Financial downsizing could mean a lot to different people but in the financial world especially with consumers who are trying to manage their finances, it simply means lowering down their financial activity. It can mean lowering down expenses and paying down debt and even increasing their income to cover more ground with their budget.
This is a timely topic because as DailySignal.com shares, the average debt amount for an American household could reach about $200,000 by 2026 if all things run their natural course. That is a big amount and a prohibitive one which could relegate the income to merely a tool to repay debt and other financial obligations and nothing more.
But consumers understands by now that debt is and will be a big part of their finances in the years to come. Starting from their student loans just to acquire higher education to credit cards to be able to pay upfront for items they cannot pay in full yet. They also understand that buying a house, which is still considered an American dream usually means taking out a mortgage loan from the bank. The same with their car, it usually means borrowing for an auto loan from lenders just to pay for the vehicle.
Loans and debts and all other financial obligations in life doesn’t just crop up all of a sudden. Consumers need to make these choices themselves. This is a conscious effort on their end and not just a by-product of one small decisions. People need to know how to strike a balance between taking out debt and managing them in a way that it does not control them.
There are warning signs that will let you know that you are headed down for debt problems and the best thing you can do is to be proactive against debt. If you can avoid it then do so. Prime up your finances in a way that you are able to either get by with little to no debt at all or put yourself in a position where you can manage any debt account that comes your way. One of the ways you can guard against debt is by financial downsizing.
Downsize your finances
Here are a few ways you can downsize your financial activity and be able to guard and manage debt a little better.
- Sit down and reassess your household budget. The first step is to sit back and take a close hard look at your finances specifically your household budget. You need to look up and scrutinize every line item in that financial plan. Take a look at the income side and if need be, update the numbers to be more realistic with the amount that is coming in. You might have been basing it on gross amount no wonder you come up short every month. Look into your expenses as well and try to figure out which ones you can do away without. Do you still have any use for those magazine subscriptions or do you have time to watch tv? Can you bundle all them into a data plan? The idea is to strip down your expenses to the barest and work from there. But even Huffingtonpost.com understands that your budget is only as good when you are able to stick to them.
- Re-evaluate your goals. You need to make smart financial decisions and part of that process is revisiting your long term and short term financial goals. You do not need to overhaul them but try to assess if you are still on track and if you need to make changes with your budget and financial plan to catch up with your goals. Financial downsizing is supposed to help you get to your goals and not hinder you away from them.
- Declutter your life. This is an important part of downsizing your finances because it mentally prepares you for the process and gives you a physical manifestation of the overall practice. You might want to think of baby steps at this point like cleaning up the house and taking out what you don’t have any need for like furnitures and old stuff. There are people who take it up a step further and give up their car and pick up a bike to commute to and from work. Some take it up a notch and try to switch homes from a big one to a smaller one.
- Make a plan. With your trimmed up household budget and your reassessed financial goals. you have the basic structure for your financial plan. You just need to incorporate the two and make sure they complement each other rather than working against each other. Your actions today on how you manage your income and expenses will help you reach your goals.
- Stick to your plan. Financial downsizing will only work if you are able to stick to your plan. Deviating away from what you have drawn up might lead you further away from your goals. If you are changing, you need to keep in mind that it must be for the better and not take you further away from your financial goals.
How to use the extra funds
Once you start realizing the financial benefits of financial downsizing, here are a few ideas on how you can best maximize the funds.
- Pay down debt. Foxbusiness.com shares that credit card fees are on the rise by as much as 5% for annual fees and 4% for late fees. That is money lost if you happen to send in late payments and have to contend with the fees the following month. Pay down debt to convert what would be fees and interest payment to lenders into interest you can earn for your future need.
- Fastrack long term goals. This can mean paying your house or car in full or even paying off years of student loan debt. You can cross out some of these obligations by putting in more to their payments. You can also start looking at starting your own business or even beginning your travel plans earlier.
- Retire early. This predominantly refers to retirement plans where one of the best ways to pull your retirement date closer is to ramp up your nest egg savings. The more you put in now, the bigger you can pull out in the future because of compound interest.
- Pursue your passion. You might have been thinking about those dance lessons you have long wanted to take up to pursue your passion in dancing. It might even be photography, baking or even woodworks. Having more disposable income on your side can help you pursue these plans faster
Financial downsizing can help you save up more funds for future use. It can be to pay down debt, accomplish you long term goals at a faster rate or even to simply pursue your passion in life. Whatever the end goal is, this is not something you can accomplish instantly. There is no magic button that you can push and everything goes as planned. That would be an easy way out and you can instantly switch from one lifestyle to the next without any effort. Financial downsizing is a lifestyle that needs to be embraced over a long period of time to make it work.