The Savings Potential of Roommates and Renting Out Spare Rooms

Housing expenses often make up the largest portion of household budgets. One effective way to lower these costs is by sharing living spaces with others. Although we typically associate larger homes with extended families, both young professionals and families can benefit from shared living arrangements, such as having roommates or living in multigenerational households.

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Originally, this article focused on the financial aspects of raising children. However, we've shifted our attention to emphasize the potential savings for individual adults through shared living situations. To calculate the cost of living for a household, use the following formula: The cost of living equals the square root of the number of people in the household. This concept is referred to as "economies of shared living" in economics.

Let's examine the possible savings from shared living for someone with monthly housing expenses of $2,000:

• With one roommate, save 40%. Your cost reduces to √2/2 = 1.414/2 = 71% of living alone or $1,420 per month.
• With two roommates, save 42%. Your cost declines to √3/3 = 1.73/3 = 58% of living alone or $1,160 per month.
• With three roommates, save 50%. Your cost decreases to √4/4 = 2/4 = 50% of living alone or $1,000 per month.

Do these calculations align with actual rental prices? By analyzing rental data from websites such as Zumper and Zillow, we compared average rents for one, two, and three-bedroom rentals in four major US metro areas: Boston, Austin, San Francisco, Atlanta, and New York City. For instance, a one-bedroom rental in Austin costs $1,623, while a two-bedroom rental is priced at $2,300. Your per-person share for a two-bedroom would be $1,150, which is 63% of the cost of a one-bedroom. This brief analysis demonstrates that the rule is applicable in many cases.

According to the √N Rule, the most significant relative advantage comes from not living alone, resulting in savings of almost 30%. This increases the savings potential for dual-income couples who may have twice the income and 30% lower housing expenses.

This concept can also apply to parents who may experience savings after their children leave the nest, suggesting that retirees might need less money to live on than initially anticipated.

In summary, shared living offers a practical way to reduce housing costs. As rent prices continue to soar, more single adults might consider sharing a home with roommates, and multigenerational family living could become increasingly popular. Instead of viewing shared living as a last resort, consider it a viable option to save money and enhance your financial stability. In other words, "Cooperation is a valuable, yet often overlooked, alternative to money."