How to gain financial independence from parents

Quick insights

• Building an emergency fund and building an accurate budget provide a foundation for financial independence from parents.
• Sustained financial independence also requires disciplined use of various financial tools.
• Independence and responsibility go hand in hand when it comes to getting away from afinancial reliance on parents.

The path toward financial independence, particularly from parents or guardians, is one with several potential stepping stones. Here’s our guide to personal banking without parental support.

What can financial independence look like?

Financial independence for young adults often means being self-sufficient when it comes to money. It’s a matter of meeting financial obligations, such as paying for rent, utilities, food and personal expenses, without relying on family contributions.

Besides covering basic living expenses, financial independence generally requires responsible savings, investment and credit usage, as well.

Motivations for seeking financial independence

Young adults may seek financial independence for several reasons, some emotional and some practical. For many, it’s simply about gaining a sense of autonomy by decreasing a reliance on others. It can also be about much more, such as handling more responsibility, reducing financial pressure on parents and satisfying certain desires.

The role of financial literacy

Achieving financial independence requires financial literacy—the knowledge and skills needed to make informed and effective decisions. Knowing how to build and follow a budget, for example, is an understanding that can improve spending behavior. Without literacy in matters of money, young adults may struggle to achieve and maintain financial independence.

Three steps to achieve financial independence from parents

There are three important steps that could help a young adult achieve a sense of financial independence.

1. Create a comprehensive budget

The foundation of financial independence is a well-crafted budget. An effective budget will account for all sources of income, fixed expenses (such as rent and utilities) and variable expenses (like groceries and entertainment). Budgeting tools, such as apps or spreadsheets, can simplify this process by providing a clear overview of income and expenditures.

An accurate budget will highlight if the costs of living exceed income. This could indicate an ongoing problem meeting financial obligations, signaling that financial independence probably isn’t practical at this point. Still, the budget can provide the right direction and help set financial goals that ultimately lead to financial independence.

2. Build an emergency fund

An emergency fund is a critical component of financial independence because it provides a safety net for unexpected expenses. From medical bills to car repair, a healthy emergency fund can help prevent the need to rely on parents for help or go into debt. The financial target for this fund varies from one person to the next—one example is 3 to 6 months of living expenses.

3. Use financial tools

To manage money independently, any number of financial tools could be used. A checking account, for example, can handle daily transactions, while a savings account can grow an emergency fund or help save for significant future expenses.

Understanding how to effectively use financial tools helps manage money on an ongoing basis, which is important to remaining financially independent. Separating money into different accounts and using more than one tool may provide the best path forward.

Financial tools for managing money independently

Several types of bank accounts can be used strategically to manage personal finances:

• Checking accounts: These accounts often come with a debit card and checks, which can be used for everyday transactions, such as paying bills and making purchases.
• Savings accounts: Designed for storing money that is not needed for daily expenses. Savings accounts typically offer interest, making them ideal for building an emergency fund or setting aside money for future goals.
• Certificate of Deposit (CD): A CD is a timed deposit account; money is locked in for a set period in exchange for higher interest rates. CDs are useful for long-term savings, typically from six months to several years.

Choosing the right checking account

When selecting a checking account, young adults should look for features that support their financial independence. Key features include:

• Low or no fees: Banks may offer accounts with no monthly maintenance fees or a way towaive this type of fee. These accounts may be designed particularly with students and teensin mind.
• ATM access: A wide network of ATMs is essential when cash is needed in a pinch or on aregular basis. It’s a bonus if in-network machines don’t cost a fee to use.
• Online and mobile banking: Robust online and mobile banking services help manage bankaccounts. Various features, including bill payments, transfers and account records canprovide convenience with a layer of security.
• Overdraft protection: This can prevent costly fees if the account balance drops below zero.Some banks offer this feature automatically, while others require opting in.
• Interest: Some checking accounts offer interest on balances, which can be beneficial if theaccount is regularly funded.

Choosing a checking account with these features generally helps manage money responsibly to reach various goals.

Using credit cards

Credit cards can be powerful tools for building credit history, which is essential for financial milestones like securing a mortgage or car loan. Credit cards may also offer rewards like cash back or points. However, their benefits are maximized only when used responsibly.

Young adults must be cautious of the potential dangers of credit card misuse. The most significant risk is accumulating debt by not paying off balances in full each month. Debt can be difficult to manage, while late or missing payments can increase debt and negatively impact credit.

Strategies for using credit to become independent from parents

Young adults can use certain strategies to help use credit effectively while avoiding the pitfalls associated with credit cards:

• Pay at least the monthly minimum: Payment history is an important factor in credit scorecalculations. Making minimum credit card payments on time each month helps maintain andbuild credit. When possible, paying off the statement balance each month typically avoidsinterest charges.
• Keep utilization below 30%: Paying down a credit card regularly to below 30% of theavailable credit limit can help maintain a healthy credit score.
• Monitor statements: Regularly reviewing credit card statements for errors or fraudulentcharges is a sound financial practice. Any suspicious activity should be reported to therelevant financial institution.
• Use rewards wisely: Rewards programs are advantageous when the benefits align withpersonal spending habits and financial goals.

In summary

Becoming self-sufficient financially from parents or guardians involves creating a budget, building an emergency fund and making use of various financial tools. Young adults must use these responsibly to gain and maintain financial independence.

Financial literacy also plays a vital role in the journey toward financial independence. When individuals make informed decisions that support their financial well-being, financial independence becomes sustainable beyond young adulthood.