If you’re dealing with a tight financial situation, a career crisis, the start of a new business, or you’re just worried about the direction of the economy, you need to read this. Often, after we’ve cut every expense we can — the grocery bill, entertainment, the landline telephones, the credit cards — we’re still left with basic monthly living expenses that come dangerously close to wiping out our income every month. When we come to that point, it’s time to look at the larger components of our living expenses, the largest of which for most is the home.
Sometimes, getting a smaller home is the single best thing you can do for your finances.
As un-natural as this might seem in the grand scheme of things, trading down to a smaller home might be the only option left if finances are tight. Or if you’re tired of economizing on everything else and just want to live your life. Often, by lowering the single biggest expense in your budget — your home — everything else falls into line and balance is achieved.
Actually, trading down isn’t even as radical as it sounds. People do this all the time — in preparation for a major change in life know as retirement! You don’t have to be on the verge of retirement to be facing such a change, not these days. Trading down should be an option.
This is the most obvious savings from trading down, and it can be substantial. Cutting your monthly house payment from $2,000 to $1,500 can make a bigger difference over the long run than we think. A $500 per month saving is $6,000 per year, and $180,000 over 30 years! That’s better than an IRA, and we haven’t even begun to add investment income to the equation.
Once you’ve sealed every crack in your home, caulked every window and turned off every light, you still can’t do anything about the problem of space. It will cost far more for utilities in a 4,000 square foot home than it will in one that’s 2,000 square feet, if only for heat and air conditioning.
Home owners insurance has been on the rise in recent years and the cost can no longer be easily ignored. The more expensive your home is, the more it will cost to insure. A smaller home will mean lower insurance and utility bills.
The difference between the value of your home and the mortgage balance on it is your equity. That equity doesn’t earn interest for you, and unless you borrow against the property (creating a new monthly payment) you can’t spend it either — hence the term “dead equity”. Higher priced homes tend to have more of this and by trading down to a less expensive one, you reduce the amount of dead equity you’re carrying.
All houses require repairs and maintenance, but bigger houses just need more. A bigger house means more rooms to carpet, more wall space to paint, bigger heaters, bigger air conditioners — and all of it costs more than it will in a more modest home.
And one other point that’s equally important; larger, more expensive homes are often located in higher priced neighborhoods that are more likely to enforce standards, such as exterior painting schedules, lawn maintenance and other upkeep. When money is tight, they’re tough neighborhoods to live in.
No one ever wants to look as though they live below the prevailing standard in a neighborhood, and in higher priced ones that standard is also higher. Maybe it’s that people in more expensive neighborhoods are more competitive. What ever the reason, it translates into higher priced cars, furniture, clothing and even toys for your children — kind of like an arms race with stuff!. Would you like to get off that treadmill?
Closely related to keeping up with the Joneses, what type of car you drive is often closely associated with the neighborhood you live in. The more expensive the neighborhood, the more frequently people tend to turn in their cars for new ones. And that can keep you locked in a cycle of perpetual car debt. Move to a less expensive neighborhood, and you might feel better about keeping your car for ten years so you won’t have a payment.
Have you ever walked into a store, looked at a piece of furniture or exercise equipment but passed on buying it because you didn’t have enough space in your home? Well, guess what? The more space you have the more you’re likely to buy, precisely because you do have the room!
Get a smaller home and you’ll probably find yourself buying less. And you know what? You’re life probably won’t be any worse for not having it. It might even be a little better if the money you don’t spend on stuff ends up in your bank account. Speaking of which…
Let’s say you sell your home for $350,000 and walk away from the closing table with $70,000; you then buy a $250,000 home with a 20% down payment equal to $50,000. That leaves a $20,000 nest egg for your bank account. Now start adding the monthly savings from a lower house payment. Get rich quick? Maybe not, but you’ll definitely be heading in that direction.
The less money you have going into your house every month, the more you’ll have for living your life. There’s a self-image attached to living in certain types of homes, and that image is both more complicated and costly the larger and more expensive your home is. A smaller home might be the ticket to more travel or even a better education for your children.
Less space, less stuff, lower monthly expenses, more money in your budget and in the bank, less worrying about what the neighbors think — all translate into less stress. If you’re in some sort of transition in your life, you’ll need to free up your time, energy, money and concern for dealing with the challenges ahead.
Can you put a price on that?
Photo from Wikimedia Commons.
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