Housing is likely the largest expense in your monthly budget. If you are looking to reduce your cost of living, downsizing your home to save money could be a great option.
That said, this is a big decision that requires a lot of thought and planning.
While there could be significant savings, it may not be worth it depending on your individual circumstances.
In this article, we’re going to cover the most common reasons why people downsize their homes, how to evaluate if downsizing is right for your family, and tips you should consider.
Keep in mind that downsizing can be an option for both people who own their home or those that rent. In either case, we hope this article helps you make an informed decision.
Reasons People Downsize Their Home
There are many reasons why people decide to downsize their homes.
The most common reasons to downsize include saving money, freeing up personal equity, retirement, children leaving home, or lifestyle changes.
It’s likely that one of these reasons may resonate with your personal situation.
Saving Money
Downsizing to save money is the most common reason for moving to a smaller home. One study found that 69 percent of people who downsized their homes did so in order to save money.
By reducing or eliminating your monthly mortgage payments, you can use that money to cover other expenses.
This can help you pay down debt, increase your emergency fund, or accelerate your retirement investing.
This also reduces your risk of being able to cover your housing payment in the event of an economic downturn or unemployment.
To Be Mortgage Free
In general, if downsizing allows you to purchase a home outright, and thus, be mortgage-free, then it may be a phenomenal option for you to consider. Not only will this decrease your monthly living expenses, but it will also allow you to apply more of your income toward investing–both of which will help you reach your financial goals significantly faster.
Think of it this way, if you are currently paying $1,500 each month for your mortgage, then downsizing in order to be mortgage-free would reduce your annual living expenses by $18,000.
Thus, you wouldn’t need nearly as much money in retirement in order to survive.
In my humble opinion, this is pretty much the best possible outcome when it comes to downsizing your home.
Retirement
Retirement is the end goal for most working professionals.
The challenge is that you need to be prepared for when your steady flow of income comes to a halt.
In the United States, a large number of people are unprepared for retirement. The Federal Reserve found that only 48 percent of people over the age of 60 feel their retirement savings are on track.
For many, downsizing is the only way to reduce their monthly income to stretch their savings and account for additional expenses that come with aging such as higher health care costs.
Retirement isn’t just for people over the age of 65.
More and more people are seeking to retire early or switch to part-time work so they can travel or spend more time with family and friends.
And to put it simply, moving to a smaller home can help you reduce your monthly expenses, and thus, help you hit your retirement goals faster.
Empty Nesters
As your kids grow older, they will eventually move out on their own.
When that happens, downsizing to a smaller space may make a lot of sense.
Plus, downsizing can free up some money to help your kids with college tuition or major life events like a wedding.
You Bought a Home That is Too Large
In some cases, people live in homes that contain more space than they could ever use in the first place.
Banks and real estate agents certainly don’t help the situation by encouraging their customers to spend the max of their pre-approved loan.
If you made the mistake of purchasing more home than you need, it might be time to downsize.
Want to learn how to save more money? We think you’ll love some of these other Be The Budget posts:
- 21 Ways To Save For A House FAST
- 15 Easy Ways To Save Money Each Month
- 12 Ways To Save Money On Apartment Utilities
- 21 Tips For Designing A Home Office On A Budget
- 25 Ways To Save Money When Buying A House
- 25 Ways To Save Money On A Kitchen Remodel
- Where To Keep Your Money While Saving For A House
Evaluating Whether Downsizing is the Right Decision for You
Like all other matters of personal finance, you will need to determine whether downsizing is right for you and your family.
Since downsizing can have major impacts on your finances and lifestyle, you need to consider the choice carefully.
While it can be a smart decision in many cases, there could be other expenses to consider that might end up costing you more than downsizing saves.
In fact, here are a few things to consider:
The Current Market
Timing is crucial in real estate.
Therefore, before you jump into downsizing, you should examine the current market conditions carefully.
If you are unsure, talk to a local real estate professional.
If the price of smaller houses in your area is up significantly, you could end up purchasing a smaller home that has a similar mortgage payment to your existing home.
And let’s be honest, if downsizing isn’t going to save you any money, then it might not be worth the headache.
The Costs Involved
When evaluating whether to downsize or not, most people look at how much they pay for their mortgage or rent of their current home and compare it to the cost of a smaller house.
The problem is that there may be other costs involved with downsizing that could reduce or eliminate any potential savings.
Here are some costs that are often overlooked or forgotten:
- Buying or Selling Costs — Costs associated with buying a new house or selling your existing home including commissions, capital gains, and closing costs.
- Moving Costs — Costs of moving including rental trucks, moving crews, boxes, and other supplies.
- New Furniture or Appliances — For example, your old sectional sofa may not fit in your new smaller house or your might need to replace your current washer and dryer.
When evaluating your downsizing options, sit down with your spouse and make a list of all the costs that are associated with housing.
Don’t forget things like utilities, landscaping, your commute, property taxes, insurance, repairs, and maintenance, etc. Then divide the piece of paper into two columns.
Label one side savings and the other costs.
If you think you will save $500 a year on utilities add that amount to the savings side. If you are looking at smaller homes in an area that is further away from your job, you may need to add an increase in fuel costs to the cost column.
Once you have all the amounts listed, add them up.
The difference between the two is the amount you can expect to save or lose by downsizing.
Tips For An Effective Downsizing
If after careful consideration you determine that downsizing is the best course of action for your personal financial situation, the next step is actually going through with it.
Fortunately, there are some best practices that can help you maximize your savings or reduce your risk.
- Downsizing Doesn’t Always Mean Smaller — In some cases, you can downsize the cost of your mortgage but keep the same size home. You can do this by moving to a cheaper area of your city or to a lower-cost town nearby. This option is becoming more popular with lots of employers allowing their employees to work from anywhere in the world.
- Have a Plan for the Additional Savings — It’s important to have a plan for what you want to do with the additional money that you are going to save each month. Downsizing your home to save money is great, but don’t fall into the trap of feeling like you need to spend the money on another bill (such as a new luxury automobile). Instead, consider putting the money toward goals like paying off debt, boosting your retirement savings, or building your emergency fund.
- Roll Over the Equity in Your Existing Home — Don’t forget about the equity that you have spent years building in your existing home. If you are fortunate enough to have a significant amount of equity, we highly recommend one of two things: putting it toward your new down payment, or using it to get completely out of consumer debt. Don’t be tempted to only use the minimum required for the down payment on your new home. Instead, use your hard-earned equity to increase your monthly financial margin.
- Consider Taxes — If you do plan to pull some of the equity out of your home to pay off debt, you may need to pay capital gains taxes. The current IRS code allows homeowners to sell a primary residence and be exempt from capital gains taxes on the first $250,000 for single people and $500,000 for married couples. In any case, if you opt to downsize, talk to your accountant for advice on your best options.
- Get Rid of Things You Don’t Need — When you move to a smaller house, you likely won’t have space for all of your belongings that accumulated for years in your larger home. Don’t make the mistake of having to pay for a storage unit to keep all the stuff that doesn’t fit in your new space. Take the time to sell, throw away, or donate anything you don’t plan to take with you.
Common Questions When Downsizing Your Home
Should I downsize my home to pay
Bottom Line
Downsizing your home can take a lot of effort both mentally and emotionally.
This is why you should take special care to thoroughly evaluate this decision.
The more time you take to consider your options and review the benefits, the more likely you will be to make a wise decision.
And, as always, if you’re wondering if downsizing is the right decision for you, be sure to seek the help of a financial advisor and/or real estate professional. There’s just no substitute for wise council from an experienced pro.
Do you think downsizing is right for you? If so, we’d love to hear how you came to that decision in the comments!
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