Downsizing has benefits, no matter what your situation, that may make it a good strategy even when it is not a necessity.
Bigger is Better
The myth that a bigger house will make you happier has been debunked. In fact, if that bigger house comes with the financial stress of making big mortgage payments, it will bring the opposite of happiness. Research shows that happiness is more positively tied to experiences than things.
Downsizing was once a retirement move, but today it is a popular trend among several age groups and income levels. The financial benefits of downsizing are good reasons to make the transition at any age.
Traditionally, when children move out on their own, parents consider downsizing to a smaller house. The decision to downsize an empty nest is sometimes driven by emotional reasons as well as financial and practical ones. It can be sad to see the kids go and unnecessary to continue paying to heat and cool the space no one is using. But downsizing is also catching on with younger people who just want to save money.
The move to downsize has plenty of benefits, many of which are financial. Lower expenses for maintenance, utilities, and a mortgage on a smaller home are a positive outcome for anyone. Empty nesters can put the savings from downsizing toward their retirement which makes making ends meet on a fixed income less stressful. Downsizing can also help eliminate the responsibilities associated with owning a large home, giving retirees more time and flexibility to enjoy other activities that enhance quality of life.
The current economic climate and trends for smaller living are moving some families to downsize before their nest is empty. Downsizing can help you save money for a larger future purchase. Some younger couples choose to downsize before they start a family so they can get in a few years of savings before they need a larger home and face other expenses of raising children. A growing family may choose to downsize to save money for a summer home at the beach or a winter condo on the slopes.
Benefits of Downsizing
When downsizing becomes a necessity, it could be a bit of a downer. Necessary downsizing can be associated with tough times like the sadness when the children have all moved away or the distress of a recent layoff. But downsizing has benefits, no matter what your situation, that may make it a good strategy even when it is not a necessity. Doing it now could help you avoid the need to downsize under the pressure of financial stress. Some downsizing benefits include:
- Lower taxes. Taxes on a smaller home may be lower. If you buy a smaller home in an area with the same tax rate as your existing home, your annual tax bill will go down since it is based on square footage.
- Smaller mortgage. A smaller mortgage means your monthly payments can be less but also your overall debt is smaller. Reducing the time it will take to pay off your mortgage can have a positive effect on your retirement planning or other long-term savings goals. You may even be able to eliminate your mortgage altogether by downsizing to a smaller home that you pay cash for or moving into a rental unit.
- Less space to clean and maintain. Downsizing can allow you to make lifestyle changes by reducing the time and money required to clean and maintain your home. Less time cleaning can mean more time pursuing recreational activities or it can help you maintain your quality of life despite physical health changes.
- Lower utility bills. A smaller dwelling uses fewer resources to operate, and a newer property may be more energy efficient than your old house, saving you money and reducing your carbon footprint as well.
What to Consider When Downsizing
Smaller is not always cheaper, and bigger is not necessarily better. You need to know what you are looking for before you begin the process of downsizing. Here are four things to consider when making the decision to downsize:
- What are your financial goals? Downsizing will not automatically solve your money problems. You have to make a plan to reach your financial goals. If your financial goal for downsizing is to have more money to travel, you’ll have to be sure you take the money you save by having a smaller mortgage payment and lower energy bills and save it toward your goal. Creating a prospective budget for your new home, noting how much you can put down on a mortgage, how long you want to take to pay off that mortgage, and how much you want to spend on taxes and operating costs, will help you find the right property to meet your financial goals.
- What are your space requirements? If you end up going too small, downsizing will not turn out to be the great benefit you were expecting. Be realistic about your need for space. When the kids move out, you may no longer need four bedrooms, but you might need one guest room for visiting grandchildren. Maybe both a living room and a family room are no longer necessary, but you might need a home office. Think about all the ways you use your home, and the unused portions of your current house, when deciding how small you want to go.
- What amenities do you consider essential? Downsizing does not automatically mean you have to give up the features that are important to you. If you enjoy working in the garden, you can find a smaller home that still has outdoor space. Maybe you are willing to give up some of the high-end finishes like granite countertops and hardwood floors for the security of a house in a gated community. Rather than a house with a pool, you could find a home near a neighborhood pool. Figure out what amenities are important to you, so you don’t end up downsizing to a home you can’t enjoy.
- What location would be most convenient? The work-from-home phenomenon has opened up relocation opportunities for many, and those retiring into smaller homes have options, as well. For example, you may want to make a big move to live in a different climate, or you may have reasons to stay close to your current community. Or, downsizing may allow you to afford a home in an upscale neighborhood where the schools are better and the streets are safer for your children. Location is an important consideration for downsizing, especially in areas where the cost of property taxes and utilities vary greatly. You could find that a smaller home where you want to be costs as much or more than the big house you have now.
Downsizing Mistakes to Avoid
The decision to downsize could be your key to a more comfortable financial future no matter your stage of life or financial situation. But, like any big financial decisions, it has pitfalls. Here are a few mistakes to avoid when downsizing:
- Going too small. Saving money can be like a drug. If reducing your living space by 500 square feet saves you $627 a month, you immediately start thinking how much you could save by going 800 square feet smaller. The next thing you know, you’re living in a tiny house with your family of four, a dog, two cats, and a goldfish. There are financial benefits to downsizing, but not at the risk of your family’s physical and mental health. Remember, moving is expensive. Moving into a house that is too small and then having to move again to get rightsized will not help you reap any financial rewards.
- Keeping all your furniture. Selling all your furniture and starting over would be a financial mistake, but so would keeping it all. A smaller space means you need less stuff; that is one of the benefits of downsizing. Jamming too much furniture in your new, smaller home will just make it feel smaller and less comfortable. You may then experience the stress of clutter, not something you want to bring into your new living space.
- Waiting too long. The longer you live in a home that is too big for your family or your budget, the more time and money you waste. You are spending money every month to heat or cool a house you are not using, and you will never get that money back. Your monthly budget is impacted by a mortgage payment that precludes you from buying a new car or going on vacation. You may get that money back when you sell the property, but you will never recoup the time you lost not pursuing the activities that make you happy.
- Poor advance planning. Moving is stressful, even under the best conditions. When you are moving into a smaller home, you will have additional considerations that require advance planning. Be strategic about going through your belongings and getting rid of duplicates and items you don’t use or won’t have room for. Measure furniture and appliances that you will take with you so you can know whether they will fit into your new space before you move. Sort through your sentimental items and make a plan for how they will be distributed or what items to keep. Tackling these chores before you actually make the move to downsize to a smaller place will help you eliminate stress.