If you’re looking to reduce expenses, why not start with your most expensive category – usually housing. While it can be a lifestyle change, one of the most effective ways to save money is to share a household with others, as it also can reduce your costs in other areas like utilities. In this article The “N” Factor and Retirement Planning, columnist Scott Burns focuses on the financial impact of having kids but also shares a interesting way to estimate how the size of a household affects how much it spends overall:
Here’s the algorithm: The cost of living for a household is the square root of the number of people in the household. So if you are single, your cost of living is the square root of 1 or… 1.
But if you are recently married, your cost of living is the square root of 2, or 1.414. Yes, two can’t live for the price of one. But they can live for only 42 percent more than the price of one. Economists call this “economies of shared living.”
Expanding on this, if you have 3 people then the √3 is 1.73 (73% increase over a single person). But if we are talking about adults and not kids, then it is probably more helpful to simply focus on the effect of each person’s share.
If you’re single and live by yourself, your total cost of living may be $2,000 per month. This includes things like food, transportation, and utilities.
- Get one roommate, and your cost of living is now 1.414/2 = 71% of living alone, or $1,420 per month.
- Get two roommates, and your cost of living is now 1.73/3 = 58% of living alone, or $1,160 per month.
- Get three roommates, and your cost of living is now 2/4 = 50% of living alone, or $1,000 per month.
Using Rentometer, I found the median rent levels for a one, two, and three bedroom rental in my area. (Yes, they are really high overall for the US.) This should provide a quick check for this rule, even though we are just looking at housing. It turns out to be pretty close:
One bedrooms: $1050/month – $1050 per person
Two bedrooms: $1600/month – $800 per person, or 76% of living alone
Three bedrooms: $2175/month – $725, or 69% of living alone
According to the √N Rule, the biggest relative benefit comes when you stop living alone, at a savings of nearly 30%. While it is easy to dismiss communal living, I think it is important to realize that is an option, even if you choose not to go that way. In many cultures even having multiple families living under one roof is common.
Burns also extended this concept a bit in showing us how a retiree can survive on $15,000 a year. Of course, the same idea can also apply to non-retirees. “Cooperation is a wonderful but generally overlooked substitute for money.”