31 Days to Financial Independence (Day 8): Trimming Your Spending – Housing

“31 Days to Financial Independence” is an ongoing series that appears every Thursday on The Simple Dollar. You might want to start this series from the beginning!

During the first week of this series, we established a strong foundation for personal finance success. True personal finance success revolves around deeply understanding why you’re making those decisions, because without that central motivating why, pretty much everyone is going to make decisions that aren’t financially smart.

The reason is quite simple: unless you have a strong grasp on the long term direction of your life and what you really want out of it, it’s going to be incredibly hard for that long term direction to win out over the desire for shorter-term pleasure. You’ve got to know where you’re headed and that direction has to drive right at the center of your life.

Part of that process has revolved around differentiating between what I call the “shallows” and the “deep” in our lives. To put it simply, the “deep” areas of our life are the small handful of areas that are most meaningful to us. Those are the areas where we should be devoting time and energy and passion and, yes, money. The “shallows” are all of the other areas. Those are the areas where we should be spending the absolute minimum amount of time and energy and passion and money.

To summarize, you should be devoting all of your time and energy and passion and, yes, money to the “deep” areas of your life and to the areas that directly support those “deep” areas (like your job performance). The other areas of your life should be as shallow as possible.

The reality is that most people don’t do this. They don’t go “shallow” in the less important areas of their life, especially in terms of spending. They spend money on things that are almost purely forgettable for a variety of reasons – marketing, keeping up with the Joneses, a sense that this should be important, and so on.

Quite often, when you look close at your spending choices and really think about those individual purchases for a while, many of them begin to look like missteps. They don’t provide any real lasting joy (although you might want to believe it does because you invested the money in something expensive). They also take money away from the “deep” areas in your life.

For the next several entries in this series, we’re going to look at each area in the typical American budget and spend some time looking at whether or not many common individual purchases and expenses in those areas can be cut back or eliminated. There are two key things to remember here.

First, if cutting a particular expense causes significant distress in your life, don’t cut that expense. Many, many people equate financial cutbacks to some kind of life distress where they’re heading for misery. The reason for that is that people visualize financial cuts as being cutbacks on the handful of things they care most about. Don’t cut those things! The truth is that you spend a ton of money each month on things you really don’t care that much about, and your goal should be to trim those expenses first.

Having said that, it’s always worth spending time reflecting on particular expenses and asking whether they’re really that big of a deal. We often fall into psychological traps when we casually think about our own purchases. For instance, it’s extremely common to believe that if you’ve already sunk a bunch of money into something, you must like it and value it. People do this all the time with things like cars. Instead, you should forget the past and ask yourself whether that thing is giving you enough value going forward to match what you could get if you sell it (and also get rid of any ongoing expenses). We’re going to touch on that kind of fallacy (and many others) quite often in the next several entries in this series.

Before we begin, let’s take a quick look at the average annual American family budget. It looks something like this:

Housing – $10,080
Transportation – $9,004
Taxes – $7,432
Utilities – $7,068
Food – $6,602
Insurance (including things like pensions) – $5,528
Debt Payments – $5,252
Healthcare – $3,631
Entertainment – $2,564
Cash Contributions – $1,834
Apparel and Services – $1,604
Education – $1,138
Vices – $775
Miscellaneous – $664
Personal Care – $608
TOTAL – $63,784

We’re going to focus on the areas where you have a great deal of control right now over that budget line, and we’re going to move from the top to the bottom over the next several entries. That means that today we’re going to talk about housing.

According to the Community Preference Survey of the National Association of Realtors, if you’re an average American reading this article right now, there’s a 70% chance you live in a single family home and a 17% chance you live in an apartment (the remaining 13% live in a wide variety of situations, including multi-family homes or without a permanent residence).

This means that at least 87% of you live in a situation where you’ve either purchased a place to live for yourself or you’re paying rent on a place to live. Many of the people who have purchased a home had to borrow money to do so, meaning they’re paying a monthly mortgage bill that comes with interest.

To sum it up, most people have some sort of monthly housing payment, whether it’s rent on an apartment or payments on a home or something else entirely. Often, those payments add up to a significant portion of one’s annual budget – about 17%, on average, and that includes people who have paid off their homes or live in other situations. Exclude them and housing quickly jumps to over 20% of a person’s annual spending.

But what can you really do about it? How can an average person actually cut their spending in any noteworthy way? It’s time to take a serious look at housing costs and what you can realistically do to cut those costs.

Exercise #8 – Re-evaluating Your Housing Spending

No matter where you live, there are a number of steps you can take to trim your housing expenses. What follows are some real suggestions on how to trim those housing costs. As was discussed above, it is absolutely vital that you don’t just reflexively discard ideas because they initially seem to cut back on something you deeply value. Is it really something you deeply value, or is that just an easy response? The best route to financial independence is through introspection – thinking about what you truly value and then cutting the lesser things.

Can you live in a different place in the same area? Unless you live in the place with the lowest housing costs within, say, half an hour of where you live and you don’t have a commute, this question applies to you. There’s almost always a town or a neighborhood that’s less expensive than the one you currently live in. Why aren’t you living there?

Don’t get me wrong, there are real reasons for staying put. It can definitely be worth it to live in a place with a lower crime rate, but you should make sure that the difference in the crime rate is actually worth the difference in cost. The same thing is true for the quality of public education – yes, some districts are better than others, but you’re paying for that difference. Is there really a big difference between one district than another?

The answer to those questions doesn’t come from hearsay or casual chats with friends. It comes from actual data on things like crime rates, school quality and so on. Do the homework and see how the various areas compare. What you should be looking for is the best “bang for the buck” area around you in terms of keeping housing costs and commuting costs low while still having access to decent quality services.

Can you move to another area? This often has to do with career choices. Many people live where they do because of their career. They found a job in a particular area and moved there because of the job.

The thing is, if you’re a good performer at work, you can often find similar work in other areas, either with the same organization or with a different one. This enables you to start considering the cost of housing in other areas of the country, perhaps in places with lower housing costs, but also with things like a shorter or simpler commute or with proximity to family (which is a big money saver if you have a good relationship).

Where else could you live in the United States? What other cities or rural areas might be appealing to you? Some people might have cultural desires for where they choose to live, but how important are those desires? Maybe you’ll find that the reality of different areas is actually different than what you expect them to be once you do some homework on those areas. If you can find employment at a similar salary in another part of the country with lower cost of living and lower housing costs that has much of what you look for in a place to live, why not move there?

(I’d start evangelizing about Des Moines and central Iowa because I love the area and I think it’s often woefully overlooked by people in other parts of the country, but to each his own. Some of the neighborhoods and towns in this area are amazing in terms of culture and crime rate and school quality for the cost of housing around here.)

Can you live in a smaller place? The question is simple: do you need all of the space that you currently use? Is there space in your home that’s empty or perhaps just filled with clutter that you really don’t need? Do you have space for entertaining guests but basically never have guests in your home or apartment?

If you’re nodding your head yes at any of those questions – or having this sinking feeling in your gut when you realize that the answer is yes when you didn’t expect it to be – you’re probably in prime position for downsizing your living space. You might move from a large apartment to a smaller one, from a rental home to an apartment, or sell your current home to buy a smaller one.

For many Americans, such a move seems a bit against the grain. There’s this constant sense that people should always be working for bigger and better things. However, many people are starting to reject that claim. You can see examples of it in things like the tiny house movement and the fact that McMansions are proving to be a terrible investment because people don’t want to buy them. It’s not a “weird” thing to move into a smaller home, not in the least.

That’s especially true when you consider the huge financial benefits of downsizing your home that go beyond the rent and the mortgage. A smaller home has lower property taxes. A smaller home has lower insurance rates. A smaller home is less likely to have homeowner association costs. A smaller home has lower utilities, meaning your energy bill will drop. All of those bills will drop, and all of those lower bills will help with your long term financial plans.

It is my belief that, for many Americans, this is probably the most sensible choice for cutting back on housing costs. Many people have substantially more housing space than they need and can actually use for anything beyond storage space, and, as we discussed earlier in this series, much of the stuff in storage space is actually stuff that can easily be sold off, which means that you don’t really need that much space.

Can you refinance your current place? If you’re currently paying off a mortgage, can you refinance that mortgage to reduce your overall interest rate? Most likely, doing so will either reduce the length of your mortgage (perhaps by switching to a 15 year mortgage) or reduce your monthly payments as well.

Your lender will probably work with you when it comes to refinancing if you’ve been consistent with your payments. If they’re not interested in refinancing, then it doesn’t hurt to shop around a little. I’d start with the credit union in your area.

Your main goal with refinancing should be to reduce the overall amount you’re going to pay to the bank over the life of the loan. You can figure that out by taking the monthly payment and multiplying that by the number of months of the mortgage. You’ll also want to add on any additional costs for refinancing. You want that number to be as low as possible, and lower than your current mortgage going forward.

Most of the time – but not always – that means a lower monthly payment, which will help with your monthly budget right away. On occasion, it will mean a slightly higher monthly payment, but that usually means you’ll pay off the debt much, much faster.

Can you share housing with other people to reduce costs? In other words, can you take on a roommate? Or, perhaps, can you move out of your current home or apartment and share a home or apartment with someone else?

In both of those cases, you immediately have a situation where you’re sharing housing costs with someone else. You might split the rent with someone or perhaps have someone pay rent to you that you can use to cover part of your housing payment. Those situations are going to directly cut your housing costs, no matter how you slice them.

Now, the question becomes whether or not the savings you get from this decision is going to be worth the actual reality of having a roommate.

In my experience with a rather large number of roommates over the years, I honestly think that the number of interactions with roommates that I’ve had was pretty low. When I shared an apartment with different people (aside from my wife-to-be and one guy who became a lifelong friend), we mostly just did our own things and avoided each other. We came up with some lists of shared chores, made it clear what everyone needed to do and what bills needed to be paid when, and then basically moved forward with it. Honestly, I’ve mostly treated situations with roommates as periods in my life where I mostly treated our shared living place as a place to sleep, a place to prepare basic foods, and a place to store some stuff. I rarely interacted with my roommates much at all – we just all saved money because of it. I would happily go through that experience again, even at this later stage in my life.

Other people have had worse experience with roommates, and there is much advice out there about finding a good roommate and a good renter. My only advice is to be very clear on what each person is expected to do and to provide from the very start and don’t just assume that the other person knows what your “reasonable” expectations are.

In the end, though, the benefits of having a roommate – the reduced costs – may or may not be worth the drawbacks – having another person (or people) sharing living quarters with you, but it’s a question well worth considering.

Give these questions real consideration and see whether or not you can take real action on at least one of them. If you can trim even 10% off of your housing cost and you have the average American budget, it will end up saving you more than a thousand dollars a year. That’s several car payments or a big boost toward paying off debt or achieving savings goals.

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