Monday, September 18, 2023

How Much To Live Debt-Free?

Just because you are debt-free doesn't mean you can live without money.

Note:  This is a draft from 2011, that I only completed today.  One down, 485 637 to go.

In an earlier posting, I noted that winning a car is a double-edged sword for some folks.  Oprah was thinking she was "helping" the needy by giving them $21,000 cars, but as it turns out, few of them could afford the $5000 to $7000 in taxes (which the IRS wants in cash) and the annual collision insurance. What's more, they likely would not even be able to afford to maintain the cars properly, and within a few years, they would be junk.  Most ended up selling the cars - and giving cash is a far better idea than giving away things that people might not buy on their own.

Elvis did this with his entourage - buying them all brand-new Chevy El Camino pickups to drive around his Mississippi "ranch" when he owned it.  Many of the entourage members secretly sold the trucks, as they needed the cash more than they needed a new El Camino.  And when "The King" found out, he was pissed.  But it illustrates the fallacy of giving hugely expensive gifts that are not cash - to people who need the cash more than they need an expensive gift.

Objects require maintenance and incur expenses - and often taxes. Give a poor person a fancy house and chances are, they might not be able to afford the property taxes on it.  Just because you don't have a mortgage, doesn't mean you don't have expenses.

For example, our house is finally paid for. Wow, that must mean we live for free, right?  Hardly.  Between our property taxes, insurance, lot lease, fire fee, garbage fee, water fee, sewer fee, and electric bill, we still need to come up with $12,000 a year to live here.  And if we don't pay this, they boot us out, eventually.  And that's not even considering maintenance expenses, which can easily total the same amount again, particularly as a house ages.  (UPDATE:  As you might imagine, these costs are higher today - perhaps 50% or more).

So, even a "paid for" house costs $1000 to $2000 a month to live in.  And that is what a lot of people pay to rent an apartment these days.  Owning a home is not really cheaper, even if it is paid for - in many cases.  Throw in a mortgage, and you are paying extra for the privilege of owning.

Granted, we could live an area with lower property taxes, lower insurance rates, fewer fees for fire, trash, water, and sewer.  But these fees never drop down to ZERO - ever.  So, once you pay off all that debt on the mortgage, all it means is that you cut out the largest single part of your monthly expense.  In some places, the taxes and other fees could be higher than your mortgage!

Of course, that doesn't cover all our living expenses. You still have to eat and drink.  We have tried to to trim our monthly food and beverage budget to less than $800 a month, but it has not decreased by much. 

Then there are the cars. Gas, insurance, and licensing fees are all we pay, as there are no car payments.  But even "just these" expenses are easily $250 a month, if not more, depending on how far we drive.   And even a "paid for" car is really costing you money, sitting there and depreciating in your garage, every day.  Most cars depreciate 50% every five years, so a $20,000 car might be costing you five bucks a day or $2000 a year, just in depreciation.  And depreciation is a real expense.

So, add it all up, and you are looking at a minimum of $2000 to $3000 a month, just to live, or about $24,000 to $36,000 a year (or more!).  Not a lot of money, and nearly at the poverty line.  Hmmmm.... I could qualify for food stamps!

Just kidding.  I would not go that route unless I was really desperate.  Safety nets are for safety - not an entitlement, like the guy with the question-mark suit would have you believe.

UPDATE: In the last few years, I have tried to live on $100 a day or $36,500 a year.  And for the first few years, it worked. Our taxable income was low, so we paid little in taxes and qualified for all sorts of things, such as an Obamacare subsidy and a low-cost hotspot.  But with inflation, we've had to withdraw more money from our IRA and that in turn increases our taxes, which means we have to withdraw yet more money, which means we lose subsidies and then have to withdraw more money..... the snowball effect kick in, to our disadvantage!

Not only that, but when your house is fairly new and your cars are fairly new, you might not "need" much income to get by.  But 10 years later, you need new appliances and a new roof and maybe a new car and suddenly, you need a lot more income to get by.  Those deferred maintenance expenses add up, just like the depreciation on that "paid-for" car.

So the coming years will be harder for us, as a lot of "big ticket" bills come due.  Of course, there are ways of working around this.  There is little point, I have learned, in "remodeling" a home unless it is really falling apart.  Good maintenance is sufficient.  Leave the next owner to do the "makeover" to their specifications.  You can remodel yourself into the poor house.

That being said, have you priced a new roof lately?  Ouch!