Because of lifestyle inflation (I’ll explain this more below), most people think about bigger and more expensive for their next house. However, there are a lot of great reasons to consider a move in the opposite direction – smaller and less expensive. Here are 4 big financial benefits of downsizing.
The median house price in the United States is just under $200,000 as of this publication date.
Our first house after getting married cost $110,000. The second house cost $180,000. Then our third house was a whopping $360,000. As if that wasn’t crazy enough, our fourth house cost a million dollars. Yep – a cool million.
What do you think our 5th house cost? You might be surprised.
But first… What happened?
As my wife and I progressed through our careers, we made more money each year. Sometimes the increases were fairly small 3-5% cost-of-living increases. A few times we either changed positions or changed companies and were able to experience huge (50%+) increases in our total earnings.
The smart thing for us to do would have been to start banking a ton of money quickly. If we saved and invested those increases we would have been very young multimillionaires.
But we didn’t. We had more money – “extra” cash flow every month. So we did what most Americans do. We spent it. Nicer cars, more expensive vacations, bigger homes (with rooms we rarely, if ever, used), and so on.
It’s an easy trap to fall into and one I wrote about in the 3 tips for living the good life (without going broke) post.
I loved the million-dollar house. Well, no, that’s not true. I loved the location. It was waterfront on a deep water creek that had GREAT fishing. I could walk out back to fish a short bit and almost always caught multiple fish in a short period of time.
The dock had a boat lift – making it nice and easy to get out and enjoy a day on the water.
It was awesome. It was fun. EXPENSIVE fun!
After a few years in the big house, our daughter was finishing up high school. She’d be leaving in a few months for college – leaving just my wife and me in this huge (but nice!) house.
We were also considering selling our business right around that time. After selling the business we could actually pay off the house, but it would be a huge percentage of the money we made. Would that really be the best use of a million dollars? Or would investing it be smarter?
The big decision
If we paid off the house we would have to continue working to support (our expensive) “life.” If we invested the money we could actually cover our basic living expenses by following the 4% rule.
Ultimately we decided that having financial freedom was more important to us than enjoying an extravagant lifestyle.
So we sold the house. We sold the big house and moved into a house that is half the size, and less than a third of the cost. We were able to pay cash from equity and appreciation – no more mortgage! We were now 100% debt-free!
Do I regret it? No, not at all. It was the best financial decision we’ve made yet.
There are a lot of benefits to this downsize move that we made. Benefits that anyone would experience if they went through the process.
Financial benefits of downsizing
1. Lower house price
This may seem obvious, but it’s a big deal so I want to make sure it is clear. When you sell your house and buy something less expensive, you save a ton of money.
If you pay cash, you get to hold on to more of your cash (and invest it or whatever you want). If you have a mortgage, your payment is going to be a lot smaller.
This is a big deal. That’s why I have it at the top of the list of benefits of downsizing.
2. Lower taxes
Property taxes on houses are based on the value of the property. When you buy something that costs less than your last house, your taxes are also going to be less in the new house. Taxes are worked into mortgage payments, so that’s another reduction in the monthly outflow.
3. Utility bills
Since our house is now half the size of the last house, our utility bills are much lower. Utility bills in various areas tend to range from $200 to $400 per month. Ours, with everything included – electric, gas, and water – is at that lower end now. Previously it was at the high end. I was actually surprised how much lower the monthly bills are now.
4. Maintenance costs
Our big house had three air conditioner units. It also had an elevator, and a generator, and a dock, and a boat lift, and a bunch of little things that required annual maintenance. The new house has one AC unit (which cools the house perfectly!) and none of those other things.
Pest control (which is a requirement here in the south) costs less since the house is smaller. The yard is smaller so easier to take care of (or less to pay someone else to take care of).
What do those savings “buy” you?
When you have more cash freed up instead of used as a downpayment on a house, that money can grow toward your big financial goals – paying off debt, covering college bills, a comfortable retirement.
Besides that initial cash, lowering your monthly costs frees up cash flow that can go toward those same goals. If you follow the best practice of dollar-cost-average investing, this gives you a bigger monthly investment amount.
Also, later in life when approaching retirement, having lower costs helps stretch out your dollars. Whether it is in your 60s or an early-retirement, once you have a fixed income you’ll find that minimizing monthly costs is a tremendous help. It could be the difference between a comfortable retirement and running out of money in your 80’s.
Non-financial benefits of downsizing
When talking about the benefits of downsizing, I feel we need to communicate non-financial gains too.
I don’t like cleaning the house. It’s one of my least favorite things to do. In the last house, it was almost an all-day experience. When you have three stories, five bedrooms five bathrooms, and a bunch of other “space”, it takes a lot of effort to clean it all.
With the new house cleaning is a breeze. Of course, the Roomba helps, but that only saves so much time. The big savings is the smaller space plus fewer bedrooms and bathrooms. Cleaning is now much less life-sucking to me as it was in the past.
2. Less “stuff”
Sure, it’s obvious, but with a smaller house, we have less space. Less space means less stuff. We no longer have a formal dining room collecting dust. There are half as many couches/tables/etc. without a family room (aka media room) and a living room.
We sold a lot of items on craigslist then held a yard sale for everything remaining. It felt good to purge a bunch of items. Until you let some things go you don’t realize just how much emotional energy is consumed by them.
3. Family closeness
I guess not everyone would see this as a benefit, but I certainly do. When you have a big house with enough rooms that everyone can spread out, it tends to happen. More space can cause people to naturally use the space and gravitate away from each other.
Smaller spaces tend to keep people closer together. When we’re closer and “doing life together” we interact more. Close interaction is great for communication. My wife, daughter, and I can sit in the same room together for hours and just talk. It’s awesome. This might be my favorite benefit of downsizing.
What do you think?
What do you think about the idea of downsizing? Have you downsized already? How has it worked out for you? Let us know in the comments section below.
Do you have a personal financial plan?
Here's a FREE personal financial planning checklist - to make sure you have the most important financial areas covered.
Get it now and start checking these important items off your list.