I think we all have that admiration at a young age of the lavish lifestyle. The large houses, mansions, luxury cars, etc.. But at a young age you have no concept of how much work it is for a dollar or what it takes to get there. Maybe a major life change happened – divorce, kids moved away, etc.. These are some reasons you might want to start considering downsizing to a smaller home. No sense in paying for unused space.
Does your home size matter though? Let me stop you… yes, the answer is yes!
Since most of us don’t have the luxury of being born into riches, we have to think a little differently. We have to be a little thriftier. Deep down we still have that voice saying “Look at that beautiful, luxurious home!”. It’s especially true with the current climate and that feeling of being “stuck” indoors. As a result, real estate is hotter than ever. You can still have a beautiful home, but it doesn’t need to be so big. Downsizing to a smaller home can be the answer you’ve been looking for.
Do you have any idea what that larger home costs? Do you realize what it really takes for someone to maintain a large home? No? A lot! And it’s more than just the value of the home itself.
Even our daily habits can cost us years of additional work before retirement!
Reasons to consider downsizing to a smaller home
1. Property Taxes
The bigger the home, the bigger this burden becomes since property taxes are based on the size of the property. If we decided we needed a home with extra rooms and a larger yard it can cost us big.
Every county and state assesses the property taxes differently, but they all revolve around the same ideas. If our property value is double that of somewhere else then we’re likely to pay double in taxes.
Here is a breakdown of property taxes by state.
This is where downsizing to a smaller home makes the most sense. Most homes have many unused rooms, if only for special occasions. Times are changing and homes aren’t used the same way as a home may have been used back in the 50’s. Formal dining rooms, are they really necessary? There are sure to be other rooms many don’t find being used.
Imagine this financial scenario that we will tally up at the end:
- Larger house purchase – $600,000
- Property tax – $12,000 per year (assuming 2%)
- Cost over 15 years (shorter term mortgage) – $180,000
Now, let’s say that instead of purchasing this lavish home that has 4 bedrooms, 2.5 baths, basement, large yard, we decided it was too much. Instead, we decide to buy a more modest home.
- Modest house purchase – $400,000
- Property tax – $8,000 (assuming same 2%)
- Cost over 15 years – $120,000
Now it’s only 3 bedrooms and 2 bathrooms with a more modest yard, but we didn’t need it anyways.
Are you mad that you didn’t get everything you wanted? Are you $60,000 mad!? Or consider the home difference, $260,000!? That money could go straight into investments.
It’s not over. Let’s see how you feel at the end of this exercise.
2. Electric Bill
Considering that same scenario with the 2 houses above, we’d now use less electric for two less rooms and have a smaller square footage house. It’s probably not a record breaking cost difference per month, but it still matters.
Now we don’t need to pump that AC as hard. No need to remember to turn off the lights in the extra bedroom and bath.
As a result, let’s assume the electric is 25% less. Grabbing some quick numbers the average electric bill by month is $110 so we’ll say it’s reasonable to go with that for the smaller home. That makes the larger home electric bill about $138.
Take that $28 difference every month for 15 years and it’s now $5,040.
Let’s add that to our existing tally – $265,040
3. Gas Bill (Heat)
Let’s assume our average gas bill per each month is around $60. This would include heat, oven, and whatever else uses gas in the house. Per year that makes it $720. Let’s compare that to the 25% extra cost it would be for the larger house and it’s $900 per year.
A difference of $180 over 15 years would be an additional $2700.
Let’s add that to the tally – $267,740
Now that you have a larger home you’re going to have a few additional items to fill in the empty space. As a result, over the span of 15 years let’s assume we spent another $5000 and I’m probably being modest.
Let’s add that to the growing tally – $272,740
The largest value, something that we can’t even put a dollar symbol on – is our time. Our freedom to do what we wish.
Now that the yard is double the size we have to spend double the time mowing and managing it. If we don’t, then we’re spending money, which will also add up as we’ve already seen.
Now we need to spend more time cleaning the house. Wouldn’t you rather spend that time with your family or friends? I know I would.
I’m not putting a monetary value on this (and we definitely could), but it’s important to note that having more space is going to take time away from our life. If that extra bathroom starts to have plumbing issues we’ll need to deal with it. We’ll be doing extra cleaning, extra lawn care, and other things we probably never thought of.
What’s the damage?
So the total tally ended up being $272,740.
If we had taken that money and put it into investments (index funds) instead, those investments would have more than doubled through the course of the 15 years.
That $200,000 home purchase difference would have turned into $338,000 after being compounded @3.5% monthly for 15 years. That compound interest adds up. Why do you think Warren Buffett is so rich?
How much would we have saved?
Take those bills and add in the true cost of the additional mortgage and it comes to….DRUMROLL PLEASE!……
As a result of our financial fortitude, we saved around a half a million dollars by making a more reasonable life decision. Many people will never fully come to the realization of this until it’s too late.
To add insult to injury, imagine if we took that half a million that we saved and continued to invest it for another 15 years @7% annually.
~$1.37 Million Dollars, Cha-Ching!
We became a millionaire because we decided downsizing to a smaller home was the right choice. How does that feel?
Well I hope so. You can become a millionaire making 1 big life decision. Now you can go buy that mansion!
Ultimately the choice is yours, but we can walk away from this with the right tools to make the right decision for our financial situation.