“Inflation has been much stickier than people originally thought it would be,” said Connor Spiro, a senior financial consultant at John Hancock. “I think as we continue to go through 2022 and even into 2023, you can see that it’s going to stay longer than expected.”
Common budgeting suggestions focus on reducing everyday discretionary expenses such as streaming services or dining out. Such moves 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 more aggressive strategy, it might be time to look at your biggest budget item — your rent, car payment or mortgage — to see if it’s time to cut back.
Making significant changes to these expenses can result in significant savings – more than enough to maintain a lifestyle that allows for more. discretionary spending. That said, downsizing requires some big lifestyle changes as well, such as moving to a smaller house or area lower cost of living or trade in a luxury car for a standard model.
Challenges to Reduce Now
While in years past, downsizing might have been a no-brainer for people looking to save big, rapidly rising interest rates are complicating the calculation. If you locked in a low mortgage rate a few years ago, your monthly payments could be lower on your current property than if you moved to a cheaper property with a mortgage at today’s rate.
“In this economic environment, it’s important to think about what you’re going to reduce,” Spiro said. “Are you looking to downsize and buy another property, or are you looking to downsize and rent? Those are two different financial paths.”
If you are renting, recent inflation can make it difficult to find significant savings, unless you move to a less desirable location. Given such possibilities, it’s important to run the numbers if you’re thinking about downsizing to see exactly how much you could save and whether it’s worth it to you.
Rising car prices also mean that you’re 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 the lease you can make money by buying it.
Your Situation Matters
There are many factors to consider before making the decision to downsize, including your current and future income and life changes, such as if you plan to get married or grow your family. Your stage of life is also an important consideration.
“If you’re 25 years old and pay almost all of your income in rent and can’t put money into retirement or save in an emergency fund, you might need to really think about whether the rent is too much for you to afford,” says Isabel Barrow, director of financial planning at Edelman Financial Machine. “But if you’re a soon-to-be retiree sitting on a large piece of property without a very large mortgage, and you’re trying to decide whether or not to downsize now or wait a few years, there may be other ways to reduce your expenses. Now it makes more sense.”
The Bottom Line
If you locked in most of your fixed expenses before inflation takes hold of the economy, you may be better positioned than you think. One important rule to consider is that your housing costs should not exceed one third of your home loan.
“In many cases people worry unnecessarily,” Barrow said. “If you have a fixed mortgage and a fixed car payment and good health insurance, though groceries are a little more expensiveyou are not necessarily in a position where you have to reorganize your entire life.”
While downsizing may be a solution for some folks struggling with inflation, the current economic environment means it’s a tougher decision than in the past. That said, looking closely at all your expenses – especially those that make up the bulk of your budget – is always a good way to keep your finances on track.