If you are a homeowner and have substantial credit card debt, or if you are struggling living paycheque to paycheque, simplifying your life can help keep your costs under control. This will make your dollars stretch further to pay off debt. One action that you can take is to downsize your home.
“If your wealth is locked up in your home’s equity and you are feeling the pinch of a cash flow crunch, downsizing your home is one strategy to help you access that equity in order to pay down debt and keep your monthly expenses manageable,” says Jeff Schwartz executive director at Consolidated Credit Counseling Services of Canada.
“With high energy prices and the high cost of living, it is becoming more and more common for people to turn to debt just to cover monthly expenses. Homeowners may be sitting right on the solution to their debt problem, by using that home equity to restructure their household finances,” says Schwartz.
Here are some points to consider in how downsizing can help you pay down your debt.
Take a look at your home
Although there are benefits to owning a large home, is the extra space worth the extra pressure that you are putting on your finances? Chances are, if you pared down your belongings (who doesn’t have too much stuff?) and used clever storage strategies, you could significantly reduce your living space.
And reducing your home’s size doesn’t just simply your finances. It can help simplify other areas of homeownership, like less space to clean and likely less maintenance. You’re not only saving money living smaller, you are saving time too.
Reduce all of your costs
Moving to a smaller home is going to cost you less in every way. Your mortgage payments will be smaller. It will cost less for heating, cooling and electricity. You’ll most likely see a reduction in your property taxes. What this will do is help ease the burden of your monthly expenses, freeing up cash flow, as well let you direct money towards debt repayment and savings.
What to do with the proceeds
Before you even put your home on the market, develop a debt repayment plan for what you will do with the proceeds of your sale. Take a look at your overall debt and decide where you might have the most impact.
One option is to pay off any mortgage debt so that you could own your new home mortgage-free, which would probably give you lots of extra cash flow every month. This depends on the interest rates of your other debts and other variables though.
Another option is to start a debt snowball with your credit cards, applying the funds from your home’s sale to the highest interest bearing debt. With your additional cash flow every month from lower home operating expenses and lower mortgage, you can continue to add payments to the debt pile, which will diminish more rapidly the more money you put down.
Don’t forget savings
If your wealth has been tied up in home equity until now, that may have been part of the problem for your cash crunch and debt load. Make sure to use your additional cash flow after downsizing to put money aside in easy-to-get to cash savings so that you can avoid debt in the future.