Managing finances in a multigenerational household

If you have multiple generations in your household, these strategies may help you better manage your finances, prepare for current and future expenses, and work toward everyone’s financial goals.

Between 1971 and March 2021, the number of Americans living in multigenerational households quadrupled, growing from about 14 million to 59.7 million people, according to Pew Research Center. That translates to 18% of the U.S. population, up from about 7% in 1971. 

Why the shift? Respondents to Pew’s survey gave many reasons, but the two mentioned most often were finances and caregiving duties. 

With sharp increases in house prices, people marrying later and student debt on the rise, younger generations are more likely to live with their parents longer to save on living expenses.

On the caregiving front, people in the sandwich generation are taking care of their children and their parents simultaneously. Sometimes, multigenerational living is simply the easiest option both practically and to avoid the cost of long-term care such as assisted living.

Managing finances for multigenerational households

For all the potential cost savings, multigenerational households can still face financial stress—but there are strategies that can help you better manage the household finances.

1. Create a family budget for your multigenerational household.

Multigenerational homes are likely to have more complex financial needs and higher costs than single-family households—but more members mean more contributors, too. Here are some steps you can follow when creating a family budget for your multigenerational household.

• Determine your household income. Figure out how much money your household members bring in each month in total. This can include salaries, social security payments and any other income streams.
• Identify and categorize shared expenses. These can include rent or mortgage payments, home maintenance costs, utility bills (including internet), cars, groceries and family emergency fund savings. Also identify individual/discretionary expenses, such as debt payments.
• Decide how much, and how, each resident will contribute to the household. You could make this a flat amount, or pro-rate contributions if adults have vastly different incomes. Another idea is to offer a “discount” if a family member chooses to be the primary carer for children or older adults, or takes on more responsibilities in the home, such as cooking and cleaning.
• Assign responsibility. Take stock of household tasks, such as paying bills and monitoring finances, organizing taxes, meal planning or shopping for groceries and household goods. These should be based on individuals’ strengths or interests.
• Hold regular family meetings. Your circumstances will change, whether individually or as a family. Monthly meetings to discuss spending and budget, and to adjust if needed, will help head off problems down the line. These meetings should be mandatory for the adults who bring in income, but you could consider involving elders and children, too.

Once you’ve determined all your household expenses and who’s responsible for what, consider automating contributions to a shared bank account from family members’ incomes. It can also be useful to set up a budgeting app so all contributing adults can see the state of the household finances at any time.

2. Set up an emergency fund for your multigenerational household.

Setting up an emergency fund that is easily accessible can help your multigenerational household better manage unexpected expenses, such as a job loss, medical bill or car or home repair. To build up funds, you should make small contributions on a regular basis. Schedule automatic transfers from your checking account to a savings account that’s reserved for unexpected situations. 

However, try to avoid putting too much money into your emergency fund, because this type of account will likely come with a low interest rate. Once you meet your savings goal for your emergency fund—typically three to six months’ worth of household expenditure—shift ongoing contributions into a tax-advantaged investment account or high-yield savings account, where it can potentially earn more interest. (Keep reading to learn more about these types of accounts.)

3. Plan for healthcare and long-term savings goals.

Living in a multigenerational household means monitoring multiple financial goals. For example, older adults may require medical treatment or long-term care in the future, while children who are planning to go to college will benefit from funds to help with tuition and other expenses. 

• Adults: If you’re enrolled in a high-deductible health plan, you can open a Health Savings Account (HSA) and contribute to it until you turn 65. The money in an HSA grows tax-free and isn’t taxed when it’s withdrawn for eligible expenses. HSAs can be used to pay Medicare and other related insurance premiums as well as out-of-pocket expenses into retirement.

You may also want to consider building savings in a traditional or Roth IRA and use that to help cover medical expenses once you turn 59 ½. (Note that withdrawals from traditional IRAs are taxed, and there are penalties if you withdraw money from an IRA early.) 

• Children: If your kids have college in their future, consider opening a 529 plan. A 529 plan is an investment plan in which contributions plus any earnings grow tax-deferred and remain tax-free if the funds are withdrawn to pay for certain qualifying education expenses, including some study-abroad costs, at any college or university. (A list of qualifying institutions, including those in other countries, is here.)

Another option is a prepaid tuition plan, where you select a participating college or university and purchase credits or units at the current price for your child to use to cover future tuition and fees. 

Note that if you’re a caregiver for a parent, you may be able to claim them as a dependent on your taxes and deduct some of the cost of supporting them, just as you do for any dependent children.

4. Aim for tax diversification.

A tax diversified investment strategy, in which you maintain a mix of investment accounts with different tax treatments, may help you lower your taxes over your lifetime. Keep in mind that these types of accounts are for the long term. 

• Tax advantaged accounts: 401(k)s, 403(b)s and traditional IRAs allow you to contribute pre-tax dollars or to deduct contributions from your taxes. 

• Tax free accounts: Roth IRAs, 529 plans and HSAs are examples of investment vehicles with benefits such as tax exemption or deferral.

• Fully taxable accounts: Money market accounts and traditional brokerage accounts offer no tax advantages but can play an important role in your financial plan.

Easy access to tax-advantaged and tax-free funds may be limited, so you and other decision makers in your multigenerational household will need to consider when you might need this money and how much risk you’re comfortable with. Consulting with a financial professional at your bank can help you craft a tax diversification strategy that makes sense for your multigenerational household. 

5. Legacy planning for multigenerational homes.

How to pass on wealth—including property—fairly and with minimal tax consequences is a common concern among multigenerational households. You may have already taken care of some of the estate planning basics, such as creating a will and naming beneficiaries. 

Consider working with an estate planning attorney to pull it all together by creating a comprehensive estate plan that includes documents like powers of attorney and healthcare directives, too, to make sure all members of your multigenerational household will be secure if you or another earner were to die.

6. Talk about family finances together.

Talking about money is tricky for most people, but it’s incredibly important when you live in a multigenerational household. Achieving all family members’ financial goals and ensuring a secure future for your multigenerational household requires open and honest communication. Encourage everyone to share their financial priorities, including those who are too young to contribute to household expenses.

By keeping lines of communication open, setting ground rules early on and having a shared financial plan, you can avoid problems down the line and help your household run like clockwork.

Learn more ways to set financial goals and priorities for you and your family.