In the United States, housing is the largest expense for most people. If you are looking to free up money in your budget and get out of debt, you may want to consider downsizing your home. Downsizing can be a great way to reduce or eliminate your debt while preparing you and your family for a successful retirement. Read on to discover creative ways to downsize and how to decide if downsizing makes sense for you.

When You Should Downsize

There are many times in life when downsizes makes sense:

• As you approach retirement, you may want to simplify your life or live somewhere different.
• When you want to reduce housing costs and associated bills such as utilities, taxes and maintenance.
• Anytime is a good time to eliminate labor-intensive tasks such as home maintenance, lawn care.
• After your kids grow up and leave the house you won’t need the extra space.
• You want to cash in on the equity in your current home but you don’t want to refinance.

However, downsizing is a task that takes much longer than you’d expect but has plenty of serious benefits such as saving you time, saving you money, and possibly generating a bit of spending money!

Advantages of Downsizing

While there are several ways that downsizing is beneficial, here are a few financial reasons it may make sense to downsize.

You’ll Save Money Quickly

In every stage of the downsizing process, you will have opportunities to save money. Before you decide to downsize, you will likely have to eliminate some of your physical belongings. This can be an opportunity to sell your belongings in a garage sale, on consignment, or to hire a third party.

It is important to note that while it may be the easiest option to hire a third-party hauling company or estate company to sell your belongings, it is worth evaluating the costs and benefits of this option. If you decide to have a garage or estate sale, for example, you can decide how much to sell your items for, rather than a company liquidating them in bulk. Hauling companies often charge a significant premium to come to pack and haul your things away.

When you sell your belongings, you will have additional cash on hand. You may want to use this cash to pay for your moving expenses, put it towards paying down debt, saving it in your rainy day fund, or putting it towards a down payment on your next home. Regardless of what you choose to do with the extra money, it can help to make the downsizing process easier.

You Can Save Money Every Month

When you downsize, you will have the opportunity to choose a home in a better location, one that has lower taxes, or one that requires less maintenance, and lower utility bills. 

By choosing a home that is less expensive upfront and has lower associated monthly expenses, you will be able to use these additional savings each month to help you achieve your financial goals. 

Note that a condo's selling price may look cheap, but the monthly homeowners association fees (HOAs) need to be accounted for in your monthly budget and overall housing cost. Even if you pay off a condo, you still have to pay for the taxes, insurance, and HOAs which can be hundreds of dollars more per month than living in a similar sized house. Then again the HOA handles exterior maintenance and landscaping which is a plus for your time, so it may be a wash. Homes with HOAs can also be subject to “special assessments” for certain types of repairs, so it would be wise to check with the condo’s homeowners’s association for how they are doing financially and what kinds of special assessments have happened in the past or are planned for the future.

Jumpstart Your Financial Goals

Freeing up additional money each month in your budget by reducing your mortgage and lowering home related expenses can help you to achieve your goals. You may want to pay off credit card or student loan debt with your additional savings, or you may want to consider paying off your mortgage faster.

For example, let’s assume that your new mortgage is $500 less than your current one. If you owe $18,000 on your student loans at a 6% interest rate your payment would be $200 a month, and it would take you 10 years to pay off. By putting the $500 per month towards that debt, you would pay it off in two years and four months – much faster than if you continued making the minimum payment.

With your budget freed up you could focus on paying down debt, spend money on a better lifestyle, or setup automatic retirement contributions. When making this decision, it may be wise to consult with your financial advisor to ensure that you are using your money in the most advantageous way.

How to Downsize

If you’ve decided that downsizing is right for you, your next step is to find a home that fits your needs. This process looks different for everyone, and you may want to have a conversation with a realtor to help you understand what is available in your area.

When you find a home that works for you, we recommend using a home buying checklist to record your impressions and stay organized. You can also capture key aspects of a home including condition, your impressions, and major warning signs. By understanding the house you are buying, you are protecting yourself against future potential issues that could cost you a lot of time and money to resolve. Buying a house is a complicated process, as is selling your existing house and arranging to move, and filing all the address change forms, etc.

When it Makes Sense to Add Space

A common objection to downsizing is the fear of eliminating amenities that your current home has such as a finished basement, storage area, workout room, or office. 

There is a clever work around that savvy downsizers can take advantage of. Building a detached shed in the backyard that is semi-finished can make a great office, yoga studio, storage area, work out room, craft room, or other space. Usually the local tax authority allows running power to this new building without assessing new square footage. When you get into adding plumbing, heating that is when they want to consider it “living space”. The laws will vary from place to place, so check into it thoroughly before going down this path.

For example, if you work from home and are worried about losing your office space in a new home, a semi-finished shed could be the answer to your worries. A shed could be the perfect reprise from the rest of your family in your home and offer an opportunity to step away from your work at the end of the day.

Permitting that your shed meets regulations, this can add a significant amount of living space to your home at a low price per square foot.

The Bottom Line

If you are ready to save money on housing and time maintaining your home, it may be the right time for you to downsize. Downsizing can be an avenue to financial freedom for you and your family. As with any major financial decision, you may want to speak to a financial advisor, and you may want to speak with a realtor if you decide downsizing is right for you.