Downsizing: Pay off Big Debt by Living Small
By Nick DiUlio
May 8, 2013
For those suffocating under mountains of credit card, student loan or mortgage debt, small spending cuts may not go far enough.
That's why some heavily indebted consumers are turning to downsizing.
Downsizing is a strategy that focuses on drastic lifestyle changes — a drastically smaller home and drastically fewer possessions, for example. The money downsizers save is then used to chip away at their sizable debt.
“A lot of people equate downsizing with deprivation and doing without, but I'd suggest that it really brings you freedom,” says Gail Cunningham, vice president of membership and public relations for the National Foundation for Credit Counseling. “If you downsize, you own your money. Your money no longer owns you.”
Anxious to try downsizing? We asked three downsizers for their advice on paying off big debt by living small.
Find a smaller home
In 2005, Tammy Strobel and her husband, Logan Smith, were living the so-called American Dream. They had a two-bedroom apartment, successful careers and two flashy cars they drove on long, daily commutes through northern California. But they were also stressed out and in debt.
“Basically, we had everything you're taught to want in life, but we were also really unhappy,” Strobel says. “So my husband and I decided we needed to simplify.”
For starters, they ditched their 1,200-square-foot apartment and moved into a one-bedroom that was about half the size. This immediately freed up $300 a month that they were able to put toward their debts, which consisted mostly of student loans.
|To cut costs, Tammy Strobel and Logan Smith moved into this 128-square-foot home. | Photo courtesy of Tammy Strobel|
By 2009, Strobel and Smith decided to make an even more radical change. They commissioned a designer to build them a 128-square-foot portable home for $33,000.
Measuring just 16-feet long, 8-feet wide and 13-feet tall, this tiny house not only allowed Strobel and Smith to live and work wherever they pleased, but forced them to survive on life's essentials while paying off everything they owed. Today, the house is parked on a family cattle ranch in California, where the couple live in peaceful, debt-free simplicity. You can read about their downsizing process on their blog.
“It's not about austerity. It's about being unencumbered by debt and being able to do what we love,” says Strobel, who now works as a full-time writer and photographer. “Our choices were perhaps more radical than the average person's, but downsizing doesn't have to be so extreme.”
Curtis Chambers, a Florida-based financial adviser and president of Chambers Financial Group, agrees that too much house is the main reason many of his clients slip into debt.
“They start making more money, usually in their early 30s, and think more money should mean more house. But this can really mess them up financially,” Chambers says. “Whatever advantages they had from more income are suddenly gone because the money is now feeding the bigger house.”
Chambers' advice: Get into a house that's small relative to your income and don't move.
“My father told me that of all the financial mistakes he ever made, the biggest was moving from his first house,” Chambers says. “If he had just stayed there, the amount of money he could have saved would have been tremendous.”
Consider your cars
Early in their downsizing journey, Strobel and Smith decided to sell both of their cars and rely on bikes and public transportation. This freed up about $500 per month that they used to pay their debts and start an emergency savings fund.
“Even if you have three cars and sell one or two of them, you'll probably save yourself between $200 and $400 a month in car payments and gas,” Strobel says.
And don't worry about the type of car you drive — Chambers says some of his most financially successful clients are the ones driving the most modest vehicles.
“Take those cars that have monthly payments and sell them. That's the quickest and most effective thing you can do to start downsizing,” Chambers says. “Then buy a used vehicle with cash and take the money you save each month to pay off your debts.”
At 44-years-old, Barbara Elaine Singer quit her job in corporate sales, liquidated her home and started traveling around the world. Four years later, she is now debt free and living on about $1,000 a month with two suitcases, a computer and three monthly bills.
In addition to the radical changes she made on the road to minimalism, one of the most profound was also the simplest.
“Buy nothing,” says Singer, author of the 2012 book “Living Without Reservations.” “No one's willpower is stronger than the power of American marketing, so just stay out of the stores and don't get sucked into consumerism.”
When you do shop, Singer suggests sticking to necessities. Don't shop for the sake of entertainment and use up the items in your pantry, freezer, garage, bathroom and bar before getting anything new.
“When I started sticking to this philosophy, I discovered I was saving about $350 a month in grocery bills,” Singer says. “That alone can have a significant impact on your debt.”
Sell your stuff
When Strobel and Smith began downsizing, they were surprised to find that many of their possessions weren't selling for much.
“I couldn't even sell my wedding ring,” Strobel says. “I thought it was really valuable, but I just couldn't get a good price for it.”
According to Viraf Baliwalla, president of the downsizing advisory firm Transition Squad, the only way to make significant money from your possessions is to sell them all at once.
“Downsizing with a garage sale may clear out a few things, but you shouldn't have high hopes of making that much money or putting a dent in your debt,” Baliwalla says.
Instead, consider an estate sale, which can produce some significant revenue. For instance, Baliwalla says Transition Squad estate sales usually generate between $4,000 and $22,000.
“Now that's something worthwhile to apply against your debt,” Baliwalla says.
Be careful with credit
In December 2012, Kimmy Hayes decided she and her husband needed to downsize. Between student loans, credit cards and the mortgage on their Oregon home, the couple's debt hovered around $256,000.
So they sold one of their three cars, got rid of cable, stringently planned weekly meals and decided to significantly limit the money they spend on social outings. They also locked up their credit cards.
“We had at least a dozen credit cards and they're now all locked up in a safe,” Hayes says. “If they're not in our wallets, we aren't tempted to use them.”
Since they started downsizing, the Hayeses have managed to pay off four of their 19 debts in full, and eventually plan on selling almost everything they own to travel the world.
“It's a challenge getting used to a new lifestyle and not falling back on credit cards and instant gratification,” Hayes says. “But every time we get another card balance to zero, it's a really awesome feeling.”
According to Cunningham, credit cards aren't antithetical to the minimalist lifestyle.
“Credit isn't the problem. It's the irresponsible use of credit that creates trouble,” Cunningham says. “Less plastic means less temptation, but you don't have to get rid of them entirely.”
Even an extreme minimalist like Strobel has a credit card that she uses for business and the occasional car rental.
“The big difference now is that I know I have the money to pay for it,” Strobel says. “Back when I was living paycheck to paycheck, I used my credit cards to pay for things I couldn't afford. But as long as it isn't a crutch, there's nothing wrong with credit cards.”