“Inflation has been much more stable than people first thought,” says Connor Spiro, chief financial advisor at John Hancock. “I think as we continue to go into 2022 and into 2023, you may see that it will continue for much longer than originally thought.”
Typical budget tips focus on cutting back on everyday discretionary expenses like streaming services or dinner out. Moves like these can be difficult to sustain, and they may not add up to enough savings to make a long-term difference.
If you’re ready for a tougher strategy, it might be time to look at the biggest items in your budget—rent, car payments, or mortgage—to see if it’s time to downsize.
Making a big change to these expenses can lead to big savings—more than enough to maintain a lifestyle that allows for more discretionary spending. However, downsizing requires some big lifestyle changes as well, such as moving to a smaller home or area with space Lower cost of living Or trade in a luxury car for a standard model.
Downsizing challenges now
While in years past, downsizing might have been a no-brainer for people looking to make a big dent in their expenses, rapidly rising interest rates have complicated the calculation. If you booked a lower mortgage rate in the past few years, your monthly payments may be lower on your current property than if you had moved to a less expensive property with a mortgage at current rates.
“In this economic environment, it’s important to think about what you intend to downsize,” says Spiro. “Are you looking to downsize and buy another property, or are you looking to downsize and rent it out? Those are two completely different financial paths.”
If you’re renting, recent inflation can make it difficult to find big savings, unless you move to a less desirable location. Given these possibilities, it’s important to run the numbers if you’re considering downsizing to see exactly how much you can save and whether it’s worth it to you.
Rising car prices also mean that you may be better off keeping an older, higher-end car than trading it in for a newer, lower-priced model. However, if you are nearing the end of your lease, you may be able to make money by buying it out.
Your status matters
There are many factors to consider before making the decision to downsize, including your current and future income and life changes, such as whether you plan to get married or grow your family. Your life stage is also an important consideration.
“If you’re 25 and you pay almost all of your income as rent and you can’t put money into retirement or save in an emergency fund, you might really want to start thinking about whether that rent is more than you can afford,” says Isabelle Barrow, director of financial planning at The Inc. Edelman Financial Engines. “But if you’re a recent retiree sitting on a large piece of property without a very large mortgage, and trying to decide whether to scale back now or wait a few years, there may be other ways to cut your expenses now that make more sense.”
If you shut down most of your fixed expenses before inflation takes over the economy, you may be in a better position than you think. One rule of thumb to keep in mind is that your housing costs should not include more than a third of your take-home pay.
“In many cases, people worry unnecessarily,” Barrow says. “If you have a fixed mortgage, a stable car payment, and good health insurance, even if… Groceries are a little more expensiveyou are not necessarily in a position where you have to restructure your entire life.
While downsizing could be a solution for some people struggling with inflation, the current economic environment means it’s a tougher decision than it was in the past. However, looking closely at all of your expenses—especially those that make up the largest part of your budget—is always a good way to keep your finances on track.