Is Downsizing the American Dream a Bad Thing?

An article posted at TheAtlantic.com laments the findings of interviews and surveys that show that an increasing number of Americans, particularly young Americans, are more concerned with hanging on to what they have than moving up in the world, and are also more interested in becoming debt-free.

Clearly this is a reflection of the stagnating economy that we’ve been dealing with for many years now. Young people in particular are overloaded with debt, especially student loan debt, which keeps them tethered to whatever job they might have and limits their ability to buy a car or house.

One thing missing from the article, however, is that many of these young people saw their parents overloaded with stuff, and the debt that comes from buying more stuff than you can afford. They grew up watching their parents buy houses with three-car garages when they only had two cars, just so there was more room to store their stuff. They watched them clean around all their stuff and lose spare rooms to all their stuff. And of course in extreme cases they saw them hoarding stuff.

The real theme I see in this article is that people want freedom. They want to be free of debt, and they don’t want to become loaded down with stuff they have to pay for, for years to come.

They also want affordable housing, but not necessarily impressive housing. Note the survey reference to owning a nice home. In recent years, “nice” meant “bigger and more impressive than your friends’ homes.” Given the survey and interview responses, perhaps “nice” can go back to meaning “affordable and comfortable.”

The sad tone of the article could use a little optimism. The fact is that downsizing your lifestyle can be freeing. Moving to a smaller place means you spend less time caring for your home and more time doing things you’d rather be doing. Moving to a more affordable place means improving your financial bottom line, and maybe even helping you become debt-free.

Yes, it can be painful to go through a downsizing of the American Dream. It sure hurt when my family was forced to go through it. But it only hurts for a little while because the freedom you gain is so worth it. Eleven years on from our involuntary downsizing, we are thriving, and enjoying debt-free life in a small, nice home.

Career Loss Amplifies the Need to Be Completely Debt-Free

We paid off our last mortgage when we were 44, one year earlier than this guy says you should pay it off.

His reasoning is this:

“The reason I say 45 is the turning point, or in your 40s, is because think about a career: Most careers start in early 20s and end in the mid-60s,” O’Leary says. “So, when you’re 45 years old, the game is more than half over, and you better be out of debt, because you’re going to use the rest of the innings in that game to accrue capital.”

I agree with him, but let’s take it a step further. For an increasing number of people, “the game” was over by the time they were 50 or 55 or 60. Their job went overseas, or they were let go in a downsizing, or younger people willingly to accept much lower pay were promoted over them and then they were sent packing. Now they’re working at a job beneath their capabilities and earning far less than they did in the career they spent most of their life on.

When you’re in that position, there’s no time to “accrue capital.” You’re in survival mode. And when you’re in survival mode, the very best place to be is debt-free. When you own your home outright, no one can kick you out unless you don’t pay your taxes (which is why if you’re forced to downsize your life, you should move to an area where you can afford the taxes). So you’ll always have a roof over your head.

We were forced to sell our paid-off house five years after we paid it off, because a career loss meant that “the game was over” for us, and we could no longer afford the skyrocketing property taxes. We did not reinvest all the money we made from the sale of that house in a new house; in fact, we spent less than a third of that money on the next house.

This worked out very well for us. But the point is, we had the option of doing this because WE WERE AND ARE DEBT-FREE. So whether your “game” ends at 50 or 80, pay off all your debts as soon as you can, including your mortgage, and you will be in the best position you can be.

Downsizing for Financial Peace

Freedom…Flexibility…Financial Peace

Though I put those reasons for downsizing in the title of my book, they didn’t occur in my life in that order.

The freedom part had been an ongoing issue. With a big family in a big house, and despite organizing and donating things to charity over the years, there was still a ton of clutter in our house, and I never seemed to find time to deal with it. But it weighed on my mind daily, and I sometimes dreamed of waking up to find most of it gone.

The flexibility part did not come into play until much later, and it was actually the financial peace part that caused the entire downsizing episode.

I knew we would have to downsize a few years before we actually did so. I told my family about it, but they either didn’t believe me or didn’t want to believe me. But I knew.

How did I know? And how can you know if you’ll need to downsize in the near future?

It’s all about the bottom line. You have to know how much you spend, how much you earn, which number is larger, and which way the trend is going. It’s really that simple. But it takes effort to figure out the first part, how much you spend. Not a lot of effort, but regular effort.

For many years, I’ve kept track of what we spend in a notebook. (Younger people not so set in their ways might want an app for this, or even just an Excel file.) I round off amounts to the dollar, and categorize as I go along. I use one sheet of paper for each month, and I write down our expenditures under the following categories:

  • Utilities
  • Property Tax
  • House Insurance
  • House/Yard Costs
  • Health Insurance
  • Dr./Dental/Medical
  • Church/Charity
  • Food
  • Entertainment/Out to Eat
  • Car Insurance
  • Car Gas
  • Car Expenses/Repairs
  • Disability Insurance
  • Life Insurance
  • Books/Newspapers
  • Gifts/Cards
  • Cell Phone
  • Miscellaneous

At the end of each month, I add up the numbers to get a grand total of what we spent that month. And at the end of each year, I add up the monthly numbers to see not only what we spent in each category that year, but how much we spent for the entire year.

You can imagine how much my husband enjoys hearing how much we spent, given that he prefers not to think about how much anything costs him.

But I’ve always felt that it must be done, and by doing so year after year, I had a good idea of where we were at financially, and where we were headed. By the year 2004, I could see that despite our debt-free status, we had begun spending more money than we earned (the difference was coming out of savings). To make matters worse, our annual income was declining, because my husband’s industry was moving to China.

For me, it was like being on a hill overlooking a one-lane road, watching a car coming from the north and a car coming from the south heading at top speed toward each other; you just knew what would happen very soon.

As I said, my insistence that we were going to have to downsize did not make me popular. But it gave us time to talk and strategize about what we might have to do. As time went on and the numbers showed more clearly that we were spending more than we were earning, even my husband came to see that something would have to be done. To live in denial would only make things worse.

Besides, we had experienced many years of earning more than we spent and saving the difference. That’s where we found financial peace. And we wanted to get back to that place.

Next: Flexibility.

What You Must Do If You Ever Hope to Retire

The recent ups and downs of the stock market should be considered a warning to those of us in our 40s and 50s who intend to retire before long. If your retirement money is invested in the stock market, even in index funds, you could suddenly lose some or all of it, and your retirement plans will be postponed or might even be destroyed.

After reading this cautionary tale, I got to thinking about how even the best-prepared folks can be wiped out if they haven’t taken enough precautions. The fellow in the article has been a hard worker all of his life. He had a great job with a solid (and famous) company, and thought he had prepared well enough for retirement. But now, at age 70, he’s living in a leaky RV and working exhausting, low-paying jobs, like spending ten hours a day as a temporary worker in an Amazon warehouse.

Clearly, this man is smart, not lazy, and he’s had some hard luck (including the illness and death of his first wife). But after finding a new love (someone who also lost all her investments in the 2008 financial crisis) and marrying her, their lives together became even harder.

What else could they have done to prevent having to spend their so-called golden years keeping their ancient RV running while they travel around the country looking for work?

The clues lie in the sixth paragraph:

By the time Barb and Chuck got married in 2009, they were upside down on their mortgage and grappling with credit card debt.

This led to bankruptcy and a forced downsizing of almost all their possessions. We undertook a preventive downsizing, and that was painful enough. So I can imagine how much tougher a forced downsizing must have been for this couple. After I read this article, I told my husband, “There but for the grace of God go us.”

The first clue, being upside down on their mortgage, is common enough nowadays. But it used to be common wisdom that you always pay off your mortgage before you retire. That way you have a roof over your head, no matter what else happens. Middle-aged people who are upside down on their mortgage either financed more house than they could afford, or used their house to fund a lifestyle they couldn’t afford via a home equity line. The takeaway here is, pay off that house before you retire!

The second clue, grappling with credit card debt, is a problem for people of all ages. We’ve had a lousy economy for years, so many people put basic expenses on their credit cards and pay only the minimum monthly payments. Add in those who used credit cards to live beyond their means in order to impress themselves and others, and this couple has plenty of company. But if you plan to retire, having credit card debt is a very bad idea. Those who have never learned to “pay cash or live without the item you want to buy” need to do so ASAP, and long before they actually retire.

Ultimately, retiring with any debt at all is a risky proposition. In retirement, you can willingly live with far less and still be comfortable and secure. The couple in our cautionary tale shows you what could happen otherwise.