Your Kids Need $85,000 Before They Leave The House: Here’s How To Get There

We need to change the way we launch our kids into the world.  The costs that are most associated with young people are the primary costs that have outpaced inflation and wages over the last 40 years and skyrocketed in the last 5 years.  We can not do what we have always done for our children.  The world that we launched in and that our parents launched in no longer exists.  We need to set a goal of our children of having a $85,000 net worth prior to leaving our house. This sounds daunting, but is much more achievable than you may think.

What Is Normal And Why Does It Suck:

Normal in Western culture is completely stupid.  Normal is we send our kids to government indoctrination camp (K-12 schooling) from ages 5 to 18, then we send them to college from 18-22 to pay $125,000 for a degree that will allow them to earn $50,000 per year at the end of school.  They graduate with $500 in student loan debt payments, then get a car on payments for another $500 a month, and with their $50,000 a year salary can only afford $1,387 in debt payments and they already have $1,000 in debt payments.  They have no hope to buy a house.  They will spend at least the next decade struggling, unable to buy a home or start a family, much less save for retirement.  This is absolutely crazy behavior.

By the time they can start to save for retirement, they will likely be in their mid to late 30s and already missed out on the heavy lifting of compounding interest. This process is especially terrible for our daughters.  Following this system most of them are unable to start a family and have children financially until they are in their 30s, at which point conceiving a child becomes much more difficult and they are much more likely to have a single child instead of 2 or 3. This is why our population is collapsing.

By allowing our children to live at home with us for 3 to 4 years after high school and requiring them to save and invest a high percentage of those earnings, they will build a solid foundation.  They will able to be home owners in their early 20s.  They will be able to get married and have children. They will be able to have an early retirement.  The massive difference in life that your child can have if you follow this plan is in stark contrast to the average experience of Western children who graduate high school.

Some startling facts:

• A 4 year college degree costs $125,000 to buy.  (Plus opportunity cost of lost wages.  Add in another $125,000).
• The average net worth for a 30 year old in the US is $9,000.
• The average undergraduate student loan debt is $37,000.
• The average age of a first time home buyer is 36.
• The cost of the median home price in the US is $387,000.
• The median 40 year old has $12,000 saved for retirement.
• The median age for first time mothers is 27
• 57% of US adults can not afford a $1,000 emergency
• The lowest rent for a 2 Bedroom apartment in Benton Harbor, MI is $981 a month, $775 for a 1 bedroom!

Why $85,000:

Here’s the goal breakdown:

• $5,000 Emergency Fund
• $6,000 Vehicle
• $64,000 Roth IRAs/401Ks
• $10,000 Down Payment

Emergency Fund:

The emergency fund is the buffer between life and finances.  Having $5,000 will cover most expenses that can come up.  It will replace a furnace, repair a car, cover medical deductibles, and allow them to stock up on items when on sale.

This emergency fund is still a starter emergency fund and after they leave the house they should continue to add to it until it is at least equal to 3 months of total expenses.

Vehicle:

This one I think will be seen as fairly reasonable.  As a financially independent 37 year old who owns 10 houses I don’t own a vehicle worth over $6,000.  I have a 2009 Honda Pilot with 270,000 miles worth around $4,000, a 2007 Honda Odyssey with 270,000 miles worth around $3,000, and a 1999 Ford Ranger with $160,000 miles worth around $3,000.

A $6,000 vehicle can be fairly reliable and last for 5 to 10 years.  I used to recommend $1,000 vehicles, however those rarely exist anymore and it is better to not be in the mindset of replacing a vehicle every 18 months.  I recently saw a $6,000 2013 Honda Civic with 130,000 miles for sale.  This car will last another 100,000+ miles and still be on the road in 10 years.  The goal is to have the same car for several years.  There are 2003 Honda civics with around 250,000 miles that sell for $3,000.  Buy a $6,000 car at 16 and drive it 1,000 miles a month for a decade and then sell it for $3,000.

Retirement account:

This is the big one.  Compounding interest greatly rewards saving sooner.  The problem for young adults is that they don’t have any money left over for retirement savings.  Further education, vehicles, and housing costs often cause retirement savings to be delayed until they are in their 30s or 40s.  Getting a large nest egg established while they have no bills living at home is crucial to building a retirement fund.

Investments compound over time and the best way to look at this is through doubling periods.  How long it takes your money to double.  If starting with $1,000 the doubling periods look like this:

With an expected 10% annualized return in a total stock market index fund, each doubling period would take roughly 7.2 years. The problem with starting out slow is that we run out of doubling periods, This is why building up to $64,000 as fast as possible is important.  This first $64,000 is the light lifting to get the snowball working.  If your child gets $64,000 invested by age 22 and never adds another dime to it, they will have $256,000 around age 37, $1,000,000 at 52, and $2,000,000 at 59, which is the earliest they can withdrawal from a retirement account without jumping through a bunch of hoops.  $2,000,000 following a 5% withdrawal rate would allow for pulling $100,000 per year out forever.

I am not suggesting that they stop investing after getting this first $64,000 saved, just that they can let off the gas and focus on home ownership, family formation, and other goals. All of this investing needs to be done in Roth accounts.   Their income is low so their federal tax burden is very small now anyways, and the growth will be tax free on the back end.

Here are 2 examples;

Sophie graduated high school and lived at home for 4 years after.  She attended community college and worked close to full time hours.  At 22 she left home with $64,000 in her retirement account.  She then contributes 10% of her $40,000 a year salary to her Roth 401K and receives a 6% match. Despite wage increases, she never contributes more than $4,000 a year.  She stops investing at age 43 when she hits $1,000,000 in invested assets.

Her best friend Katrina went to a 4 year school straight out of high school, graduated with a $500 student loan payment, got a car payment, and doesn’t start saving for retirement until she is 35. At 35 she saves $8,000 a year until age 60.  She still never catches up.  Both invested in a total stock market index fund.

Sophie’s Retirement Account:

At age 60 Sophie has $5,000,000.  This is enough money to live off of $250,000 a year every year forever.  She could have easily retired as young as 40 and been able to replace her income with a 5% yearly withdrawal.  In total Sophie contributed $145,000 to her retirement accounts, with $57,000 of that being while still living at home.

Katrina’s Retirement Account:

At age 60 Katrina has $1.2 Million.  This is still pretty impressive and will allow for a decent retirement of around $60,000 a year. This is still roughly only a quarter of what Katrina has and she is right on the edge of being able to replace her income at age 60.

Katrina is also NOT normal.  The median 401K balance for a 65 year old in America is just over $70,000.  The median person probably started saving at around age 40 with 1% to 3% going into their account per year, and then didn’t invest it.  This is what most people do.  Following the same 5% withdrawal strategy the median account holder would only be able to withdraw $3,500 A YEAR from their 401K.

By following this strategy we are setting our children up to have $5 million at age 60 instead of $70,000.  This is 71 times as much money.

$10,000 Down Payment:

A $10,000 down payment can get someone into a house in most of the U.S. There are plenty of loan products that require a 5% or less down payment.  $10,000 is 5% of a $200,000 home.  There are many areas of the country where a $200,000 is a relatively nice place to live. Becoming a home owner allows your child to never pay a rent payment and always be building equity.  Ideally they would get a 15 year loan, and perhaps a duplex or quadplex.

The move in ready house I just sold for $120,000 likely cost the buyer less than $5,000 to move in.  He got an FHA loan which has a 3.5% down payment requirement.  This would be $4,200.  Closing costs for houses in this price range are around $4,000.  As the seller I offered $3,000 cash back at closing, which would reduce his cash outlay from $8,200 to $5,200.

This buyer was also a first time home buyer and would qualify for the Michigan $10,000 down payment assistance for first time home buyers, which would have covered everything, except for the 1% of personal funds that are required.  He could have bought this home with only $1,200 out of pocket. The additional money from the $10,000 would have gone to lower the loan amount, so likely he put down $1,200 cash out of pocket and got a loan for around $110,000.

How To Get Your Child To A $85,000 Net Worth:

Step 1: Age 15 Buying A Vehicle:

Saving up $6,000 for a vehicle is a massive undertaking. I recommend parents match this first major saving milestone.  If matching 1 for $1 isn’t practical, 50 cents on the dollar can be just as motivating.  There are not a ton of job opportunities for 15 year old’s, however there are some restaurants that will hire them.

For a 15 year old to save $3,000 it would take $60 a week in savings.  At $10 per hour it would take 300 hours of work to reach $3,000.  Working 1 weekend day for 6 hours at minimum wage would cover this.  My 15 year old currently averages 18 hours per week while going to high school. He will reach his $3,000 goal with only 1/3 of his hours worked.

If a parental match is out of the question this child will need to work around 12 hours a week at minimum wage to buy a first car. Getting to $6,000 by 16 is completely possible.

Step 2: Real Job at Age 16

At 16 your child will have a ton of more employment opportunities, and with a license he or she can drive themselves to this job.  With an expectation of working an average of 18 hours per week, including the summer at $15 per hour, this would be a gross income of $14,000 for the year. 75% of this income should go towards building wealth.  50% to the emergency fund and 50% to the Roth IRA.  This would result in $5,000 going into the emergency fund and $5,000 going into the Roth IRA. I would encourage a 25% to 50% match to the Roth IRA.

Your child needs to buy into the process and the WHY behind this.  If not, they will not likely accept working all year and only being able to spend around $2,000 to $3,000.  With an overall average of 18 hours per week this could likely be closer to 12 hours during the school year and 30 hours during the summer.

Step 3: Continued Working Through High School Age 17:

Following the same expectations as above, your child should earn roughly $14,000 and contribute $10,000 to their Roth IRA.  I would encourage a 25% to 50% match to the Roth IRA.  At the end of this year your child will graduate high school and have:

• A $6,000 vehicle
• A $5,000 emergency fund
• $20,000+ in a Roth IRA

This is already a great start to life, but the real advantage comes over the next 3 years.  Before you give me a hard time about matching their 401Ks,  parents often co-sign student loans and gift tens to hundreds of thousands of dollars to their children to go to college.  This is spending a total of $12,500 over 5 years on matching funds to ensure financial freedom for life for your child.  This investment is not outrageous. If matching is not possible in your situation, consider having them stay at home another 6 months to reach the same savings milestones.

Step 4: Live At Home And Save 50% Of Their Income

Now they should enter community college and do roughly 9 to 12 credits at a time.  This will allow them to work 30 hours a week and graduate with an associates degree in 3 years rather than 2.  Taking this extra year allows more tax credits to come into play, likely making the cost of this 2 year degree $0.  They could also pursue trade school, google certificates or other learning.  The idea is that SOMETHING is being done for further education with working at least 30 hours per week and saving 50% of this.

For this example they will be working at Walmart and receive a 6% 401K match.  Earning $16 per hour 30 hours per week is $25,000 per year.  They will be saving $12,500 per year with a $1,500 employer match and ideally a $2,500 parent match. This brings the total per year to  $16,500

At the end of the first year out of high school they should be at $39,000 in their Roth IRA/401K.

At the end of the 2nd year out of high school they should be at $60,000 in their Roth IRA/401K

Both of these years they would be able to spend around $6,500 per year.  Keep in mind they are living at home with no bills. Roughly $500 a month in disposable income is higher than most young adults living on their own have, since greater than 75% of their income goes to expenses like housing, utilities, and groceries, all of which are covered living at home.

Step 5:  Year 3 Living at Home:

Entering the 3rd and final year of living at home, they will graduate with an Associates degree and save another $12,500.  This should be split with $10,000 going to a down payment and $2,500 going to their retirement account.  We want to maintain the retirement savings at a minimum of 10% going forward.  They will contribute $2,500 to their retirement account and receive $1,500 in matching from their employer and the last $2,500 match from parents.

At the end of this 3rd year of living at home they are 21 years old with:

• A $4,000 vehicle (Accounting for depreciation)
• A $5,000 emergency fund
• A $10,000 down payment fund
• A $72,000 401K balance
• Total net worth: $91,000

This is also a point where if they stay another few months they can beef up the emergency fund and/or increase their car value.  They are currently able to work at least 40 hours a week and likely to have a job closer to $20 per hour. If they live on virtually nothing for another 3 to 6 months they could save an additional $7,000 to $14,000 to go towards a vehicle upgrade or a stronger emergency fund.

At this stage they are ready to move out.  Staying at home that 3 years will build an incredible base.  With that $10,000 down payment they can get into a $200,000 home with 5% down.  Ideally they would buy a duplex or quadplex in that price range and essentially live for free.  If they earn $50,000 a year and always contribute 10% with a 6% match, they will hit $1 million at age 42, $2 million at age 49, and $5 million at age 58.

Step 6: Home Ownership:

Buying their first house should actually be easy for them now, provided they aren’t trying to live in an expensive metro city.  They have way more work history than the 2 years needed.  By adding them to one of your credit cards at 16 they will have a 770+ credit score.  They will have $10,000 for down payment funds.  All the boxes are checked.

Loan Type:  Home loans are for 15 years, 20 years, or 30 years.  I highly recommend 15 year and 20 year loans.  They end up paying much less interest over time and it is a set it and forget it thing.  With a 30 year people say they will make extra payments, but rarely do.

Percent of Income: At 22 your child should be earning around $50,000 a year.  The total maximum loan they should qualify for would be 33% of their gross income or $1,387 per month.  At current interest rates of 7% on a 20 year mortgage the most house they could afford would be $180,000.  To be more conservative I would suggest shooting for a home price closer to 25% of gross income, allowing a mortgage of $1,041.  On a 20 year mortgage this would be a maximum of roughly $140,000. By purchasing a home now early in their career, they are limited from buying too much house.  Likely at 30 to 35 when most people buy their first home their income will be much higher, allowing for a higher total cost of housing.

Multifamily:  2 to 4 unit multifamily properties get the same low down payment loans as single family houses do.  These properties can be small apartment buildings or detached properties.  Having a tenant paying rent in 1 to 3 units can greatly reduce housing costs and allow them to essentially live for free.  There is much less competition in the multifamily space.

This Duplex in Dowagiac, MI is listed at $140,000.  It’s been on the market 2 months.  I would advise my child to offer $120,000 on it.  The mortgage on a 20 year would be about $930 a month.  The rent from the other unit would be around $700 a month plus utilities (which are separate).  This would drop his mortgage cost down to $230 a month.

This 3 unit in La Porte, IN is listed at $150,000.  It would likely sell for $140,000 and the 2 units rented out would make the property cash flow positive.  Another advantage of this property is that the units are different sized.  It has 1 2 bedroom unit and 2 1 bedroom units.  He could live in a 1 bedroom for the first couple years to get more rent from the 2 bedroom, then move to the 2 bedroom later on.  The mortgage would be around $1,050 a month and the 2 bedroom would rent for $800 and the 1 bedroom for around $650.  That’s a net positive cash flow of $400 per month.

Multifamily also has Airbnb potential.  It is much easier in my mind to be an Airbnb host than a long term landlord, especially when you also live on property.   Selecting the wrong long term tenant can be a nightmare, but Airbnb guests stay short term and pay up front.

Why This Plan Is Actually Conservative:

This plan is very conservative because it assumes your child doesn’t graduate high school until age 18.  There are ways to speed this up.  My son is earning an online high school diploma from Penn Foster, which he is on track to finish at age 16.  This buys him an extra 2 years of life. This means the final 2 years of staying at home he would not be still going to community college and rather than earning around $25,000 per year would likely be earning closer to $40,000 a year working full time, which would greatly increase savings.    With these adjustments a young adult would have closer to $100,000 in a retirement account when leaving the house at 21.

This plan also assumes working 30 hours while going to community college.  Another option would be going to trade school.  Our county is partnering with the local community college to make a Votec program where students of high school age can start paid apprenticeships during their last 2 years of high school.

Upon turning 18 and having a high school diploma a young adult could enter a trades program directly and earn $15/hr for 40 hours a week while being trained in the field.  These apprenticeships have raises every 1,000 hours. At the end of a 5 year electrician apprenticeship a journeyman in our area earns around $40 an hour plus benefits.

How To Setup Your House For Your Children:

Option 1: Do Nothing:

They already live there.  They can continue living in the same bedroom as they always have.  This may not be ideal, but is a possible solution.  Instead of them going to school every day they are going to work every day.  Our oldest lived with us for about 18 months after high school.  It worked just fine.

Option 2: Convert Space:

A friend of mine recently mentioned he is looking to add an egress door to his basement to turn it into an apartment for his children when they are adults. His basement is semi-finished and already has a kitchen and bathroom in it.  Adding an egress door would give them an apartment feel like they are living on their own.  Doing it himself and converting an existing window would probably cost around $1,000.  Hiring it out may cost closer to $3,000.  Then framing up a bedroom and making it more finished would for a DIYer be another $2,000.  This is well worth the cost because it is improving the home value anyways.  This $5,000 investment probably adds $20,000 in value to the home.

Option 3: Add Space

Add a trailer or shed bedroom/apartment to the property:  This is costly and depending on how many children you have and what municipal area you live in this may not be feasible.  We can get a 14 X 24 336 sq ft building like this delivered for $14,000.  Add in DIY flooring, drywall, and electrical and it would cost another $3,000. Then there is the question of a restroom, and this will likely vary for boys and girls, as boys will be open to more rustic options.  A composting toilet would be the least expensive option, followed by renting a portable toilet at $20 a week.  The next option would be to tie in drain plumbing to the house or existing septic tank, which would cost probably around $2,000, which would be worth it long term for someone with multiple kids.  This would also add Airbnb potential.  Water supply lines are easy to add as well, and putting in a small bathroom would be feasible for another $1,000. Adding an electric heater is also inexpensive, running a few hundred bucks. We are looking all in at roughly $21,000. Maybe these estimates are too optimistic.  Increase the cost to $25,000 total.

Once again, this adds to the value of the property.  This is probably adding $40,000 in value to the property.  With the bathroom added, this could be set up as an Airbnb for a year before the children move in.  My 200 square foot studio apartment in my 6 unit apartment complex earned around $15,000 last year.  I think a year of Airbnb and this property would likely pay for itself, (OK 15 months, include 2 summers).  Then it’s free for the kids to use and will add value to the property.  A solution like this would be great for someone like me who has 4 kids with a total of 10 years of age gap.

What do you think of this plan for launching our children?  What issues do you foresee?