For most households, the biggest expense is housing. A time-tested way to reduce your housing costs is to share a place with others, but usually we think of a bigger house as the result of a bigger nuclear family. However, even young professional adults can choose to boost their savings rate by embracing shared living past the college days, and families can save big money by embracing the multigenerational households that are popular in other cultures.
In the article The “N” Factor and Retirement Planning, 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.”
The article is focused on families with children, but here I am shifting it to talking about individual adults. Therefore, I’d rather talk about it in terms of the amount you are saving through shared living as a percentage of your previous level
Theoretical savings from shared living. If you’re single and live by yourself, your total cost of housing may be $2,000 per month.
- Get one roommate, save 29%. Your cost goes down to √2/2 = 1.414/2 = 71% of living alone, or $1,420 per month.
- Get two roommates, save 42%. Your cost goes down to √3/3 = 1.73/3 = 58% of living alone, or $1,160 per month.
- Get three roommates, save 50%. Your cost goes down to √4/4 = 2/4 = 50% of living alone, or $1,000 per month.
Does this match up with actual rental prices? Using rental data from Abodo.com, I found the average rents for a one, two, and three bedroom rental in four major metro areas from around the US: Austin, San Francisco, Atlanta, and New York City. For example, if a 1-bedroom costs $1,366 in Austin and a 2-bedroom costs $1,725, that means your per-person share is $862.50, which is 63% of the cost of a 1-bedroom. This should provide a quick check for this rule, even though we are just looking at housing. It turns out to be pretty close:
According to the √N Rule, the biggest relative benefit comes when you stop living alone, at a savings of nearly 30%. This magnifies the savings ability of a dual-income couple, with possible double the income and 30% less in housing expenses.
Burns applies this to the savings that parents can feel after their kids move out of their house. As a result, retirees may be able to survive on much less than might be expected based on other rough rules of thumb.
Bottom line. Shared living is a powerful way to reduce your housing costs. As rents rise, this may result in more single adults sharing a house, or increased rates of multigenerational family living. Consider shared living as an available option to save more money and increase your financial stability, as opposed to only a last resort. Put another way, “Cooperation is a wonderful but generally overlooked substitute for money.”
[Revised and updated from original post from many years ago. I’m cleaning up my archives and updating selected articles.]
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That’s a really interesting statistic, Thanks!
Interesting to see this put to a math formula, but around 40% was what I eyeballed on my own for what a spouse would “cost” in additional expenses so I think this article is on the mark. As a single guy nearing retirement, how any spouse-to-be effects the assets/expenses becomes a factor, especially if they haven’t been as aggressive in savings! It becomes an interesting factor is dating decisions because it can effect the lifestyle I am targetting…..
As a side note, I also noticed that my company’s retiree health plan says it will only cover a spouse IF I was married to them BEFORE I retired, so if I don’t get married before I retire, there is another expense to add in! Talk about dating pressure 🙂
If the Mrs. wasn’t so opposed to it, i’d totally get a roommate (or two even). I really enjoyed living with others! besides the awesome cost benefits you mention, it’s just nice having others around to chat with, hang out, meet new people, learn new stuff, etc.
I guess the Mrs. “counts” as a roommate though, so that’ll have to do 🙂
Thanks for the information! I am about to start my last year of graduate school after which I will be living on my own for the first time. I have been throwing around the pros and cons of living with a roommate, but never knew that the decrease in expenses would be so great! I think that I will rethink the roommate idea more seriously.
totally hear you, sexy budget guy.
my name’s the only one on the mortgage, and I’d love to get someone else in here to help pay it down a bit, but my boyfriend’s not too keen on that idea. He does pay half, which is great, but I’d like to be paying even less if possible, especially on utilities!
Studio apartments are often as cheap as half of the rent in a 2-bedroom, but most people don’t consider them an option. I’ve actually seen a lot of studios that are more spacious than 1-bedrooms, and even lived in a 1-bedroom which was basically a studio with some silly french doors put up to make a sleeping area.
the savings on utilities and mortgage payments is awesome, but having a roomate limits your freedom, and there is no price on doing whatever you want whenever you want.
I’m moving to a new location…but I don’t know if I could even find a roommate….
Carefully consider the downside risks.
If you own the house, a paying roommate becomes a tenant with specific rights under landlord-tenant laws of most jurisdictions.
If the roommate co-signs a lease of course you are liable for the difference or must scramble around for a replacement if the roommate can’t pay.
It’s hard to keep emotional boundaries. Consider how you would feel if the roommate became ill, disabled, got fired, etc., and lost their income. You feel sorry for them — would you be able to kick them out for nonpayment? If you had spent the past couple of years chatting, hanging out, and the like?
All things considered – once beyond a certain age, the risks of splitting rent/mortgage with someone who isn’t a spouse or formal legal partner, exceed the benefits, IMO.
Most peoples’ jobs and lives are stressful enough. Roommate problems can be severely stressful in and of themselves and destroy the potential for your home to be a sanctuary.
Trust me on this one, I’ve been there.
Being able to walk around your apartment in your underpants (or naked)…. priceless…
I have done the roommate thing, since buying a house, and struggling with the new expenses. I have had a couple of good roommates, and three very bad roommates. If I were ever in a financial pinch again, I would consider it, but with my finances in a good place, I am not willing to take the risk again.
It’s funny because me and my girlfriend just finished (2 days ago) going over our budget and we came to the conclusion that it’s only costing us about 35-45% more to share living expenses since moving in together. I guess your formula is pretty accurate. I thought it would be more like 75%.
I attribute living with a roommate for the first 4.5 years in the workforce as a major factor in my ability to save and grow my net worth. Having a roommates significantly cuts down all those after tax expenses (rent, utilities, etc).
Think of 10 ways to reduce the living costs you estimated in. For example, you could reduce rental costs by having roommates
Currently I have a roommate that works nights, I work days. So it is actually great since there is usually always someone in the house (security) and he is there during the day if I get any packages delivered!
Yes, in the Bay Area roommates are often the only way you can afford rent.
Anyway, as an older adult I am not a big fan. But I would certainly go back to roommates if I had to.
I had roommates in college and rented a very large home in a nice home in a nice area for about $300-$400/month. (Rent went up $25 monthly, every 2 years).
In comparison, a studio apartment on the bad side of town was an easy $1k monthly.
Likewise, it is quite common for adult professionals to rent houses together. It can make such an expensive area rather affordable. Living alone is a luxury with a very high price.
I also don’t see why college is s’posed to cost a million dollars. With this kind of stuff it was actually rather affordable. I have too many friends who thought they had to pay $12k/year to live on campus in crappy dorms. I cut my room and board in half, easily, and had much more space to myself. At least I had my own room!
I am with notailgate, getting roommates is something that needs very serious thought before doing. Besides that some of them may cost you you more than you’ll save, there are quite a bit emotional and every day things that may go wrong with that
The other added benefit is that you can rent nicer homes because your total rent is higher. I rented for 4 years with roommates. First a little apartment with one roommate. Later with 2 roommates I rented first a house with a pool and a hot tub and after that a waterfront house.
I paid less then half of what I would have paid as a single renter in a tiny and cramped apartment in an ugly complex.
This is some contrived formula that has no basis in fact. It sounds good but means nothing.
Sure, but isn’t that how rules of thumb work? Someone fits a more complex relationship into a simple formula, like “you can afford a house that is 4x your income”. Then after a while others will do the backward thing and see how well it really fits with various data.
This rule fits a lot better than “two people living together will each have half the living costs”.
Living with your grown kids in a big house seems to be the answer. As long as you have separate spaces and kitchens. Imagine the savings if you had adult children bringing in income plus retirement savings for yourself. Then there is always someone there to talk to Grandma and Grandpa and always someone there to watch the kids.
I shared a 3-bdr apt for 8 years with roomies (rotating cast found on Craigslist), I had the smallest room and paid the least rent. It was in a high rise on the waterfront with amazing views of NYC. That helped me save a lot of money (obviously a high cost area) for the down payment on my own place later on. Yeah, it was kinda crazy but a positive experience socially, plus the savings.
After a while, I did get tired of those who couldn’t grasp basic recycling concepts, don’t switch off lights when not in use, don’t wash dishes promptly, etc etc. But yeah, unbeatable way to save $$
That’s impressive! I don’t know if I would be able to negotiate the social labyrinth of that many roommates.
This is an interesting article. I’ve lived with as many as 3 other roommates in the past, but definitely prefer living alone. From a non-financial perspective, there always seemed to be one person to have to chase down for their share of the bills or to do their share of the chores. But, from a financial perspective, it is definitely a money saver.
BTW – I think you have a typo in the “Theoretical Savings…” paragraph. The answer is correct, but it should be square root of 3/3 and square root of 4/4 for getting two and three roommates, respectively. (Sorry, don’t know how to make the square root symbol)
Yes, my goal is mostly to get more people to consider it as an option and weighing the pro and cons, as opposed to simply dismissing it instantly. Thanks for the correction, fixed!