How Buying a Smaller Home Could Make You $2 Million!
The decision on where to live while you pursue your FIRE journey is an important one. There are a lot of things to consider, including affordability, amenities, neighborhood, and design. But there is one thing that you need to think critically about: SPACE.
For those of you looking to buy a new home, you have to really assess how much home you actually need. For those of you who currently live in a large home, let me ask you something: When was the last time you used- and I mean really USED- that spare bedroom or formal living room? Is it typically left empty save for the occasional cleaning session or holiday get-together? If that's the case, you're not alone!
Whether you’re purchasing a new home or whether you’re currently in a home that’s too large, it’s time to talk about smaller homes!
The average American home is $375K, for an average of 2,500 square-feet. So, if we break that down, on average, Americans pay around $150 for 1 square-foot of space.
That’s crazy considering most Americans are DRASTICALLY underutilizing the amount of space in their homes. If we look at the historical trends, we can see that on average, American houses are getting bigger while at the same time family sizes are getting significantly smaller. This means that there is usually a lot of extra space in a home that we’re just not using!
You don’t have to just take my word for it! Researchers at UCLA conducted a study of 32 dual-income families living in the LA area. This study found that 68% of the families’ time was usually spent in areas like the kitchen and family room, typically near the TV.
Let’s play out this study with a 2500 sq ft home. After we allocate around 500 sq ft for bedrooms, we are left with 2000 sq ft of living space, which would include the kitchen, breakfast nook, family room, formal dining room, living room, sitting room/foyer, laundry room and 1 bathroom. Based on the UCLA study, only around 30% of this space is being utilized- so around 600 sq ft.
This makes sense because although houses with more amenities and space are more attractive to home buyers, once we move into a home, we naturally focus more on functionality. This results in families typically spending more time in areas that have high functionality like the kitchen, breakfast nook and family room.
So, if you add the 500 sq ft for the bedrooms with the 600 sq ft that the high-functionality areas make up, we can see that the average American family only really needs 1100 sq ft!
That means that the average American is buying 1400 sq ft of space that’s not needed! But is that really such a big deal? So you’re not using some of your house space, so what? Well, let's look at it in terms of costs and savings.
If we go back to the cost per square-foot of $150 and multiply that by 1400 sq ft that’s not needed, we can see that with all this extra space, the average American ends up actually wasting $210,000 (and that’s not even including interest!!!)! Just take that in for a sec . . . think about all the other ways you could spend that $210,000 (plus interest)!
Considering the average cost of a house is $375,000, and $210,000 of that is going towards space that you don’t even use, the average American only really needs $165,000 to buy a house, without any wasted space!
Sounds simple right? And yet so many people don’t even think about this. So, then this begs the question: WHY are we paying for space that we don’t use and don’t need?
Why Do People Buy Such Large Homes?
1. The Status Argument
Put bluntly, one reason we buy larger homes than we really need, is because we are trying to keep up with the Joneses. Many of us are constantly looking at what we have relative to others and are stuck in a mindset of “more = better.” The thing is, if you’re trying to achieve financial independence, that stuff should be irrelevant to you. Ironically, the amount of focus that we place on appearing wealthy and successful to others will serve as a real obstacle to actually becoming financially independent.
2. The Functionality Argument
People will also claim that they need a larger space for functional reasons. For instance, people will often say that they want a larger space in order to comfortably entertain in their home. But in reality, people typically entertain much less than they originally plan to. While there may be some people who really would use these spaces in their homes enough to make the expense worth it, that is not most people.
Why Should I Buy a Smaller Home or Downsize?
How I look at it is this: Buying a smaller home allows you to waste less space and save more money. The more money you can save, the more money you then have to invest. And the more you invest, the quicker you can achieve financial freedom!
Let's look at another example to solidify this idea. So for a 2,500 sq ft home with a mortgage of $375,000 + taxes and additional charges, the monthly mortgage payment would come out to roughly $2,500/month.
Compare this to a smaller 1,100 sq ft home with a mortgage of $165,000. Including taxes and insurance, the mortgage payment would only be around $1,400/month. So by downsizing to a smaller house, you save $1,000/month, which can then be invested, bringing you closer to your goal of financial independence.
If you invest that $1,000/month instead of dumping it into a house that you probably don’t need, after 30 years with compound interest and a 10% return, that money would grow to 1.9 MILLION DOLLARS.
That number may seem huge, but it's not necessarily out of reach. All you have to do is look at how you utilize the space in your home and decide whether it might serve you to downsize or reevaluate your residential “needs.” Do you really need that spare bedroom or that 2nd garage? Remember people: space is money! Space directly correlates to a cost. And that cost is something you can save to achieve financial independence!
Financial Minimalism - A Strategy to Retire Early (FIRE Movement)
