Tuesday, October 28, 2014

Financial Black Holes (It doesn't cost me anything to keep it!)

Many middle-class folks have a financial black hole that swallows up their money.

I wrote this blog for my own purposes - to analyze and figure out where "all the money went" as a middle-class person.   This is not a blog about coupon-cutting (which I think is generally a waste) or how to stretch your food budget by using breadcrumbs as a filler.  There are other blogs that cover that sort of thing.   No, I am more interested in why people in the middle class seem to be falling down the economic ladder.

And over the last few years, I have learned a lot.   For starters, there are a lot of little recurring expenses that can bankrupt you - things like cable TV, cell phones, and other subscription services (or repeated purchases) that over time, add up to thousands of dollars.

For example, a friend pays $189 a month for their cell phone bill.   And I think he is being honest about this.  Many others claim to have lower bills, but they quote only the "come on" price, not the regular price (once promotional periods end) and also don't quote the amount they actually pay, with taxes and fees every month, which can be $20 to $50 more than the base price.  Like penis size and gas mileage, men lie about their cell phone bills (and so do women!).   $189 a month is about what it costs to make a loan payment on a car.  And yet, if you asked someone if their cellphone was worth a car they would say, "of course not!"   But yet, they are paying as much as, if not more than, their cell phone than they are for their car.

And the same is true with bad spending habits. Paying $5 a day for coffee at Starbucks comes to about the same amount of money over time.   And that money, invested at 6% interest over 30 years, comes to $152,938.06 in your 401(k).   Or paying $12 a day for lunch at work - or spending $20 on a delivery pizza.   Over time, these things add up.

But those are just a few examples of how small monthly expenses can add up to big costs, over time.   And over the last few years, I have cut these expenses to the bone.  I pay $100 a year for my cell phone.  A year, not a month.

However, there is a second group of expenses that can be a far more serious detriment to your finances.  They can form what is essentially a black hole in your wallet - sucking money out so fast, you don't even know where it went. And many middle-class people have these kinds of expenses, and yet fail to see them.   Often these are the "Sacred Cows" in their lives, that they spend enormous amounts of money on, while complaining about being flat broke all the time.

What sort of expenses am I talking about?  Houses, Cars, Boats, RVs, Airplanes, Motorcycles, etc. - that are purchased and then used for a while and then abandoned.   I am not talking about the mere ownership of these toys (which can be an enjoyable hobby for a while) but how people hang on to these things long after they are "done" with them.  Since the item is "paid for", they believe that "hanging on" to the item in question doesn't cost them anything to keep it.   But in reality, every day they own the item in question, it costs them money, in terms of expenses and in terms of depreciation.

Let me give you a few examples, based on real-life experiences of people I know.   Some of these I have touched upon before in this blog:

1.  Henry owns a boat.   It is a 30-foot twin-engine powerboat that he paid $40,000 for, a few years back.  He and the wife used it a lot, but now he is older and the wife is no longer interested in boating.  He pays $300 a month to store his boat.   I met him at the boat storage place (where I kept my boat) - and his experience is one reason I sold mine.  At the time, he was having the outdrives overhauled (on a boat he no longer used!) which cost him $3000 in parts and labor.

He is spending about $3600 a year on storage, and another $3000 on maintenance, fuel and oil.   That is pretty easy to calculate.   But the boat is now worth about $20,000 - and every five years, it is dropping in value by about half.  So in the next five years, he loses $10,000 in equity in the boat, or about $2000 a year.  That's five dollars a day, right there.  The total cost of ownership is thus $8600 a year (on a $40,000 boat!) or $23.50 a day.

That's a lot of money, to be sure.   And if you figure that in terms of income, he'd have to earn about $12,000 a year in pre-tax income, you can see than $8600 is putting a real dent in his retirement income.

Now again, I am not anti-boat.  Boats are fun and all.   But when you stop using them regularly, they become a huge expense - just in terms of depreciation - and do not provide any real reward in return.

I asked Henry why he kept the boat.   "Pride of ownership" was his reply.  I think Henry may have had a mini-stroke or something.   "Pride of ownership?"  That is about the dumbest thing I have ever heard of.   There is no pride in paying money for a commodity item.

2.  Suzie and Earl own a 40' Boat.   They made the "circle route" in it (up the ICW, across the Erie Canal, across the Great Lakes, and down the Mississippi) many years ago.  After the trip, instead of selling the boat, they kept it, tied at their dock.  They used it a few times, but for the last ten years, the boat has not left the dock.  They now want to sell it, and it is worth nothing.  

Earl says, "I could have sold it ten years ago, but I wouldn't have gotten much for it - maybe half what I paid for it, so I decided to keep it.  It wasn't costing me anything!"

But, au contraire,  it did.   You see, that was an $80,000 boat, and he could have recouped $40,000 if he sold it back then, in working condition.   Today, he would likely have to pay someone to tow it away, or hope the "Boat Angel" people would take it as a donation.

So yea, he lost $40,000, or about $4,000 a year, by keeping this boat on the premise that "it isn't costing me anything!"    It was actually costing him about $10 a day.  But most people don't see that - the money flying out of their wallet on a daily basis, by keeping a "paid for" toy they aren't using.  Depreciation doesn't show up on your bank account, tax returns, or in the dollars in your wallet.   But it is real.

And by the way, how do you think these "donate a boat" places stay in business?   The simple answer is this:  There are hundreds, if not thousands, of such abandoned watercraft, lingering in folks' back yards, at boat hoists, marinas, and storage lots, all across America. These are middle-class people who complain about "living paycheck to paycheck" but yet let these hugely expensive toys molder and depreciate.  Their heirs often have to dispose of these derelicts by giving them away to donation places.  That is how they stay in business!

Of course, many of them are upside-down on these items, so even the donation folks can't help them there!

3.  Fred and Wilma own a 45' Sea Ray.   Fred rented dock space from me in Florida.   He and the wife enjoyed the boat and went to every dockside restaurant on the ICW in Florida - twice.  He took it out on the ocean a few times, but his wife didn't like that - it scared her.  Within a few years, Wilma was bored with boating, and Fred was losing interest, too.

And the twin gas engines sucked fuel with two straws.   Fred was lucky to get 1 mpg in his boat, if that.

Fred stopped using the boat due to health problems.   He kept upgrading the boat, hoping his wife would be interested again, and he could handle the Florida heat.  He upgraded his generator and added two air conditioners.   But Wilma still was bored with boating, and the boat never left the dock.

Again, Fred justified keeping the boat on the grounds that "It isn't costing me anything" as it was paid for.  But the depreciation on this beast was running at least a couple of grand a year (it was pretty old at this point) and I was charging him $150 a month in dock rent.   And a string of mechanics came to work on it, as every time Fred started the engines, something would go wrong.   Boats do not like to sit, particularly in salt water!

4.  Joe is retired and his wife died.  He hasn't remarried, but he has a girlfriend who is a widower.  She has a motorhome that she and her late husband bought for $250,000.   After he died, she decided to keep the motorhome.   She never uses it.   She hires a mechanic to come out once every few months to start the motor and see that everything is still working - and to pressure-wash off all the dirt and grime and mold and algae that forms on it.   She stores it in her side yard, so she says (wait for it), "It ain't costing me anything to keep it, so I might as well keep it!".

Again, she fails to consider the cost of the mechanic (about $200 a visit, four times a year, or $800, plus parts like new batteries).   But depreciation is the biggie - $10,000 a year or more.   Motorhomes can rapidly depreciate, and an older coach like this will still need a lot of work, even though she has it serviced regularly.   New tires for such a bus can cost $3000 or more. 

Keeping an old motorhome as a talisman of your dead husband is an awfully expensive talisman!   Maybe keeping his ashes on the mantle is a cheaper alternative.

5.  Linda's parent die and leave her the family home.   Linda wants to sell the home, but it is full of her parent's possessions.   Every time she goes to visit the home, she breaks down in tears about her parents, and re-lives moments from her tormented childhood.   It has been three years since her parents died, and she has yet to clean out more than a few items from the home, much less prepare it for marketing.

The property taxes are a staggering $10,000 a year.  Insurance is another $2,000.   Then there are trash fees, water bills, sewer bills, utilities, lawn care, regular maintenance, and the like.   The house is easily costing her $15,000 a year (!!!) to hold as a keepsake.

Yet, she complains she is short on money to remodel her new home.   When pressed on the issue, she says, "Well, it will take me a long time to go through all their things, and besides....."

(you guessed it)

"..... it isn't costing me anything to keep it!"

Her husband, of course, disagrees.   And a nasty divorce could be on the horizon if they don't sort this out.  Sadly, I see this game being played for years more, before anything changes.   Linda likes to complain about this massive "burden" in her life - the friend with the easily-solvable perpetual problem.

Her husband prays every night for a house fire.

* * *

The list goes on and on.  Expensive motorcycles languishing in the basement.   Hobby cars under tarps in the garage.    Airplanes gathering dust in hangers.   Houses left unoccupied and abandoned for no reason at all.  And the people who own these things are not "rich" by any stretch of the imagination.   They are middle-class and upper-middle-class people who just don't understand money and how it works.

They think that just because you own something outright, that it is yours forever and it "doesn't cost me anything to keep it."   But that is rarely the case.   These possessions depreciate down to nothing, over time.   And while you cannot see depreciation blowing money out the window the actual cost is there.   And if there are maintenance, storage, registration, insurance, or other recurring costs associated with the unused item, well, then, the costs can be staggering.

Even if you are making $100,000 a year or more, an expense of "only a few hundred a month" can be devastating to your finances.   As I noted before, for someone making a hundred grand a year, maybe 10% of that is "disposable income" (about $10,000).   Thus, even $100 a month represents more than 10% of that disposable income.  And bear in mind that in order to make that $100 a month to pay for your unused toy, you have to earn $120 a month or more to pay income taxes and the like.  It really adds up.

What really fascinates me is how prevalent this sort of thinking is.   I've given five examples above, but I can point to maybe a dozen more, just relating to people I know or have met.   I suspect this sort of "dirty little secret" is quite common in the middle class.  (Just sitting here, I can think of two more friends with boats languishing in their backyards.  The list goes on and on!).

And it is one reason we decided to downsize our lives.   Yes, we had two boats, six cars, and two houses, and it was fun and all.   But after about eight years of "snowbirding" we decided that, well, we didn't want to do it anymore and we sold it all while we could still get something for these "things" in our lives that cost a lot to own, in terms of maintenance, taxes, insurance, registration and depreciation.   Once you have "been there, done that" it is time to sell out and move on.

This is not to say we will never have a boat again.   But if we do, it will be to make a certain trip, and then sell it - rather than keep it and pay for perpetual storage, insurance, and maintenance.

"Things" are transitory in your life, and there is nothing wrong with disposing of a favorite toy, once you are done with it.   Hanging on to "things" is a bad idea, as you are frittering away your income.   The material is mortal error.  What you do with material things is far more important than the mere possession of them.

It is hard to feel sorry for the "put upon" middle class in America.   They make good money, but squander it faster than they make it.  They buy expensive toys and then let them rot.  The blow through money on designer coffees and status smart phones.   And then they whine and complain about how awful the economy is and how it all has to be someone else's fault.

It is not like we are living in Syria or something.   In fact, the economy is doing quite well.   But in order to get ahead, you do have to keep your eye on the ball.


The next time you hear someone (or yourself) say, "It doesn't cost me anything to keep it!" - think again.  Chances are, you are not seeing the full picture, and the item you are refusing to sell is in fact, costing you dollars a day, in depreciation alone.