Why Downsizing To A Smaller Home Can Make You Happier

As the current lease on our rented condo rolls towards the end of the contracted dates, some of our friends are asking us, once again, when we plan to stop renting and buy our next home. When I share my findings that renting is still cheaper than owning in our town, some suggest we “should” move into a larger home. When I ask, “Why should we move to a larger home?”, responses usually include a quick shrug of the shoulders, a time-stalling “uhhhh,” then perhaps something like “your daughter will need more space as she gets older,” or “don’t you want to grow a larger garden?”

I’ve learned that everything you own owns you. Several years ago, we chose to free ourselves from the handcuffs of STUFF. We downsized our lifestyle almost 50% by moving from a 2450 square foot home into a condo with about half as much floor space. In doing so, our housing and utility bills dropped dramatically. We sold half of our belongings and made over $13,000 in cash. Decreasing our monthly expenses caused our net worth to grow exponentially.

More importantly, our minds are more at peace, and we live a more culturally rich life. We have more time and energy to consume experiences rather than things. We play more with our child, talk more with each other, and enjoy more of life.

Less space gives us more of everything we value most.

According to David Wann, bestselling author of Affluenza: The All-Consuming Epidemic, many of today’s three-car garages occupy 900 square feet, which is about the average size an entire home was during the 1950’s. Today, most people use the extra garage space to store things they own but seldom use.

The number of “very happy” people peaked in 1957, and has remained fairly stable or declined ever since. Even though we consume twice as much as we did in the 1950s, people were just as happy when they had less! 86% of Americans who voluntarily cut back their consumption feel happier as a result.

This recession is putting the squeeze on many families. Perhaps it’s time to consider downsizing your biggest budget buster– your housing expense.

Renting is NOT throwing your money away

Whether you pay mortgage payments to the bank or rent payments to your landlord, you are paying for SHELTER. Contrary to what most people used to believe (but now we know better, right?), homes do NOT always go up in value. Your home is your shelter — not an investment. Often it is less expensive to rent a home than to buy one. Consider renting and investing your down payment savings and your monthly savings into income-producing real estate, businesses, stocks and bonds, or your education instead. You will often come out ahead financially in the long run.

And you might find yourself happier for it, too.

Plan A and Plan B

In response to my recent post, Will your parents’ financial decisions leave you holding the bag?, Steve wrote,

I agree with the premise that a person’s retirement should be taken care of before saving for a child’s education, but saving enough for one’s own future seems to be a moving target.

When does a person ‘have enough for retirement’? I am 27, with a 6 month old baby. Besides $15,000 in student loans (@ 2.6% interest rate), and a mortgage, my wife and I are debt free. We contribute to our 401k’s up to the match, and we contribute $100 a month to a Roth IRA. Since we are so young, we feel secure in our ability to save enough for retirement, so we also contribute to a 529 plan for our child.

Even though we feel secure, anything could happen at any time. Maybe one of us gets injured, and we can not work anymore. Maybe this happens to both of us. We never know, therefore I am inclined to save more. But when is it enough? If I max out my 401k, is that enough? I am 27…I may have 60 years of life left…$15,000 will not be enough if something happens next year.

I struggle with the concept of taking care of myself first, then take care of others, when there exists so many potentially negative unknowns. If I am not saving for my daughter’s education…should I not be giving money to charity? Take care myself first, right???

What is the sweet spot for annual saving for yourself, vs saving/giving to others?

Yes, the future holds many unknowns, making it difficult to be completely accurate with long-term financial planning. This deep recession, for instance, has all but destroyed many well-laid plans. The key, however, is to plan for the best while preparing for the worst. In other words, create Plan A and Plan B.

Plan A is what you hope to have happen. You hope that you’ll remain healthy and able-bodied, fully employed, happily married, able to donate money to charity, and able to save for your child’s future as well as your own.

Are you saving enough? It all depends on how much you spend now and what you anticipate spending in the future. Plug your financial considerations and planned life events into a Lifetime Financial Planner software or an Excel spreadsheet and tweak it until the numbers work.

Plan B considers what could happen; the what-ifs. You, your wife, or your child might become ill or disabled. Your marriage might not last and your assets and income could be divided in half. You might join the growing ranks of the unemployed. You might hurt someone in a car accident, get sued and lose all of your savings and everything you own.

How can you protect your finances from catastrophic incident? Buy high-deductible insurance policies, namely disability insurance, term life insurance, personal liability insurance, health insurance. Maintain and improve your job skills. Run a sideline business from your home. Consult with an attorney for additional “what-if” planning.

Additionally, save as much as you can today while you are young. Use your youth to exploit the power of compounding growth. And stay far, far, far away from consumer debt so that if something bad were to happen, you and your family could afford to live on little income.

Where does charity come into play? This is a very personal choice. Until I knew that our financial future was firmly on solid ground, I chose to donate my time rather than my money. I’ve always served as a volunteer in one way or another and not only does this help others, but it improves my set of skills, introduces me to a network of new people, and makes me feel great. This crazy busy world needs more of the gift of time from volunteers.

Should you contribute to your child’s 529 Plan? Most of us have heard a flight attendant recite these words as part of their safety spiel prior to departure:  “Please secure your own oxygen mask prior to assisting children or others”…

5 Things The Marshmallow Test Can Teach You About Money Management

Tina is an intellectually-gifted bartender who struggles to pay her bills. Tina serves martinis to Susan. Susan is no more intelligent than Tina, but Susan is a millionaire. If not intelligence, then what explains the difference between Susan’s wealth and Tina’s financial lack? And what do sticky, gooey marshmallows have to do with it?

In the 1960s, Stanford University psychology researcher Walter Mischel conducted a longitudinal study. Mischel placed marshmallows in front of hungry four-year-old children. He told them they could have one marshmallow now, or if they could wait several minutes, they could have two. Some children quickly grabbed the marshmallow and ate it. Others waited.

Mischel followed the group and found that 14 years later, the children who eagerly devoured the first marshmallow weren’t faring as well as the children who had waited for two marshmallows. Years later, the “grabbers” suffered low self-esteem. Teachers and parents viewed these kids as stubborn, prone to envy and easily frustrated. The “wait-for-two-fers” possessed better coping skills; were more socially competent, optimistic, self-assertive, dependable and trustworthy; and scored about 210 points higher on their SATs.

Perhaps the key difference between financial lack and wealth is not merely hard work or superior intelligence, but the ability to delay gratification.

What can the Marshmallow Test teach you about personal finance?

1. Avoid looking at marshmallows when you’re hungry

During the Marshmallow Test, some successful kids reportedly covered their eyes so they couldn’t see the tempting treat. My take away tip: Avoid temptation– stay away from the mall when you’re bored.

2. Save a marshmallow today and you’ll eat well tomorrow

The children who waited for the second marshmallow were rewarded with a 100% return on their first marshmallow. My take away tip: Unleash the power of compounding and you’ll be wealthy when you retire.

3. Drooling over s’mores? Wipe your chin and wait for the hot goo to cool– because you don’t want to burn your mouth!

One child reportedly licked the table around the marshmallow while waiting for the experimenter to return. My take away tip: Imagine having what you want, but wait until the time is right to consume. If you shop, wait until you have cash in hand to buy– don’t get burned by finance charges and credit card debt!

4. Stick your marshmallow into the fire, keep your eye on it and remove when perfectly browned– before it bursts into flames.

Some successful children watched their marshmallow to prevent others from snatching it, waited patiently until the researcher returned with the expected second marshmallow, then enjoyed their reward– without begging greedily for more. My take away tip: Invest in the market, monitor your investment and sell your shares when they reach your target price– before the bubble pops.

5. Give your children mini-marshmallows and teach them how to make rice crispy bars.

Some kids handled the wait by turning their back to the marshmallow, singing songs or talking to themselves. My take away tip: With practice, kids can learn how to delay gratification. Provide opportunities for your child to develop strategies. Give your children an allowance and teach them money management skills.