So many Americans have houses or pay rent that they really can’t afford. It’s not their fault. Americans really don’t know when to downsize your home. Sometimes downsizing isn’t an option for these Americans.
Research by Harvard University shows that over 40 million Americans can’t afford their own home.
Additionally, an alarming 40% of Americans struggle to pay for their housing and food.
But even if you don’t fall in one of these demographics, statistically, you could be saving more on housing. Like way more.
Is Downsizing Really Worth It?
Sure, we humans love bigger living spaces.
You have more room for activities. There are rooms dedicated for a single purpose. You have more storage space for items. And bigger homes tend to look more lavish as well.
But bigger living spaces cause for bigger costs.
Your rent/mortgage, utilities, maintenance, upkeep, and insurance all cost more.
You start to wonder, “Is that extra bathroom really worth it?” And that extra room that never gets used, literally never gets used.
Why pay more for that?
Advantages to Downsizing Your Home
Heating and Cooling
Not touching the thermostat will not help you much here!
Whenever your AC/heat is on, that air fills your entire house. There are measures you can take to prevent this, typically it doesn’t help much.
Larger homes are more tedious and expensive to insulate. That air you pay for is literally escaping right out your front door. This is even more the case with older homes.
If you pay rent, you most likely have the convenience of somebody else fixing maintenance issues. Consider yourself lucky.
For everyone else, simply put, larger homes mean larger problems. These problems are typically more expensive to fix too.
Take this into account when considering why and when to downsize your home!
The more expensive and/or large your home is, the more expensive insurance payments are. There is a few ways to make your insurance cheaper though. For starters, make sure you check out different insurance companies when thinking about when to downsize your home. Each insurance company will charge you a different price.
Another way you can lower the cost of homeowners insurance is moving somewhere else. This may not be the most feasible option, given your individual circumstances. On the contrary, you could be paying thousands of dollars more just based on where you live.
For example, Florida residents pay almost 300% more on homeowners insurance than Oregon residents do.
Rent and Mortgage
Lower rent and mortgage payments arguably will save you the most money when downsizing your home. Just knocking off a hundred dollars a month on rent will save you over $1,000 a year. And I know just how valuable $1,000 is to some people.
Why Your Housing Budget Shouldn’t Be 30%
As a general rule of thumb, experts have been recommending you spend 30% on your rent and mortgage payments. I do not recommend this!
Let me explain why.
This rule was first seen from the United States Housing Act of 1937. 30% was the rate the government recommended a household could not exceed before the household became “burdened”.
And this was during the Great Depression!
The average cost of a new house in 1937 was $4,100 and the average income in 1937 was $1,780.00. So the average cost of a new house in 1937 was about 230% the average annual income.
The average cost of a new house in 2018 was around $380,000 and the average income in 2018 was around $62,000. This means that the average cost for a new house in 2018 was about 613% more than the average annual income!
Why does this rule still apply when the cost of housing to income is 2.67 times more than when it was made!
One reason is because of the 50/30/20 rule and how common it is today. My friend, DebtandCupcakes, can tell you just why a 50/30/20 budget is stealing your money.
When to Downsize Your Home
There are generally 4 circumstances you should know when to downsize your home.
You are paying too much
You aren’t saving money
Going through financial struggles
About to go through financial struggles
You are paying too much
There’s a good chance you’re paying too much for your home. Like 50% likely.
That’s right, 50% of renters were paying more than 30% on their home. These ‘cost-burdened’ individuals are more likely to be found in big cities like Miami (highest), Philadelphia, Orlando, Los Angeles, and New York.
Even more likely to fall into the category of the cost burdened were African Americans. In 2015, African Americans were 12% more likely to fall into this category than white Americans.
This may seem like minuscule difference, but it’s not. Those are millions of Americans we are talking about.
But I stress to you this. If you are any bit unsure about whether you fall into this 50% demographic, find out now.
Downsizing your home might just be the answer for you!
You Aren’t Saving Any Money
If you are not saving any money despite your best efforts at being frugal, there’s likely an issue here.
More times than not, people think that they can save money by just being more frugal in what they purchase.
That’s not always the case.
Majority of American’s have to adjust their assets and expenditures in order to be financially dependent. And one of the things that needs adjusting is rent and mortgage.
Downsizing Over Financial Struggles
Every day, houses are taken from Americans due to financial struggles. These people are now a part of the growing homeless demographic in this country.
We have to take a stand to this by not letting ourselves get to this point.
If you are or think you may encounter financial problems is when to downsize your home.
Do whatever you can to spend at the least you can!
Recommendations for Downsizing
Myself and many others think that the 30% rule is a little overboard.
The fact of the matter is that times are different.
Inflation costs for housing have risen tremendously despite the average income trending the same.
My suggestion is to spend around 20% on your income on rent and housing costs. There should be some leeway of around 2-3%. If you are spending only 23% of your income on housing, you are doing better than a ton of people already.
One couple claimed to have saved $50,000 in one year by spending only 15% of their income on housing!
Just remember that everybody’s financial situation is different. If you don’t meet the curve, don’t worry! This isn’t a fact you are doing something wrong.
We all just need to keep downsizing in our minds.