Should You Downsize to Save Money?

As inflation pushes up the price of just about everything, Americans are spending nearly $450 more each month to purchase the same goods and services that they bought a year ago, according to an analysis by Moody’s Analytics.

“Inflation has been a lot stickier than people originally thought it was going to be,” says Connor Spiro, a senior financial consultant at John Hancock. “I think as we continue to go through 2022 and even through 2023, you may see that it’s going to stick around longer than originally thought.”

Typical budgeting advice focuses on cutting back on everyday discretionary expenses like streaming services or dinners out. Such moves may 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 may be time to look at your biggest budget items — your rent, car payments or mortgage — to see if it’s time to downsize.

The Potential Savings

Americans spent an average of $22,624 on housing and $10,961 on transportation last year, according to the Bureau of Labor Statistics. Those two items comprised more than half of their total annual spending.

Making a significant change to these expenses could yield 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 home or an area with a lower cost of living or trading in a luxury car for a standard model.

Challenges to Downsizing Now

While in years past, downsizing may have been a no-brainer for folks looking to make a big dent in their expenses, rapidly rising interest rates have complicated the calculation. If you locked in a low mortgage rate in the last few years, your monthly payment may be lower on your current property than if you moved to a less expensive property with a mortgage at current rates.

[READ: How to Take Advantage of Rising Interest Rates.]

“In this economic environment, it’s important to think about what you’re going to downsize to,” Spiro says. “Are you looking to downsize and purchase another property, or are you looking to downsize and rent? Those are two completely different financial pathways.”

If you’re renting, recent inflation may 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 of downsizing to see exactly how much you could 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 a lease you might be able to make money by buying it out.

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’re planning to get married or grow your family. Your life stage is also an important consideration.

“If you’re 25 and paying 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 start thinking about whether that rent is too much for you to afford,” says Isabel Barrow, director of financial planning at Edelman Financial Engines. “But if you’re a recent retiree sitting on a big piece of property without a very big mortgage, and you’re trying to decide whether or not to downsize now or wait a few years, there might be other ways to cut your expenses right now that make more sense.”

[Read: Can You Negotiate Rent?]

The Bottom Line

If you locked in most of your fixed expenses before inflation took hold of the economy, you may be better positioned than you think. One rule of thumb to consider is that your housing costs shouldn’t comprise more than about a third of your take-home pay.

“In many cases people are worried unnecessarily,” Barrow says. “If you have a fixed mortgage and a fixed car payment and good health insurance, even if groceries are a little more expensive, you’re not necessarily in a position where you have to restructure your entire life.”

While downsizing can 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 of your expenses — especially those that make up the bulk of your budget — is always a good way to keep your finances on track.

More from U.S. News

10 Things to Watch When Interest Rates Go Up

How to Save Money: 10 Expert-Backed Ways

Personal Finance Ratios to Know at All Times

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