget. Be careful to include all of your existing commitments such as transportation costs, cell phone, loan payments, and so on. If you have a vehicle, include the cost of insurance, gas, and regular maintenance. (See Chapter 7 for more information about creating a budget.)

Start with your budget in mind. A good rule of thumb is that your rent should not exceed 30 percent of your after-tax income. You may want to consider shared accommodation just to be closer to your job and to reduce your rent. Remember the less you spend on rent, the more money you have left over for other things.

Consider transportation between your apartment, work, and family and friends. Your apartment should be easily accessible to the places you frequent the most. How long will it take you to get to work or to travel to visit friends and family?

Where you live will have a great bearing on the cost. Large cities can have very high rents, forcing you to spend more, live in a less desirable neighborhood, or live on the outskirts of the city. If you live on the outskirts of the city, that could mean an increase in gas mileage if your job is in the city center. If you don’t have a vehicle, you will need to consider whether or not the transportation (e.g., bus, subway) will be adequate. Will it cost more for a bus pass the further away you live from the city center? Money isn’t the only cost when it comes to transportation; consider the amount of time you will spend commuting.

If you have a budget, and you have a good idea of the area in which you would like to live, start looking at some options within your budget. The more places you see, the better you will get at judging what you like and what works for you. Go and inspect at least ten apartments in different buildings. Take your time. If you do not find what you are looking for, keep looking. It is a good idea to take a day or two to consider your choices before signing a lease. Once you have identified an apartment you like, ask for a copy of the lease, take it home with you, and read it. Understand what you are signing, and if you are not sure, use a highlighter and ask your potential landlord for an explanation of highlighted sections.

Make sure you ask what utilities are included in the rent (e.g., electricity, gas, parking, cable, Internet). If utilities aren’t included, you will need to determine how much the additional costs will be. Add these extra costs to the rental amount. Make sure you are still within your budget.

If you are responsible for paying for your own utilities, call the providers and ask about security deposits. Frequently, providers of utilities will require you to pay a security deposit before they give you an account. Each of these may be several hundreds of dollars. Note that payment is required before service is connected. Before saying yes to an apartment where you are responsible for your utilities, it is a good idea to ask the utility providers for a letter of preapproval.

You should do a walk-through with the landlord. If there is any damage to the place, it should be noted by both the landlord and you — preferably in an inspection report (meaning written down) and signed by both you and the landlord at the end of the walk-through. It may also be a good idea to take pictures of any damages to the rental property before you move in, so when you move out, you can prove you did not contribute to the previously documented damages (this should also be done with the landlord present). Ask the landlord if, prior to you moving in, the apartment will be painted, carpets cleaned, and appliances cleaned and inspected. Some landlords do all of the preceding, some do none. You may be able to negotiate some or all of these.

Sometimes it is possible to negotiate the rent. Do not be shy; if you ask politely and you clearly state your other options, you may find you are able to reduce the rent from the original asking price. This is where your research pays off because you now know what the comparable choices are. Early in the conversation, let your landlord know you are on a budget. Then try this question, “Is this your best price for this apartment? I am comparing several, and it would help me to make a decision if I know your best price.”

When you have found the place you want, you will be asked to sign a lease. Most leases have a one-year term. This can usually be renewed annually. Note that rents do increase over time. As you sign the lease your landlord will request a two-month deposit. Half will be applied to your first month’s rent. The balance will be held as either the last month’s rent or a security deposit. This will be returned at the end of the lease after the landlord has inspected the property to ensure there are no damages. Assuming you completed an inspection report with your landlord prior to signing a lease, you can then verify that the condition of the apartment did not suffer while you were a tenant.

Congratulations! You are now a fully self-reliant adult. You have completed a strategic methodology to achieving your educational, career, and first apartment goals. Take a few minutes and thank those who helped you through your student days. Thank your parents for their love and support as you start your new life in your new home. Better yet, invite them over for a nice dinner!