September 12, 2016

Get To Financial Independence Quicker With a Smaller House

Living in a smaller house might be one of your most important decisions on your way to financial independence (FI: I like to define financial independence as being wealthy enough so you can choose to work or not). Rest assured, I’m not talking about those tiny houses that seemed to be popping all over. Rather, I think you should own a regular house, only a tad smaller. As we will see further down, downsizing only 20% could get you a long way towards FI.  

Not only will it reduce your mortgage payments but also many other related expenses. Hence, a more modest home will automatically result in less property taxes, less insurance, less maintenance/repairs and also a much more affordable utility bill... Ultimately, it may also save you a lot of time.

A little more than 15 years ago, our frugal nature enticed us to buy a smaller house and we now realize all the benefits of that decision. One of the most interesting consequences will be that we will get to financial independence much faster.

I decided to do some digging on this subject after I played golf with Alvin, a distant acquaintance. Alvin inherited some money and a fancy house in a rich neighborhood from his uncle 2 years ago.

Even a Free House Can Be a Burden

I was flabbergasted when I learned about his property taxes bill. Without telling us the exact figures, he made it clear it amounted to more than triple our annual mortgage payments (including taxes).

The more he talked, the more I was glad about our small cheap but cozy house.

At first, his wife Lucy was literally in love with all those very nice vivid flowers surrounding their new mansion; yet she now realizes that it demands a lot of care and attention.

In the same matter, his two kids really like all that room to play but rapidly lost their initial enthusiasm when they had to deal with the young snog neighbors always bragging about their latest toy or their family’s so-called remarkable feats.  

Alvin is a nice humble guy that really seemed overwhelmed by the burden, not only financial, imposed from what initially looked like an amazing gift. His family simply can’t keep up with that lifestyle and he can’t wait to get rid of all the inherited troubles from his «free» house.

As the two mandatory years registered on the will are almost over, they will be very happy to part form it. But they have a new problem now: their huge house is very hard to sell as there is no market for it!

How Much Could a Smaller House Save You?

In 2016, the average Canadian house value went over the 500 K$ mark1. Let’s see how much could potentially be saved by settling for a smaller house with some quick number crunching.

You can estimate right away that a 20% downsizing would result in a monthly mortgage payment reduced by about 500$2. Also saving you a lot of interests.

On top of it, recurring expenses would also diminish by around 300$3 for a grand total of 800$. Imagine accumulating an additional 800$ a month…it could really amount to a big chunk if invested wisely!

In fact, just that extra contribution would grow to more than 500 K$ over 25 years at 6% and over 800K$ at 9%. If you choose that path, it could get you to financial independence a lot sooner!

Remaining disciplined and avoiding spending all that extra cash may be the only catch. Yet it can be possible as many of us are already systematically doing it.  

2. 100 000$ at a very conservative rate of 3.5% over 25 years.
3. Assuming property taxes of 6000$/year going down to 4800$, maintenance and repairs at a conservative rate of 1.8% and utility/insurance of 350$/month reduced to 300$.

In our neck of the woods, house values are a little lower (average a little more than 300 K$).

The same basic calculations would result is saving about 480$ a month. Still a pretty hefty addition to your nest egg considering the cost of living in the Montreal area is quite cheaper.

Even that modest amount would accumulate to more than 300 K$ at 6% and about 500 K$ at 9% over a 25-year period.

Now, envision downsizing by 25% or 30%...this could be an easy way and a real key to getting to retirement very early!

Another possibility would be to get rid of your mortgage faster. After market rallies, we often opt to make mortgage principal payments instead of investing in stocks. But pretty soon, we won’t be able to use this option anymore as we will be mortgage free.

In the end, living in a smaller house will give you leeway and different options will be available to better manage and improve your overall financial situation.

That being say, can a big house be a better long term investment? Despite money put in your house would be quite safe and should built up to a certain extent, we think that in the long run, your net worth will probably be better off with additional money invested in quality dividend stocks.

It’s a good idea to have some of your assets in real estate but too much exposure will likely limit their growth.

And even if you plan to sell it later, you will get used to the higher standard of living in a bigger house and probably will lack the will to downsize and won’t sell it afterwards.

Lack of storage space is perhaps the most nagging inconvenient of a small house. It’s finally a good thing because it forced you to avoid wasting resources and buying unnecessary stuff.

Many Good Reasons to Live in a Smaller House

As many of you have already noticed, the benefits of a smaller house aren’t limited to the monetary aspect of it.

On top of reducing time before you get to financial independence, a smaller house will also provide you more time for more interesting stuff like quality moments with friends and family as you will waste less effort on boring house cleaning chores and the ever recurring lawn mowing. As they say, the neighbour's grass is always greener and boy do mine sure grows faster!

All things considered, our smaller house is really in line with our Aggressive Saving Objectives and reasonable spending habits.

Hope this post and our modest-home story can inspire some of you!

Feel free to take a moment to share your thoughts on the matter.

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