Tuesday, December 20, 2016

Ancillary Costs

The purchase price of a house, a car, a boat or an RV only represents part of the cost of ownership - sometimes the smaller part!

When I was younger and naive (as opposed to being older and naive today) I used to think that someday I would own my own home, free and clear, and I would be set for life, as it would be "paid for" and I wouldn't have to come up with a monthly mortgage payment.   Similarly, I thought it would be keen not to have car loan payments and "own" a car outright and not have to pay for it anymore!

Eventually, these things did happen to me, and I discovered that even when "paid for", things that I owned still cost a lot of money to own.   There are carrying costs to owning anything, which is why it is a good idea to own fewer things.   The more stuff you own, the more you have to pay for it, and the harder you have to work to pay for these things - or the faster you run through your savings.

What got me started on this was we thought about buying another boat.   We sold our last boat during the recession mostly because we weren't using it much, and it cost over $3600 a year just in storage fees, not to mention insurance, etc.   We sold that boat for about $35,000 which means every year we were spending more 10% of its value just in storage fees and insurance.  In ten years, you've paid for the boat!.   But of course, it gets worse.  In addition to operating costs like fuel and oil, there are repairs which need to be made even if it just sits in storage.   And of course, there is depreciation - the drop in value, about 50% every five years, that you take on anything you own, particularly things with internal combustion engines in them.

We thought about getting a larger boat and storing it here at the marina in the water.  The storage fees have gone up - $13 a foot plus $25 a month for electric - about $467 a month!   With insurance you are looking at over six thousand dollars a year to keep a $40,000 boat in the water - and that's not counting repairs, fuel, and maintenance!   In a few short years, you've spent more on docking fees than you've spent on the boat.

For that reason, we are going back to my first instinct - to find a trailerable boat that can be stored for $50 a month on the trailer, or even for free in the driveway.   Not only is it cheaper to store, but a boat can go 70 mph and get 10 mpg on the trailer, whereas in the water it might only go 15 knots and get 2.5 miles per gallon.

And it may seem attractive to buy an older, cheaper boat or RV or whatnot sometimes.  After all, they are almost giving them away!   However after a certain point, you are merely buying the repair rights - the right to throw more money at something, fixing it constantly.   And some people enjoy this sort of thing - tinkering and whatnot.   It is sort of what we have done with our "buggy" which was pretty clapped out when we got it.   Fix it on the cheap (sort of) and use it.   But a boat can be a much larger and more complex machine, or series of machines, that is harder to overhaul, repair, and maintain.   Thus, the cost of "repair rights" drops pretty dramatically.

One thing though - no more stern drives!   Carl Keikhaefer said it best - "too many damn holes in the boat!"

The point is, purchasing anything it pays to think about ancillary costs which can often outweigh purchase price.  Many young people pay as much as, if not more than, their monthly car payment just for car insurance.   I know I did at one time, due to my poor driving habits.   But even with "low" car insurance, the cost of running a "paid for" car can run into the hundreds a month - often as much as if not more than the car payment.   When you own six (as I once foolishly did!) the costs can get out of control.   Yes, it was fun.  No, it wasn't worth it at all.

But even random junk in your life "costs money" to keep, whether you believe it or not.  Mark's Dad would keep some old piece of farm equipment on the premise that "it's paid for, so it's not costing me anything!"   But in reality, it was worth a little less every year, so he was indeed losing money on it, as it depreciated.   And since he could have sold it for cash money (there is no other kind) and put that money to work for him, there was indeed an "opportunity cost" in keeping old stuff around.

Yes, opportunity cost arguments do make sense when it comes to hoarding old crap.   They do not make sense when a car salesman tries to get you to lease a new Cadillac.   Buying stuff never creates opportunity for consumers - selling off stuff, however, does.   In the same way, spending more money than you have to, has an opportunity cost.   The man with a yard full of rusty old cars is wasting real money, as those cars, when sold, would yield cash that could be invested.   (And no, old cars are not an "investment" as the wild auction prices for collector cars are often only half of what it costs to restore them).

Even owning a house costs money - after you've paid off the mortgage.   I calculated before that my present "paid for" house costs me over $850 a month in terms of utilities, taxes, insurance, and the like.  That doesn't even begin to count maintenance, which you need to do to keep a place up.   We've sunk tens of thousands of dollars into this house (and indeed, every house we've owned), and sadly, we won't "get that back" when we sell, as this is the one property we bought at the height of the market and today it is worth about what we paid for it (and we are lucky to be in that situation!).

The point is, owning a house costs money, even if someone gave it to you.   And that is why these idiotic contests where they give expensive things to poor people often backfire.  Oprah Winfrey gave away Pontiacs (they were that worthless) to homeless mothers on her show.   The problem was, these folks had no way of paying the income taxes on such a gift.  But beyond that, they could not afford to even pay the sales taxes, license fees, and insurance costs, not to mention the upkeep.   What sounds like a "free gift" is actually an anchor around the neck of someone who is otherwise broke.

It is like giving someone a pet as a gift.  "Here's a dog.  Now you pay to feed it and care for it for 20 years!  You're welcome!"   The cost of purchasing a pet is the smallest part.  As I noted in another posting, it can run $1000 a year or more to own a pet, and if you only making 30-50 of those thousands a year, that is a huge bite out of your income.  But it is surprising how many "poor" people own designer dogs.

Of course, this is not to say you should never have a pet.  Or a car.  Or a house.  Or a boat.  Life is to be enjoyed and experienced.   But on the other hand, if you try to "have it all" you'll find you have no time for any of it, and what's more, the carrying costs of all these things will force you to spend all your time working and leave no time for enjoying.

That, in short, was the treadmill I found myself on when I started this blog, with a house, a vacation home, two boats, six cars, and antique tractor, and a travel trailer.   It seemed like a fun idea at the time, but the costs were staggering and what little free time I had leftover from working to pay for it all, I spend washing, waxing, winterizing and whatnot.

Today, we have one house, two cars, a travel trailer (the same one) and now a "buggy" - which itself may be too much.   I look forward to someday owning one car, or maybe none.   And I am still not a big fan of owning a lawn, although I think I have that down to a pretty maintenance-free system at this point (more on that later).

So, we will "pass" on the boat for now.   Two more years in the Casita (travel trailer) including a trip to Alaska, and then we may sell the Casita and look for a small boat to explore places by water.   Or maybe not - just travel overseas or rent a cottage somewhere.

But whatever I decide to do, I will add up the ancillary costs before I make a decision!