In the last 18 months we’ve reduced our monthly housing expenses by more than 80% and cut our financial independence timeline by almost 7 years. That sounds unbelievable, but it’s true. Contrary to what you might expect, our life has improved dramatically despite downsizing and leaving our upscale neighborhood.
Since 2019, we’ve been on a journey to make the “just right’ housing decision. I’ve written about this throughout the process, but now it’s time to talk numbers and the result. Did 18 months of change and choice lead to actual financial progress? The receipts are in.
I want to be clear up front – I’m not sharing magical financial tricks, house hacks, or real estate secrets. We had stable incomes, saleable assets (despite the definition some use…), and the ability to move. This isn’t financial wizardry.
Instead, it’s a story of fighting lifestyle inflation, solid decision-making, and intentional action to prioritize what is important. It’s our story, and it changed everything for us. I won’t make that ridiculous claim that “anyone can do it.” Your conditions might be different, but maybe there is something in our story for you.
Table of contents
- Housing Costs
- Starting Conditions
- The Decision
- The Moves
- The Results – Reduced Monthly Housing Expenses
- What’s Next?
Why is reducing housing expenses so important? Housing represents a huge portion of spending for most families. There is the oft-referenced advice that housing should be no more than 30% of our expenses.
30% is a lot. Yet, Americans routinely exceed that. Some estimates place housing costs nearing 40% on average. Check out this expenditure analysis by quintile:
If you can reduce your largest monthly expense, it frees money to save, invest, or spend on other priorities.
Unfortunately, many do the opposite and move into ever more expensive housing as their income grows. We certainly did.
Then we made a different choice. Let’s get into it.
We started our journey to financial independence just over 4 years ago. For the first two years, we didn’t even consider giving up our expensive house. We liked where we lived, and it was built into our financial independence plans.
We’d moved into the house after 10 years of marriage, and just over ten years in our careers. We could “afford” it, but it was expensive, large, and in a high-tax area. Not good characteristics of a strong financial choice.
Still, we built our initial FI plans assuming we were going to keep the house. We tracked backward from our initial financial independence target date and determined what we’d have to pay extra each month to have a paid off house. ($1300..yikes!)
Here’s what our monthly housing expenses looked like at the time:
|Utilities* (12 month avg)||$418|
|Extra to Mortgage:||$1325|
*Utilities include electricity, gas, water, sewer, garbage, internet
Ugh. Yep, that’s right – we were spending almost $4700 a month on housing expenses. That’s a total of nearly $60,000 each year just for housing. Even had we dropped the extra mortgage pay down, we were still looking at $3300+ and would have had to carry that into retirement.
You’ll also note that it doesn’t include anything for upkeep or maintenance. We weren’t tracking or saving for those expenses, instead just treating them as surprise costs. Like I said…we weren’t that sharp.
The Rental (Our First Home)
Back in 2010, we’d moved out of our first house to move into that large house costing us $4700 a month. When we did, we converted our first home into a rental.
We made that choice not because we understood the financial benefits or had run the numbers, but because in 2010 we were near break-even on it after the 2008 crash. It was easier to convert it to a rental rather than try to sell. It wasn’t a great financial decision, and for the first few years it was even slightly cash-flow negative.
It ended up providing monthly cash-flow after a few years, but we were using that to pay down the mortgage on the rental faster. Also, by the time we made some needed capital improvements (roof) and then rehabbed it from a bad renter experience, we never saw extra money from it. The primary benefit was the renters paying down the mortgage over a ten-year period.
So, we’ll count the rental as a neutral housing cost at the start. It’s important to name it as an asset, because it’s part of this journey.
Remember at the beginning, when I said that I never say “I did it, anyone can!” That’s because starting conditions are so different.
Yes, we were spending stupid amounts of money on housing each month. However, it’s also important to acknowledge two fortunate things:
- We bought our first house (the rental) back in 2002 for $185,000. In our area, starter homes are now closer to $400,000. We’ve refinanced to improve interest rate, but had never increased our principal while doing so. We’d also had renters paying down our mortgage for most of a decade.
- We bought the large stupid-expensive house in 2010 at what turned out to be the bottom of our regional market. Now, the fact that housing prices were down 40% was part of the reason we were willing to spend on the stupid-expensive house, but still.
So yeah, we had two real estate assets that had appreciated from relative lows, were in our highest earning years, and our first home had been paid down for 18 years. Now, these weren’t gifts and we’d paid for it all ourselves, but timing matters. In our case, our timing was fortunate.
Important to name. People can make the same choices we made – but they are likely not starting with two houses.
We had a strong financial plan, a clear timeline, and high confidence we’d reach financial independence eventually despite the housing costs. For several years, we worked towards that goal and loved it.
Then, we took a road trip. On that trip, we talked about what we really valued in life and how we wanted to live in retirement. None of it included a large house that we’d spend too much on when home, and worry about leaving for long periods of time when we traveled. That moment opened up the possibility of selling.
We ran some quick numbers and realized how much we could potentially reduce our monthly costs in the present and our financial needs in the future. Downsizing the house would cut our financial independence timeline by years. It was suddenly possible.
I’ve written a series of posts about the things we went through to get here. I’ll summarize rather than rehashing the details so I can focus on the numbers and results. (Follow the links if you want to dig into details.)
First, we wanted to be sure we wouldn’t regret the move. We made a list of pros and cons of downsizing. It supported our initial thinking and we decided we’d go for it.
Then, in our usual over-the-top way, we moved to sell quickly and did so. We got a good price for our house and were able to cash out six-figures in equity. (This comes into play later.)
While looking for the right smaller home, we decided to rent a townhouse to see if it would work for our lifestyle. This was a good move for two reasons – first, we hadn’t found another home we liked, yet. And second – it turned out we didn’t like a few things about living in the townhome. The size was right, but shared walls and no outdoor space wasn’t.
Still, moving into that rental townhome immediately cut our monthly housing expenses in half. (rental + utilities + renter’s insurance.)
Moving Into The Rental
Then, in January 2020 we had an opportunity. Our original house that we’d been renting out was due to have a vacancy. We’d never seriously considered moving back. But, after 6 months of living in a smaller space we thought it might work.
Moving back into a rental as the owner also provided other financial advantages. Namely – the ability to recapture some capital gains deduction if we decided to sell. We also had repairs to do that I could do on my own over time if we lived in it.
We were clear on what we wanted and needed and we believed it could fit with a bit of work.
We decided to move back. At the same time, we chose to use some of the cash we’d pulled out from selling the larger house to kill off the mortgage on the rental. Mortgage freedom!
No mortgage. Our monthly housing costs were only insurance, property taxes, utilities, and a maintenance/upgrade fund we started.
The Results – Reduced Monthly Housing Expenses
That’s an incredible amount of change in 18 months. Were we fools? Maybe.
Did it work out? Definitely. Let’s look.
I’ve written before about the unexpected benefits of downsizing from the larger home. It was a clear win for so many reasons.
Mortgage freedom has been amazing in helping me push back against my financial insecurity mindset. It’s also been incredible during the pandemic to know that, no matter what, we have our house.
We also may have dodged some unforeseen circumstances by choosing to stop being landlords. We would have absolutely supported any tenants who needed to take a financial break during the pandemic. It would have added uncertainty and stress for us, too.
All in all, it’s been a win even from a non-money side. But, let’s look at the actual numbers:
We went from a large house, with a big mortgage, in a high tax area to a smaller house, no mortgage, and lower taxes. It’s cheaper on every front. We now contribute monthly to a sinking fund for taxes and maintenance, but have no mortgage at all.
At the start of this story, we were spending $4700/month on housing. Let’s look at now:
|Starting||Current||Decrease||% of Starting|
*Utilities include electricity, gas, water, sewer, garbage, internet
We saved across every area. Here’s a quick breakdown:
The mortgage savings came from two choices.
First, simply by downsizing we reduced our monthly mortgage cost. It eliminated the need for the extra $1325 payment. Had we continued to pay on the existing mortgage in the former rental, our mortgage payment would have also dropped from $2022 monthly to $1300 monthly.
So, simply moving back into the smaller place freed up over $2100. But then. . .
We used the equity from the sale of our too-large home to pay the remaining 9 years on the rental mortgage. That eliminated the $1300 monthly mortgage payment entirely.
This savings was small, but we reduced our insurance costs by 24% moving from the larger house to the smaller lower-value house.
By moving from the central metro area to a city on the outer edge we significantly reduced our property taxes. While some of this is the result of a lower house value, the majority is the result of moving to a lower-tax municipality. We pay ~$6000/year less now. That’s a savings of over 60% on taxes!
It’s important to note that this expense persists into retirement – so it matters a lot!
The utility reduction of 33% is the result of two factors.
First, our current house is smaller and requires less energy to light, heat and cool. We’ll pay attention to how this plays out over a full year, since we’ve only had the summer months so far. However, we know from living here previously that natural gas (heating) and electricity (cooling) tend to balance out between seasons.
Second, water costs significantly less here. Our water/sewer charges are about 50% less, despite similar usage.
Less environmental impact (one of the unexpected benefits of downsizing) and financial savings? Win.
This looks like a cost increase, but is instead an improvement in financial tracking. In the previous home, we didn’t keep a separate fund and instead simply dealt with costs as they arose. If they were significant, we dipped into our emergency fund. Now, with our better financial approach we have a designated fund to deal with upgrades and eventually larger replacement costs.
$908 / month is 19% of our original monthly housing expenses! It’s not all mortgage savings either. We’ve reduced the ongoing costs of taxes, insurance, and utilities. I’m confident upkeep is less too, even though we weren’t tracking it.
If you don’t consider including the extra mortgage payment valid, we can remove that quickly. $908 / ($4683-1325) = 27%. It’s still a 73% reduction!
Quite the difference. And yes, I acknowledge the opportunity cost of giving up the rental and paying off the mortgage over investing. We may not have fully optimized, but it’s still a solid decision.
The left-over equity we cashed out from selling the larger home went straight to investments and is earning nicely.
The headline: we reduced our monthly housing expenses by 81%!
Financial Independence Timeline
I said at the start our original financial independence timeline was 12 years. That was with a beginner’s understanding and very loose goals. Over time, we understood our money better. We discovered and took advantage of new investing options like the 457b, reduced expenses in other areas, and got a lot clearer about our needs. Those steps cut at least 2 years from our timeline.
What did reducing our monthly housing expenses by 80% do? Try 5 years.
How you ask?
Well, if you go from $4700 per month in housing expenses down to $900 you realize two sets of benefits:
Lower Future Expenses
We’d originally planned to hold the larger house in retirement, but now need a full $45,000 a year less.
Using the quick math of the 4% rule, that means we’ve reduced our financial independence number by more than a million dollars. That’s amazing!
(Alternatively, we could have kept paying the extra amount and had the mortgage disappear after 12 years. The other expenses would have remained at the inflated level.)
More Money For Savings Now
We’ve freed up that same amount to pour into investments. We’re putting in an additional $3700 per month into a taxable brokerage. That adds up quickly, and provides extra capital to compound.
The result? Slashing our financial independence timeline by 5 years.
Housing expenses matter. A lot.
It’s been a crazy 18 months. The results speak for themselves. We’re happier than ever, have more security and control of our lives than before. We see financial independence in the near future and will be able to make intentional choices with our time.
For now, we’re staying in our current place for at least another 21 months. That’s how much longer until we regain the capital gains benefits of selling a primary residence. We’re settling in well here, so it may be much longer than that. Who knows?
If we decide to move, our plan is to either sell and buy another place for the same price or less. We could also choose to run it as a rental again (this time cash flowing) and use the rent generated to offset our next housing choice. Right now, it’s unlikely simply because housing values are much higher than rent here.
Either way, future housing will be cost neutral or better. We’ve defined our needs and are comfortable in this range, and maybe even a little less.
We reduced our monthly housing costs by 80% in 18 months. Our quality of life improved.
It wasn’t financial wizardry, but instead a case of getting our priorities in order. The results feel magical though.