One of the biggest options for people creeping up to retirement age and looking for ways to jumpstart financial freedom in order to leave the workforce is to downsize their living situation. Spoiler alert for below, but not only does having less of your net worth tied up in your home free it up to invest in the stock market, it reduces the costs of running your household monthly too. An even better option for individuals earlier in their financial journey is to intentionally choose living in a smaller home when they purchase their first (or second or third) property, letting those savings they invest compound for decades so they can retire sooner.
When we bought our first house in our mid-20s, we knew the less net worth we had tied up in the house, the better. My husband, in fact, often jokes that buying a house is the worst investment you should still probably make. We intentionally purchased a much smaller house than many of our peers, which allowed us to pay it off quickly. With the extra amount we could invest without a mortgage payment, we were able to accelerate a large part of our dream retirement goal by two decades. Squarely on the other side of getting to live that dream now, I can confirm it was 1000% worth it.
Below, we share what we learned about living in a smaller home, and why we think you should consider doing the same.
The benefits of living in a smaller home
1. Less debt gives you more freedom and more options
A smaller house typically means a smaller price point, which also typically means a smaller mortgage. One of the greatest financial lessons we’ve learned is that the less debt you have and the fastest you can pay it off, the more freedom you have. That freedom buys you options for life that you can’t buy on credit.
Paying off lower interest debt like a mortgage may not always make the most mathematical sense. Our financial advisor pointed out that when it came to dollars and cents, paying off our 4% mortgage wasn’t the best decision.
Stubborn as we both are, we didn’t listen. For us, it turned out to be one of the best decisions we ever made. Without owing anyone anything, we were free to make choices that many of our friends and colleagues couldn’t because they owed their income to others.
Learn more about if you should pay off your mortgage early.
We wouldn’t change that freedom for a study, pool, or extra 300 square feet.
Now, we can afford a 3,000 square foot house in a higher cost-of-living area, but we’re still looking for something closer to 1,800 square feet (which will feel massive to us) to keep more of our money working hard for us and for the other benefits below.
2. A smaller home purchase can allow for greater gains in the stock market
A funny thing happened after we paid off our mortgage and turned our focus from paying off debt to investing additionally in the stock market. Suddenly, our financial advisor didn’t think it was such a bad idea that we’d paid off the house, as we were able to invest an additional four figures every month while the market was down (AKA on sale).
Even if we hadn’t paid off the house early, our $750 mortgage payment allowed us to invest a lot more than others with the same income level who had $1,500+ mortgage payments. Not only did our house value increase significantly in the decade we owned it, but all the extra we invested compounded in growth over that decade as well, getting us closer and closer to reaching the top of our FIRE ladder.
While homes gain value in their purchase/selling price over time, overall the housing market doesn’t typically keep up with the stock market, especially when you factor in the additional costs of maintaining the home. In addition, you can’t get to the equity in your home unless you move. So our status has been and continues to be that the less you invest in your house, the better.
3. Having less of your net worth in your house is less stressful
Owning a house is stressful. If someone tells you otherwise, they’re lying. If we weren’t worried about the air conditioner crapping out (again) on a blistering hot night in July, we were worried that a hurricane would come through and level everything we owned. The fact that we had homeowners insurance didn’t qualm the stress levels during Hurricane Irma or Hurricane Ian.
At least we knew when we lived in a smaller home that if God forbid something happened, we’d be okay. If we had a total loss of our home and had to start all over, we’d miss the sentimental things we couldn’t replace and would have to grieve the loss, but we’d survive. We could afford to lose our house completely, insurance or no insurance, and it would suckkkkkkkk, but we’d survive it without losing our financial footing.
The more of your net worth that’s tied up in a house, the less of this backstop you have. The more and more leveraged you are with your primary residence, the more stress you’re likely to feel simmering beneath the surface every day.
4. Smaller houses are easier and cheaper to maintain
A smaller home not only saves you on the purchase price and in overall interest with a lower mortgage balance, but that savings compounds with lower maintenance costs. People often say renting is throwing money away and point out they could get a mortgage for the same cost of their rent. To this, I channel my inner Badger and cry Fallacies.
What these people fail to factor in is that your house is like an 80-year-old grandpa with a bad hip and brittle bones who frequents the local emergency hospital.
If you so look at a drawer from the wrong angle, the guide rail will break. There is always some upcoming project or expense, whether it’s a HVAC or furnace, a roof, or a leaking toilet.
Even if you’re handy and can DIY to save money, it still takes time.
The smaller your house, the less there is to break, so the less you’ll spend keeping up with maintenance. It’s also cheaper overall. Painting a 1,100 square foot house is a lot less expensive than painting a 3,100 square foot house. In a 3,100 square foot two-story house, you may have two air conditioning systems that could break, while our one-story 1,100 square foot house only had one, which we did, indeed, have to replace. Along with the garage door and the roof and the flooring… I’ll save you the rest of the laundry list.
5. A smaller home has a ripple effect on smaller bills across the board
Along with a cheaper mortgage and smaller maintenance bills, smaller home living also leads to other cheaper bills to help keep your fixed “needs” costs of your monthly budget low, freeing up more of your income for investing and fun money. (I’m biased, but I recommend it tucking it away in your vacation sinking fund.)
Heating or cooling 1,100 square feet is a lot easier, and thus cheaper, than doing so for 3,100 square feet. When our friends were waxing woes of $300 electric bills, I was complaining about our bill hitting a new record high for the season around $120.
Along with smaller utility bills, a smaller home is cheaper to insure and has lower property taxes. Depending on where you live, this can add up significantly. By the time we left Florida, what we were saving in sinking funds monthly for our homeowners insurance and property taxes was nearly half of what our mortgage used to be. That added an additional 50% to our required housing needs we had to budget for monthly. And that was for a small house!
Living in a smaller house was one of the best financial situations we made, as it freed up our income across the board and allowed us to reach Coast FIRE status.
6. It forces you to buy less, which saves you more in your monthly budget
We moved into our 1,100 square foot house from a 1,700 square foot house we rented. The first stop our U-Haul made on moving day was to the dump to clear out extra furniture even Goodwill wouldn’t take. (This was before I discovered my mad Facebook Marketplace skills and the ability to give almost anything away for free.)
By downsizing our living, we had to downsize our stuff. It felt like picking a favorite kid (the couch) to send to college at the time while shipping the other one (the loveseat) off to the coal mines, but looking back, I’m thankful for our somewhat unintentional downsizing.
Not only did we have to purge furniture we quickly realized we didn’t need and didn’t miss, it prevented us from buying a bunch of new furniture when we moved, which kept the moving budget from ballooning out of control.
Holiday décor was another area where I really noticed the difference. While I love visiting family and friends who deck the halls with holly to make the season jolly, we had one Sterilite container that had to house all of our holiday décor for all seasons because we simply didn’t have room to store more stuff we’d only use for a month out of the year. It made me intentional with what I bought. It has also made me cherish what we do have because I’ve had to buy and keep only the items I really wanted, like our FRIENDS and Nintendo Christmas tree ornaments.
7. Less stuff means less clutter, which is good for your health
Not only does having less stuff lead to less clutter, but smaller home living also limits the number of surfaces that can accumulate crap. When our dining room table tucked in the nook by the sliding glass doors became a defacto dumping ground for advertising mail, preapproved credit card applications, and all the other junk we brought into the house, I felt my anxiety buzz. We quickly found a better solution that kept the house clean so I wasn’t having to waste my time constantly managing the area (see #8 next).
I’m anxious by nature, so this isn’t something that everyone might see as such a benefit. Yet, clutter has been proven to make people more anxious. And no one likes digging through a million locations trying to find where the bleep they left their Bluetooth speaker.
There’s just something so relaxing about coming home to a clutter-free home and being able to relax and unwind at the end of the day without stepping on a LEGO and lighting up every pain sensor in your foot.
8. You can clean SO much faster, giving you freedom of time
Real talk: I hate cleaning. Vacuuming, dusting, tidying up. It feels like fighting the natural entropy of the world. No matter what you do, it just gets dirty again. You are the tribute in The Cleaning Games, and the odds are never in your favor.
One of the biggest benefits for me of smaller home living was that there is less to clean, which means less time doing the chores I hate. I don’t want to brag, but I could vacuum my entire house from two outlets.
There were also less toilets to clean, less bathroom sinks to scrub, and, perhaps the best of all, less baseboards to keep sparkling white.
Time is our most precious and often scarce resource, so the less time I have to spend keeping the house clean, the better.
9. Smaller homes have larger market appeal and are easier to resell
We saw the advantage of smaller home living even before we decided to purchase our house when looking at what was in our comfortable house budget range. While many of our coworkers were out buying twice as much house as us, we didn’t want the weight of that responsibility.
That burden has only increased in the past several years as the house marketing has finally rebounded after the housing market crash of 2008. The Jane and John Joneses who are hoping to become first-time homeowners are swallowing hard when they see the housing prices coupled with higher mortgage interest rates than what we became accustomed to in the past several years.
Smaller home living has become more of a necessity than a desire for individuals trying to get into the market who didn’t ride the housing price wave up. The more affordable your home, the easier it will be to resell.
We ended up selling our house before it even went live on the MLS. No on the other side of the game, we went and saw a house in our new town that was in our budget’s sweet spot, and it had multiple offers in for over asking within the first four days. Affordable housing is hot right now, and it’s hard to see that changing soon.
10. Smaller houses have a cozy vibe that’s warm and inviting
This one doesn’t impact your money or time, but it’s a feeling that neither can buy. Smaller homes have a vibe that’s hard to beat. Smaller places are cozy, and that isn’t just a buzz word real estate agents use on listings to mean “cramped.” A smaller home doesn’t have to be suffocating. Instead, it can be warm and inviting, which is easier to obtain with smaller spaces than with large spaces full of either large voids or with lots of clutter, both of which are the opposite of cozy.
While many of our friends bought much bigger homes, they all commented that they LOVED our smaller house. Maybe they were just being polite, but it felt genuine. We always had wonderful, hygge times around the small, square dining room table with friends.
The final word
Living in a smaller home has many financial benefits, but the advantages go beyond just the money math. It’s easier to breathe when you have less of your money tied up in a house and less debt on a mortgage. While smaller homes aren’t all silver linings—it can honestly feel cramped at times, even when clutter free—we’re so glad we took the route of smaller home living. It has helped change our perspective and personal finances for the better.