Thursday, November 20, 2008

Hobbies Run Amok!

Hobbies are fine and all, until they take over your life.

Almost everyone has a hobby, be it stamp collecting or world cup yacht racing or something in between. Having a hobby makes life worthwhile and fun. But for many folks, hobbies get way out of hand, not only dominating their lives, but ruining their finances as well. By ruining their finances, I don't necessarily mean making them bankrupt. What I mean is the squandering of huge sums of money on hobbies while failing to properly fund your retirement or savings, the net result being that later on in life, you are broke.

Living here on Retirement Island, I see this all the time. People who "lived large" in their 40's and 50's with large yachts and motorhomes, only to find themselves destitute in their 60's and 70's when these horribly depreciating assets....depreciated. In the recent economic downturn, many folks who bought large yachts or motorhomes a few years back (with easy money financing) are finding themselves now "upside down" - owing more money on these behemoths than they are worth.

Many, not surprisingly, walk away, leaving the bank to repossess and re-sell them at far below market value. Like in the housing sector, this further depresses prices, causing more people to go "upside down" and the process repeats. However, unlike homes, depreciating assets like cars, motorhomes and boats will never again increase in value. They depreciate from the day they are made. So "hanging in there" is simply not an option.

If you are lucky enough to have cash these days, you can pickup one of these white elephants for a fraction of what they would have sold for even a year ago. But be careful, owing and operating expenses can dwarf the initial purchase price. I use expensive hobbies such as yachts and motorhomes as an example. However there are other hobbies out there that can start off inexpensively and get totally out of hand. It need not be this way though.

Now, don't get the wrong idea. I am not anti-hobby. I have many myself, so I know from where I speak. Some hobbies can end up being careers, if you are lucky. But that happens to so few of us. The key is to think about where you are going with a hobby. Here are the three basic points I've learned from my own mistakes as well as those of others:
1. Don't take it a step too far.
2. Be aware you might outgrow the hobby.
3. Don't fall for the hype of the hobby industry.
One thing I have observed with most hobbyists, is that they seem to be happiest when they are just starting out or at the intermediate level. Often this stage of wanting rather than having is most fun. The mistake I often see is that people take it "to the next level" and buy that "ultimate" hobby machine or whatever, only to find out it was not as good as anticipated, and worse yet, their interest at this point in the hobby had waned. If you are truly rich, these things are simply not an issue.

You can afford such hobbies and squandering thousands or even millions on them is no big deal. But for most middle-class Americans, hobbies can get out of hand and lead to severe economic consequences. To illustrate these points, let me use some real-world examples based on my experiences and those of others:

1. Dan liked to water ski. He was pretty good at it, and every chance he had, he'd head out to the lake and throw a ski in the water. He had a hoary old Glastron that he bought from a junkyard. It had been in a fire, and he sawed the last foot off it and fiber-glassed in a new transom. He rebuilt and old six-cylinder white Mercury and bolted it on the back. It was fast, if not fancy, and it cost him nearly nothing to own or maintain. Every weekend, he'd tow it to the lake behind his old Toyota Supra and go skiing. He had a lot of fun. Of course, he'd look longingly in the ski magazines at the pictures of the fancy go-fast boats, with their metal-flake hulls and cushy interiors, complete with matching trailers. Wouldn't it be cool to have one of those? Of course, the cost of such a boat was out of the question for a 23-year-old.

Then the unexpected happened. His Father passed away, leaving him a $50,000 life insurance settlement. Rather than invest this once-in-a-lifetime windfall, Dan went out and bought a brand new metal-flake boat and trailer, and a Corvette to tow it around with. He finally had the boat and car of his dreams. He should have been on cloud 9, right?

Not exactly. A boat is just a boat, and a fancy boat can be more of a headache that a "beater." Dan was worried that that metal-flake hull would get scratched easily. They are difficult to repair, and even the smallest scratches make them look horrible. So he didn't let anyone drive it. He stopped skiing altogether. He'd drive the boat around real fast, trying to impress girls. When he wasn't driving it, he'd anchor it in shallow water and wax it.

And he discovered, after a year or two that a boat or a car is a depreciating asset, and that even with the best of care, they wear out and are worth less. His $50,000 windfall was worth less than $40,000 after the first year. Within a few years, it was worth less than half of what he had inherited. While he could strut his stuff and impress people with his shiny Corvette and boat the first year, after four or five years, it was just another used car and another fading boat.

And he discovered another thing. As he started approaching his 30's, he started thinking more about getting married and settling down. The boat and the Corvette were eventually sold, of course, when the new baby came along. I think he got a few thousand for each. His wife was just happy to have them out of the driveway. I don't think the boat ever saw water that last year. Dan wishes now that he kept the old Glastron a few more years rather than buying the fancy new boat.

As it turned out, he outgrew the hobby, which is typical of water skiing. You don't see a lot of 40 and 50-year-olds water-skiing regularly, as it is a young man's sport. He was much happier when he was in that old boat, wanting, instead of having. And the promises of the slick sales brochures and boating magazines paled in comparison with the reality of owning that fancy new boat. He took his hobby a step too far, he outgrew the hobby, and he fell for the hype of the hobby industry.

Note that in the boating world, they have a term known as "two-foot-itis" which refers to the desire by many boat owners to buy a newer boat that is two feet longer than the one they have. Many boat owners go from boat to boat, increasing their debt load over time, hoping the next boat will be "the one" that the wife likes, the kids like, handles well, and impresses everyone at the local marina. Usually the last boat in this chain ends up being too much for the owners, and is rarely used and gets sold rather quickly. I would suggest that keeping it at the previous level and being happy with what you have might be more cost-effective in the long run.

2. Chuck like to race motorcycles. He had an old Husquavarna motorcycle, which at the time was out of fashion. All the hot-shot motocross racers had Yamahas. Still, in the amateur class, he managed to beat some of those hot-shots with his old beater bike. Some of the other "kids" got new bikes every year, and their fathers would equip them with the latest gear. They would ride to events with custom trailers complete with team graphics. Chuck would throw his bike in the hatch of his old Chevy Nova. The other kids would laugh, until he beat them soundly at the track.

Motocrossing, like water-skiing, is a young man's sport. Broken bones and torn ligaments are part and parcel of the game. When you are 20 and can heal quickly, it is no big deal, But as you push 30 and your joints start to creak, it is another matter entirely. Chuck got so good at racing his old "Husky" that he eventually rose to the top of the Amateur class, accumulating more points and trophies that anyone else in the area. According to the racing rules, he had to graduate to the "Expert" class.

He bought a new Yamaha 500 and set out to conquer the Expert class. It was a disaster. The expert class was a whole new world. Not only was he competing with the best of the local riders, he was competing with factory teams and professionals from all across the country - and even the world. Not surprisingly, he finished last or near least in nearly every event. It was a sobering experience. Then a horrible thing happened. Coming out of the starting gate, he got the "hole shot" and leaped ahead of the other racers. Overconfident, he dumped the bike in the first turn and ended up getting run over by several other riders. His arm was broken in several places and required pins to set properly. His knee was smashed. His racing days were over, and the medical bills were piling up into the tens of thousands of dollars.

He kept the Yamaha for quite a few years after that. Once his bones healed, he would take it out occasionally to ride local trails. But it wasn't the same. And more and more, he found it not worth the bother to get the bike tuned up, trailer it out to the powerlines and ride it. It sat for a year, then two, and finally was left covered with dust, in pieces, in the corner of his garage. Chuck realizes now that he failed to think about where he was going with this hobby. Taking it to the next level turned out to be a mistake, as he was ill-equipped to handle the Expert class. Although he enjoyed teaching those rich boys with their shiny new bikes a lesson with his old Husky, the international riders in the Expert class did the same to him quite quickly once he moved out of his own league. Knowing when to quit is the key.

3. Edna likes to go antiquing. She and her friends enjoyed riding out in the country, having lunch and then combing through old barns and yard sales for unique and interesting items. She started out buying small things to decorate her home, and then bought a few pieces of furniture as well. One day at an antique shop, she was delighted to discover that the dealer was selling, for $50, the same antique egg-beater that she had bought at a garage sale for a $1. Excited, she decided to turn her hobby into a part-time business. She rented a cubicle at the local "Antique Mall" and set about furnishing it with items from her country trips.

At first, it was exciting to go shopping every weekend for things, but quickly, it became more like a chore. She had to carefully examine every item in a barn or yard sale and compare it with the potential retail price she could get. Rather than leisurely lingering over these old things, she found herself racing through the rural barn sales in a businesslike manner, and then moving onto the next sale. She had to cover a lot of ground, fast. And in doing so, she noticed one thing she had never noticed before - others just like her, coolly and professionally viewing all these old goods in a detached manner.

At each yard sale or barn auction she would attend, she would see the same cars and same faces of the other professional and quasi-professional collectors like herself. At first, she managed to make some money on the items she sold at her cubicle at the Antique Mall. She bought some items cheaply and sold them at a decent markup for reasonable prices. However, other items in her cubicle were bad purchases that she either paid too much for, or were damaged or otherwise not as desirable as she had thought. While the good merchandise sold quickly, the "dogs" started accumulating in her cubicle. She was loathe to lose her "investment" by selling anything for less than she paid for it.

Within a year, her cubicle became quite crowded with "dogs" - items she had paid too much for and would not sell. She started taking these items home, figuring that if they couldn't sell, she could at least enjoy them, and perhaps someday, the market for a broken colander from the 1930's would pick up. While this cleaned out her cubicle at the Antique Mall and allowed her to buy more things, the same thing happened again and again.

The business of buying and selling antiques was becoming less and less of a joy and more like drudgery. In fact, all the joy was gone. If you asked her about her business, she would regale you with a litany of complaints, from surliness and mean practices of the owner of the Antique Mall, to the sharp practices of her fellow "dealers" to the rude comments made by window shoppers to the breakage and shoplifting of teenagers. It was a lot of hard work and difficulty.

On top of this, while she was spending a considerable sum of money buying all this stuff, she was not really making any money on it. What profits she made were quickly plowed back into buying more things. Eventually, her home was filled with antiques, some valuable, some not. But most worth exactly what, if not less, than she paid for them. She was merely converting money into stuff, not making money. The problem with making a hobby into a business is that there are a million other people out there (quite literally, perhaps more) trying to do exactly the same thing.

While you might enjoy accumulating NASCAR collectibles, setting up a store to sell them is probably not a good idea, as there are simply way too many outlets for such items in comparison to the demand. Antiques might seem like a market with limited supply for a flexible demand, but every year, more and more recent vintage items are deemed "antique" and the stores keep filling up. Items from my childhood are now deemed "antique." While it is fun to look at some of this stuff, a lot of it is just junk, and not things you'd want in your home, "collectible" or not.

Running any retail business is difficult, at best. The cost of overhead is staggering. Hiring people to help you is not cost-effective. And today, much of what you can buy at a retail store can be bought more easily and quickly online. The competition is fierce, as the barriers to entry are low, and everyone else, it seems, has the same idea, and customers can be scarce. Think long and hard before you make a hobby into a business. It is possible to be successful. However, in order to be successful, you have to approach it as a businessperson. In doing so, you might find that all the joy of your hobby is lost.

4. Joe liked old BMWs. He bought his first one in 1974 and enjoyed tinkering with it. He joined the BMW car club and was active in events. He worked at a car dealer, and whenever an interesting trade came in, he'd arrange to buy it. Before long, he discovered he had over a dozen old BMWs. He tried to make a business of his hobby. However, since he was not a businessman, he had no idea how to proceed. He thought there would be a market for "rich people" who wanted their old BMWs restored for huge amounts of money. However, he discovered that "rich people" would simply rather buy a new BMW. Moreover, the restoration business was already quite well populated with shops that specialized in that service. After a few years, he closed his doors.

As he got older, his collection of cars increased, much to his wife's and neighbors' dismay. He had nearly 50 cars at one point. The cars were usually older "interesting" cars, but in need of total overhaul or major repairs. They sat out on his lawn, gathering dust and slowly rusting. He had a long-running battle with the local zoning enforcement officer. When asked about the cars, he would tell his wife that he would "fix them up someday" or that they were "his retirement" and that someday, someone would pay him hundreds of thousands of dollars for his "collection." On BMW forums and magazines, he held forth as the "old expert" and snarled at any newcomers who dared question his expertise on any subject BMW-related.

Of course, since his collection was mostly from the 1970's and 1980's, any car newer than that was "junk" and not worth talking about. He was not outgrowing his hobby, but it was outgrowing him. Ironically, at any BMW meet, he would show up in his wife's rusty Subaru, as all of his cars were unserviceable, or not in very presentable condition. The car hobby was not fun for Joe anymore. He was alienating his neighbors, his wife, and even others in the car community, who viewed him as a cranky old misanthrope.

Yet he felt trapped by it. Selling any of his cars would be "giving up", as he had forged an identity as "Mr. BMW." And of course, he wouldn't sell any of his cars for less than he felt they were worth (regardless of what the market felt they were worth). A better idea for Joe would have been to keep one or two cars of interest, that could be readily restored, and sell off the rest. With the money he raised from clearing out his junkyard, he could restore one car to pristine condition and actually enjoy it, instead of looking out over a field of rusted metal.

By the way, Joe (like the other characters mentioned here) is an amalgamation of a number of people I have met, not one specific person. I have met such people in nearly every car forum, whether it be BMWs, old Fiats, Russian Motorcycles, Bayliner Boats, you name it. I can guarantee you there is a similar Jaguar guy, MG, guy, and Ferrari guy - you name it. I know there are more than one Edsel guys out there - I have seen pictures of their "collections" of rusting Edsels. They are cranky and not fun to be with. They think that their "basket-case" rust buckets are worth zillions because they are "rare". They suck all the oxygen out of the hobby, reducing the love of cars into a battle of expertise and experience.

I have met a number of Joes in my lifetime. They keep rusty old hulks of cars and pretend they are worth millions - based on auction prices they see on TV or read about in the magazines. You know, a little paint and upholstery, and that rust bucket will fetch a half-mil in Arizona! I just don't have time to get to it, today. The reality of the car hobby is that in order to restore a car to the shiny condition you see at those over-hyped auto auctions, it takes considerably more money that the car is worth. You can spend $20,000 restoring and old BMW (or whatever) and it will be worth $10,000.

If you spend $40,000, it might be worth $20,000. In other words, in terms of an "investment" cars are about the worst thing you can invest in, unless you consider losing half your money a good deal. And the cars reaching those stratospheric prices at auction are professionally restored, most often to a standard higher than when they were made. Forget about your rust-bucket ever being in the same company. Yes, occasionally the collector car market goes berserk. But it usually corrects itself rather quickly, and many folks get burned in the process. In the 1990's Ferrari's soared in value as "Dot-Com" millionaires looked for flashy places to stash their cash. Just as suddenly, the Ferrari market crashed, with many of the cars dropping to half their former auction values.

Similar things have happened (or will happen) to American Muscle Cars. In the 1980's and 1990's, Mustang convertibles from the 1960's soared in value. Clever body shops would find cheaper hard top cars and "create" new 1966 Mustang convertibles using reproduction parts that were virtually indistinguishable from the real thing. The supply, it seems, was not as limited as first thought. By the way, don't believe the hype in the car magazines about "numbers matching" or "only 1 of 17 made", "original build sheet" or "original window sticker", etc. All of these things can be forged or manufactured in such a manner as to be untraceable. You want "matching numbers"? It is just a matter of buying a metal stamp set. The number of 1960's cars running around with their "original window stickers" defies the law of probability.

The other problem with the American Muscle car fad is that, despite all the hype, they are essentially poorly made American cars. Back in the day, they were considered a disposable commodity, not a collector's item. Many a "vintage" car buyer is woefully disappointed to discover that a 1960's car with a live-axle and bias-ply tires handles worse than today's pickup trucks. And for many of these cars, driving them is the last thing you every want to do. Once you put miles on them, it destroys the value. You can enjoy an older car, and actually save money in the process (this is the subject of a future article). However, like any hobby, car collecting can be easily taken too far.

5. Frank and Shirley decided to buy a Motorhome and become RV'ers. Selling their home, they bought a fairly inexpensive Winnebago and decided to hit the road, full-time and "see America." They had camped in camper trailers before and read all the RV magazines, which promoted the "RV Lifestyle" and "full timing" in luxurious "Motor Coaches". The first year on the road was fun. But they were spending more money than they expected. While they didn't have a mortgage payment or property taxes, they did have to make payments on the motorhome, keep it full of fuel, and also pay to camp somewhere nearly every night.

The fantasy sold in the RV magazines is that once you have your luxury motor coach, you can pull off by the side of the road, and park next to a pristine lake, and then wake up in the morning with the birds chirping, while your wife makes coffee over the open campfire. Unfortunately, this is all a fantasy. In reality, you cannot simply pull off the road and park on someone's private land without permission. All the pristine lakes are spoken for, usually by vacation homes. And even if you could find such a spot, your motorhome would likely get stuck in the mud. And campfires? It takes an hour to start them, and making coffee is almost out of the question. Not to mention how smoky it will get your new rig!

So Frank and Shirley ended up staying in State Parks and RV Parks. The State Parks were OK, although Frank scratched the beautiful paint on his motorhome on a tree in one State Park. Why don't they cut down all those trees? It would make camping easier. On the weekends, the State Parks could get crowded with families and noisy children. Frank and Shirley stayed in their rig and watched satellite TV. RV Parks were easier to get in and out of, as nearly every tree had been cut down. However, the row upon row of pads were not very attractive, and oftentimes, they'd end up parked next to rowdy campers who would build large fires and talk loudly all night.

In the morning, Frank and Shirley would wake to find a litter of beer bottles and their shiny new rig dusted with campfire smoke. They tried some of those new "RV Resorts" but found them to be hugely expensive. "For what we are paying a night here, we could stay in a hotel!" Shirley exclaimed. While the RV resorts were clean and full of mostly older, "full timers" like themselves, Frank and Shirley were chagrined to discover that their simple RV was looked down upon by the "Motor Coach" set. Worse yet, some resorts refused to let Frank and Shirley stay at all, as their coach was deemed "too old".

During a trip to an RV dealer for service, a salesman showed Frank and Shirley a higher-end motor coach. "You know, for the same payment as you are making now, I can put you in this coach!" the salesman explained. Frank and Shirley were only months away from "paying off" their old coach, which they had (smartly) put a very short term three-year loan on. The new loan would extend 12 years, and what little equity they had in their old coach would be swallowed up as the down payment on the new one. The smell of new leather and carpeting, along with their memories of being humiliated by the "Motor Coach" set in the RV resort was all it took. They signed the papers.

Excitedly, they set off for their favorite RV Resort to show off their new purchase. They were big-time now! When they arrived at the resort, however, they found that their mid-priced motor coach drew less attention than their inexpensive starter model. Although they considered it special and new, it was merely just another RV when parked next to the $500,000 and Million-dollar custom bus conversions. You see, no matter how much you spend on a hobby, there is likely to be someone who will spend even more.

Trying to impress people by purchasing things is a very silly thing to do. Only the shallowest of folks are impressed by your ability to sign loan documents. It takes no special talents to "buy" or own something, only a checkbook. Moreover, the people you are trying to impress are usually people you don't even know! What is the point of that? Unfortunately for Shirley and Frank, it got worse - a lot worse. Their huge and expensive (to them) motor coach was hard to handle, and taking it to inexpensive State Parks was out of the question. It simply wouldn't fit.

Even RV parks were problematic. Frank started doing the math on the "RV Lifestyle" and discovered, to his horror, that they were going through their retirement income at twice the rate they were when they lived at home. To save money, they tried parking at Wal-Mart and Flying J parking lots whenever possible. "This is great", Shirley said sardonically, "We're spending twice as much as we did before, and now we're living in a truck stop!"

Now, to be sure, RV'ing wasn't a total downer for Frank and Shirley. There were occasions when they would wake up parked next to a pristine mountain lake and enjoy the sunshine and birds chirping - before someone in a neighboring RV would start their generator. RV'ing can be fun, but full-timing it was getting old, and costly. And Frank was getting old, too. Since they had to have a car everywhere they went, Frank and Shirley had to tow one behind the motorhome.

Driving this huge rig, with a car behind, was not much fun, as cars would weave in and out of traffic, and honk, and trucks would blow by, pushing their coach sideways with the wind. Setting up and taking down camp was tiring and difficult, particularly for someone pushing 70. Then Frank got sick. It happens, particularly when you get old. They had to stay for a while in one place, while Frank went to the VA hospital. They found an RV park where they could get a monthly rate, which helped cut their costs. But now, instead of traveling and seeing the country, they were in effect, staying in a very small condominium in a very bad part of town.

Once Frank got out of the hospital he found it hard to get in and out of the RV, climbing the steps. Setting up camp and stowing gear exhausted him. They needed a place to settle down. Unfortunately, the RV was now worth less than what they owed on it. But the monthly payments kept coming. With their retirement savings almost gone, they could not afford to rent an apartment and make payments on the RV. When the repo man came for the motor coach, they quietly handed him the keys.

As a lifetime Good Sam Club member, I get all the RV magazines, and I read all the hype about the latest and greatest (and larger and larger) motorhomes, costing in the hundreds of thousands of dollars. I also read, in the classified section, the ads for used RVs, with notation "Poor Health Forces Sale." Frank and Shirley's experience is not an anomaly, it is the norm. We've seen, firsthand, in trailer parks, elderly people living in rundown motorhomes, too poor to move into assisted living, their coaches no longer worth anything to anyone, not having been run for months or years.

We've also seen, firsthand, EMS rescue people have to break out the windows on such coaches to extract the occupants, who usually leave, feet first, in a gurney or body bag. While RV'ing can be a fun hobby, the idea of spending your declining years in a motor home simply defies common sense and financial mathematics. There are some more economical ways to RV that might make some sense. For example, Joe and Suzy have a travel trailer they keep in Florida. Such trailers, which are huge inside, can be purchased for as little as $20,000. Since they don't have an engine and drive train, they are inexpensive, and depreciate very slowly.

They keep the trailer at an RV park on a golf course, and every winter, they drive South and spend several months in their "Florida Home." The RV cost them very little, and the monthly "lot rent" is less than a few days stay at a "Motor Coach Resort." The only disadvantage to this model, is that while it is quite inexpensive, it also really isn't RV'ing in the sense that they are seeing the USA and camping out. It is just a cheap way of having a summer home - one that, if it blows away in a hurricane, you won't care too much about. A better model could be to simply buy a condominium on a golf course, back in the day when such things were affordable (and may be so again soon!). The overall costs could be the same, or similar to that of monthly rent in an RV park, but with the added bonus of having some equity over time.

I've had four RV's over the last two decades, and I've learned some of the same lessons, at a lower cost. Three of the RV's have been second-hand trailers, and they've held their value over time. One we actually sold for more than we paid for it. Properly maintained, a travel trailer or 5th wheel holds its value. Our one excursion into motor homes was a depreciation nightmare. After only a few years, it was worth about half what we paid for it. Anything with a motor depreciates, period. Going camping for a few days or even weeks is fun.

But spending months in an RV can be wearing and also costly. Most campgrounds charge $30 or more per night. Even State Parks charge $15 a night or more. Throw in an armload of firewood for the campfire, and you're over $20. For the extra cost in fuel to tow the trailer, you could probably stay in an inexpensive motel for less. With the motorhome, add in the depreciation, and you're talking a nice Hotel with room service. If you have to pay for RV storage, it adds up even further. RV'ing can be fun, but don't kid yourself that you are "saving money" or "getting back to nature." Like any other hobby, taking it "to the next level" is often the fatal mistake.

Getting back to Frank and Shirley, you can see they fell prey to all three of my hobby rules:
1. Don't take it a step too far: They should have stayed with their first motorhome, which was almost paid off. When they decided to give up RV'ing they would have been able to sell it for a tidy sum. Instead, that money was swallowed up in the down payment on their new rig.

2. Be aware you might outgrow the hobby: Outgrowing a hobby is not just something that happens to younger people. If you are older, chances are, changes in your life circumstances will force you to retire a hobby eventually. They should have anticipated that eventually their age would force them to give up on RV'ing.

3. Don't fall for the hype of the hobby industry: The magazines hype and promote RV'ing as they are magazines that the industry pays for, in terms of advertising dollars. You will NEVER see, in any hobby magazine, a cost-benefit analysis of the hobby or any warnings not to take it too far. The downsides of RV'ing full time are rarely discussed. But if you read between the lines (such as the "health forces sale" classified ads in the back) you can separate the hype from fact.
While these examples may seem a bit depressing, they are based on real-world examples, and illustrate how a simple hobby can get seriously out of hand and literally bankrupt a person, while providing less and less enjoyment with each level of increased spending. Oftentimes, not owning things and dreaming about them is more enjoyable (and less expensive) than having. The key is to figure out when it is time to call it quits, and whether going to the "next level" makes any sense. Oftentimes, it is not.