Downsizing can often be viewed as a rite of passage into retirement. So, when people choose to go smaller earlier in life, it can seem like a step backward. But downsizing isn’t a step back and isn’t only for retirees and empty nesters, it makes sense for a variety of people. Most American families have plenty of room to downsize their home without cramping their style.
Let’s consider the numbers: The average new single-family home comes in at over 2,600 square feet, according to the United States Census Bureau. You may not think that’s all too big until you look back at history. The National Association of Realtors reports that the average home size in 1950 was 1,000 square feet or less and families were bigger back then! By those standards, today’s homeowners are living large!
Let’s at the upsides to downsizing: saving money, saving time and having less clutter in your life. Downsizing could be just the fresh start you and your family are looking for.
Is there a right way to downsize?
If you’re thinking about downsizing your house, planning ahead will help ensure your transition is successful. Do you need extra space for a purpose? Only you know if you can spare that extra space or if losing it would be more of a headache than it’s worth.
Remember back in college when your entire life fit in that tiny dorm room? Somehow you had everything you needed within arm’s length. Though that may be far from practical these days, you can still benefit from cleaning out the clutter from those closets. Sell what you don’t need and take that money to the bank. Or donate it to a local charity and get the added bonus of a tax benefit. Wouldn’t it be nice to have less to clean and more money in your pocket?
Downsizing may save you money in those monthly mortgage payments, but what about the hidden costs? Does your home need any repairs to get it market-ready? What about your old furniture and appliances, will they fit into the smaller place, or do you need to bump up that budget for more space-efficient pieces?
And don’t forget to take into account the cost of moving, property taxes, storage, and possibly even higher HOA fees. When it comes down to decision time, you may find that taking that leap to a smaller space will save you BIG time, or maybe that you can save just by staying right where you are.
What are the possible financial Benefits of Downsizing:
- Reduce Utility Expenses
Typically, the smaller your property, the less you pay for home utilities such as electricity and gas. The fewer/smaller the rooms in a home, the less money you need to spend on heating them because the heat will be much better contained in a smaller space. Similarly, you will be saving money on electricity, having fewer rooms to light, also meaning you will have fewer electrical items to clutter up each room. According to a 2016 Forbes article, downsizing from a 3,000-square-foot house to one with 1,000 square feet could reduce your monthly electric bill by as much as $200.
- Spend Less on Home Maintenance
Home maintenance is inevitable. Eventually, you’ll need to replace the roof, siding, windows, appliances, and flooring. Homeowners should expect to pay between 1 and 4 percent of the home value on maintenance each year. Downsizing makes it easier to reduce regular maintenance and cleaning, which reduces costs and leaves more time for fun. Rather than spend a minimum of $3,000 a year on a $300,000 property, you could reduce your maintenance costs by at least $1,000 when you buy a $200,000 property.
- Pay off Debt Quicker
If you’re working hard to kick debt to the curb, downsizing your home can help you manage that a lot quicker. Let’s say you owe $18,000 on your student loan. With a 6% interest rate and a minimum payment of $200 a month, you’ll be paying on that loan for 10 more years! If you can put an additional $500 at your loan each month, and you’d trim a whopping seven years and eight months off your pay-off date.
- Boost Your Retirement Fund
Once your debt-free with a fully funded emergency fund, it’s time to build wealth for the future. By investing 15% of your household income into Roth IRAs and pre-tax retirement plans, that extra $500 could be the push you need to get there. The difference $500 could make, in 30 years, you could have potentially an additional $1–1.6 million in the bank to get you through your golden years. You can do a lot of living and giving with that nest egg!
- Pay Off Your Mortgage
Trade in your mortgage for a paid-off home! Use the proceeds from selling your current home to pay cash for a smaller one. Just imagine what you could do with no mortgage holding you down!
If you can’t pay cash, aim for a 15-year, fixed-rate mortgage and put at least 10–20% down on your new home. Apply the $500 you saved from downsizing to your new monthly payment. At 4.5% interest, you could pay off a $200,000 mortgage in less than 10.5 years, saving almost $25,278 in the process.
Some people are all work and no play, and they’re perfectly happy with this lifestyle. But if you want more out of life and feel stuck because of a large mortgage payment hanging over your head, downsizing can help you afford more experiences.
Here’s an option: Take the money you save after downsizing and split it into two separate accounts. For example, put half the savings toward building your emergency fund, and the other half toward creating memories and enjoying life to the fullest. Think of how many new adventures you’ll be able to enjoy each year with thousands of dollars accumulating in the latter fund. Downsizing might not make sense in every situation, but it’s worth a look if saving money and simplifying life appeal to you.