Affordability

The term "affordable' is not used with sufficient precision by most people. Hell, we're all guilty of flubbing the thing, from time to time.

For most people, a thing is "affordable" if they can pay for it; that is, if current revenues are sufficient to support the additional proposed cost. Common sense, after all, says that if you can't pay for a thing, you can't afford it.

I;d suggest, however, that while it is true the we cannot afford the things we cannot pay for, it does not follow that we CAN afford the things we CAN pay for.

To take a simple example - most families could probably make the payments for a small bass boat, a travel trailer, or some other such consumer good. Don't like sports and recreational equipment? Fine. Howzabout a nice plasma TV or a classic car?

Point is, you COULD pay for these things. True, it might limit your funds for other purposes, but still, you could make the payments.

But can you afford them? Now that's a different question. To figure out affordability, you have to factor in the opportunity cost of the thing - in buying this, you are tying up funds that could be used for other purposes, or are obligating yourself to X additional hours a month at work, or what-have-you.

So, the real question to ask is whether the opportunities - investments, savings, or time away from work - are a good trade-off for the thing you're looking to purchase. I'd suggest that it might be helpful to denominate the "cost" of the thing in terms of actual hours of work required to pay for it. In making this calculation, don't go by actual take-home pay; rather, go by funds actually left over after you've paid everything that needs to be paid to keep body and soul together and the collectors (although there shouldn't be any) away from you. You'll find your "disposable income" is a lot less than you thought it is, and that your hourly rate of "free and clear" money is far lower than a salesman would have you believe.

Sure you can still afford it?

What are you, nuts?

That's the question that is asked of me as I embark on the final wrap-up of Phase I of my down-sizing plan. Who goes and sells a high-dollar house (bought very cheaply) and then turns around and buys a smaller, older home worth only a fraction of what the new one was?

Well, the question can just as easily be turned around, and I suggest we all should do it.

What are you, nuts? What the Hell are you doing pouring better than half of your take-home pay into a house? It's just a place to live, right? So why should it cost you so much?

What are you, nuts? Why in the world should you drive around in a car that costs up to half or better of your annual income? It's just a means to get from point A to point B, right? So why are you investing so much in an asset that depreciates so rapidly?

What are you, nuts? Why should you need two incomes just to live a lifestyle that's barely equal to what your parents and grandparents had on far less income? you work to pay your bills, right? So why make yourself work harder than you need to for such pitiful returns in terms of quality of life?

Gorillas in Your Midst

Every family, every situation, every problem, has what’s known as the 800 pound gorilla - one overwhelmingly important factor before which nearly every other consideration shrinks into insignificance. And, as we all know from the cliché, he’s the 800 pound gorilla in the room that no one is talking about. Your 800 pound gorilla won’t necessarily be the same as your neighbor’s, whose resident simian may bear no resemblance to that of his best friend’s. Still, the gorilla is there. Sometimes he’s discreet and quiet, but he’s always at work, even (and especially) when no one notices him.

This ape, however, is likely to be the chief saboteur and instigator of your financial stress. There may be a variety of reasons for his presence, and there may be some long and convoluted tale as to how and when he first took up residence with you, but he’s there, and he’s robbing you blind. The sooner you find that interloper, the sooner you stop letting him clean out your bank account, the sooner you can stop working for him and get on with the very real and serious business of living your life without having to play zoo-keeper.

I had developed something of a knack over the years for spotting the gorillas in other people’s lives. Because I had NEVER driven in my entire life, and because I had decided to make a virtue of necessity - in this case, our inability to support a second vehicle for my own commuter use - I had always sort of viewed the two-vehicle family with a mixture of pity and contempt.

We’d pass by our neighbors’ houses, and I’d see that, in some cases, the probable purchase-price of their cars matched or even exceeded the price of their homes. Purest folly, I thought to myself. The economics of the thing just didn’t make sense at all - who in the world really needs to encumber themselves with so much debt for a rapidly-depreciating vehicle, after all? I always though of transportation as a sort of utility - it was something to be obtained for the lowest possible price, whenever possible.

In our case, it was public transit for me, and only limited driving of the van for the wife and kids. Clever folk that we were, we’d bought our house along a mass-transit line, and used the bus system as a “second car” for my commute. Living where we did meant we didn’t need that second car that I had seen as the unacknowledged source of so many other families’ financial hardships. The mind simply boggled when we considered how much money we weren’t spending on another car, and we patted ourselves rather heavily on the back for the wisdom of choosing to live where we did.

Of course, this wasn’t without its costs. We had one vehicle, with mass-transit (such as it was) hauling me from home to Gig #1, then from Gig #1 to Gig #2, and then home again at the end of day, which was, for me, around 8:00 in the evening. I estimated that I spent not less than 90 minutes commuting in the morning to the first gig, and then another 45 minutes from there to the second job, and then about 45 minutes from there back to the house, for a total, on a good day, of about 3 hours spent in transit and/or waiting for the bus to show up. It was a pain, but it was tolerable, and we knew it certainly beat the expense of another vehicle, insurance, and all the attendant expenses.

Right?

Doing Business

The world of money and credit treats you as if you were a business. They look at income, assets, liabilities, cash-flows, and all the rest of it. Your bank treats you like a business; economists regard households as economic entities. The time has come for you to look at yourself as others do.

So, brew (or buy) some coffee, get out a calculator, a notepad, pay stubs, and bank statements, and get ready to run some numbers.

1) Start with your pay stubs; ideally, you’ll want at least three months’ worth, but the experiment works even if you’ve only got your most recent one. Add up your total monthly take-home pay. This is your Revenue.

2) Now grab your bank statement or statements for the month or months matching your pay stub or stubs. Note the regular monthly expenditures by category; if last month you had to get a new hot water heater or something, leave it out - it’s a one-time thing, and so doesn’t have much bearing on this exercise. These are your Expenses.

3) For each category of regular monthly expense, divide the monthly payment amount by your monthly take-home pay. These are your Expenses by Category.

All right, after you’ve done this little exercise, you need to take a good, hard look at that list. Housing (rent or mortgage, plus property taxes) should be at or near the top of the list. Transportation (car payment, if any, gasoline, etc.) or food (include groceries AND any take-out or sit-down restaurant meals) might be the number two or number three items, depending on your circumstances.

All of your Expenses, all those regular, big expenditures you make in order to keep a roof over your head, food on the table, and gas in the car, that’s your Overhead, or what it costs you to stay alive.

Now, while I don’t want to tell anyone how to live, I do want to suggest to you that none of your top three expenses had better be more than 30% of your take-home pay. I’ll go further, and say that your top two expenses had better not add up to more than 50% of your take-home pay.

Revenue or Income?

Revenue is everything in the way of cash and value that you bring in. Your paychecks, dividends, what-have-you, well, that's Revenue.

So, what's Income?

Prepare to be depressed, because Income is Revenue minus Overhead. So, taking the figures from the little exercise above, tote up all your Revenue, then subtract your Operating Expenses, to find out your Income.

I'll pause while you wipe the tears from your eyes and pick up your jaw from the floor, because chances are, your Income is not what you thought it was, and is not all you'd like it to be.

That's business for you.

The Magic Coffee Cup

There are financial gurus who explain that if you don’t buy a cup of coffee on your way to work, you’ll save hundreds, maybe of thousands of dollars a year. Just bringing a sandwich to work instead of buying your lunch can lead to riches beyond your wildest dreams. Penny-pinching, they argue, is the key, and all you need to do is brew your morning coffee at home, brown-bag all your lunches, and you’ll be on the way to wealth and prosperity.

It’s not always a cup of coffee, of course, but these guys always seem to fixate on some trivial but regular expenditure and the need to remove it if you’re ever going to get anywhere with your finances. For them, the secret of success appears to be in finding and plugging the countless hundreds of little “holes” through which money leaks out of your life.

Here’s a news-flash: If a couple of dollars a week can make or break you, you’ve got more problems than you know.

This isn’t to say that there is no point in trying to cut back on the non-essentials. In fact, we all probably spend more than we should on things we don’t need and could just as easily do without. There really ARE a whole bunch of little holes and leaks in everyone’s budget, and they can cause problems, BUT you won’t get anywhere if you focus on them. If it turns out there’s a three-foot gash in your finances, a couple of slow leaks are the least of your worries.

The Liberty Project

Downsizing.

It's what the boss calls it when he lays you off or cuts your hours; it's what economists and other jackasses with MBA after their names call it when an entire sector of the economy disappears. It's a neat and sterile euphemism for one of the worst things that can happen to anyone.

It's also one way (maybe THE way) to protect yourself and your family from uncertainty and hardship during rough times. You can wait to get downsized, or you can downsize yourself; take your pick.

Personal downsizing has become hip and fashionable, and there are all manner of slick and high-quality publications and websites pitching the idea of "voluntary simplicity" or some such nonsense. Their target demographic appears to be prosperous neurotics, into which category, alas, I do not fall, and about whom I know next to nothing.

Because I'm not talking to these folk, you won't see much in the way of "Spiritual Wholeness" or "Zen Finances" or any of the other crap put out there to persuade people to spend more money in order to learn how to think about spending less money.

Nor will we talk about the penny-pinching "Don't buy that cup of coffee and, in 10 years, you'll have saved enough money to buy a house in Aruba and a plane to fly you there" kinda stuff. It's not true, any of it, although we could all do to spend a bit less from time to time.

No, the primary focus here will be on how to go about setting up your life, financially, personally, and otherwise, to equip you to ride out any shock or other disturbance in the Force that may come down the pike. The goal will to be provide practical, if radical, suggestions to restore order and sanity to your finances and your lifestyle.

This blog will also highlight my own efforts along these lines; I've just about wrapped up Phase 1 of a radical restructuring of my life, and will report on it in due course. When the dust settles, I'll have cut my housing expenses by more than 50%, without having to take in a roommate, live in a van, or any of the other whacky ways others have found to get there. I'll tell you how we did it, why we did it, and share some of the traps and pitfalls we encountered along the way.

None of us has all the answers, because none of us knows all the right questions to ask; I'd be honored if you'd join me as we work together to build a sane, rational way of life for ourselves and others.