Wednesday, May 25, 2011

Budgeting: Part 24: Avoiding Maintenance Fallacy

"Another flaw in the human character is that everybody wants to build and nobody wants to do maintenance."
- Kurt Vonnegut, Jr.

"A man builds a fine house; and now he has a master, and a task for life: he is to furnish, watch, show it, and keep it in repair, the rest of his days."
- Ralph Waldo Emerson

(In this post and subsequent posts, I am walking though 12 different examples of household budgeting mistakes and how they can all be corrected with accrual accounting techniques. Accrual accounting recognizes income when it is earned and expenses when they are incurred. An alternate definition is that accrual accounting records events that change your net worth.)

The symptom:
Avoiding maintenance seems like frugality.

The example:
You observe how much money some of your homeowner friends spend on home repairs and replacements - roofs, siding, gutters, carpet, A/C. Over time it's big bucks! You think to yourself they could be rich if they would stop doing that. You think to yourself that you could live without repairing and replacing most of that stuff. You decide that when you buy a house, you will do things differently. If a pipe breaks and water is gushing everywhere, of course you will fix it. But for other types of things, you will just live with it. You can stand to live with no A/C and old carpet and leaky gutters and so forth. It's not that bad, even if others make fun of your frugality, because you will be laughing all the way to the bank. The extra one or two hundred thousand dollars you won't be spending on home maintenance during your lifetime will pay for early retirement. You'll show 'em.

A lot of personal finance bloggers write about how they used to be out of control with debt. I don't have that kind of story. I never got myself into debt trouble. Others blog about how they lost tons of money on mindless investments. Now here you might think I would have a story worth writing about, as I have a very high degree of openness to experience. Indeed, over the years I have seemingly tried every possible investment option, but as luck would have it, my openness is also paired with an unusual sensitivity to worst-case risk. So while I may have lost 100% of my position on some investments, I wagered a ridiculously small amount, learned my lesson, and moved on. Winners made up for losers. Thus, I've never really had my fingers burnt badly in the aggregate with my investments.

But there is one financial area where I truly blundered in the past, and that area is home maintenance. After I bought a house and nothing major went wrong for the first few months, I naively assumed a lot of this maintenance stuff was unnecessary. In fact, 10 years ago I might have been the swaggering person in the example above.

The first reason why avoiding maintenance is foolish is probably obvious to most people, and I'm sure I should have known better. Unattended, little problems quickly become big problems. Isn't that how life always works? Yes, I suppose so, but I was truly unprepared for how such small home maintenance issues quickly became large issues in subtle ways. Let me lament for a minute...

  • I didn't bother to seal up some minor cracks in the mortar of the brick facade in the front. This had been pointed out by the home inspector when we bought the house. Why bother? No one will notice from a distance, and I'm sure the heat loss isn't much. Ha. It wasn't that easy getting rid of mining bees and sweat bees that nested in the walls of my house.
  • And then there was the fence that needed painting. It didn't really look that bad. I figured I could save a little money for a few years. Yeah, you guessed it. After about 3 years of rotting wood, the fence collapsed.
  • And the arborist warned me that the roots of that pine tree were pushing up the A/C slab. But I didn't listen, and now I know that those motors don't like to be run at an angle for very long.
  • And what's the big deal about clogged gutters? It's not like I stand at the roofline in the rain and care about the spillage. Well, I let that go for a while, and then the fascia got ruined. And then it quickly pulled away from the eaves just a little bit. And then a squirrel crawled in through that gap into the attic. AND THEN THE SQUIRREL HAD BABIES IN THE ATTIC!
The squirrel incident was the final straw, and I finally got religion about the fact that little maintenance issues quickly become big issues. I was thousands of dollars late in this epiphany, but better late than never.

The second reason why avoiding maintenance can be foolish is a little tricky, and for sake of argument, let's assume for a moment that we live in some perfect world where little maintenance issues don't snowball into bigger ones. Unfortunately, there would still be a financial danger, and a little accrual accounting will help elaborate that danger. But before the math, let's use a little common sense. One surely has to question whether the road to wealth involves buying things and then not fixing them when they break. It seems unlikely that a financial advantage is obtained by doing nothing when problems surface. Why then do we fall into this trap? I think there are two reasons. First, it has a ring of austerity. If the A/C and the upstairs bath faucet both break down, and you don't fix them, you've deprived yourself of being able to use the shower and the air conditioning. Sacrifice is easily confused with frugality. Second, there is a cash flow difference in the short run. If someone hands you a $100 estimate for repairs and you agree to it, you have to fork over the $100. If you don't have it fixed, you don't have to pay. Walking away from the $100 repair might feel the same as walking away from any $100 item you might purchase at the mall.

Now let's look at the numbers for durable goods. Here's an ultra-terse definition of the following terms to make sure we're all on the same page with their financial impact: Purchases: Money is converted to an asset. (No gain or loss) Depreciation: The asset decreases in value over time. (Loss) Breakages: The asset breaks and loses value. (Loss) Repairs: Money is converted into an improved asset. (No gain or loss!) Upgrades: Junk old asset + purchase new asset. (Loss only on the old asset) So where do we lose money? Interestingly enough, we don't lose it directly on purchases or repairs, and we typically don't lose very much on upgrades. Money is lost primarily on breakages and depreciation, which are both generally unavoidable. Now to be fair, purchases (and upgrades) indirectly affect your financial position, in the sense that you are setting yourself up for future depreciation of the item you purchase. Thus, we see that avoiding home repairs, maintenance, and even many upgrades is simply yet another variation of cash flow gimmickry. It's very easy to suspend cash flow temporarily. I can decide that during the next week, I'm not going to purchase any gasoline or food, pay my credit card bill, repair anything on my house or car, and so forth. That's fine if I have a cash flow crunch and need to do that temporarily, but it doesn't really make me any richer. All I'm doing is delaying all these payments, and unfortunately, delays often have negative consequences, both financial and otherwise.

There is also another subtle reason why avoiding repairs and replacements is generally financially unwise, and this reason involves uncertainty. If someone else needs to make the repair or the replacement, they will tend to demand a discount for the uncertainty involved. For example, suppose you own a $10,000 car with a bad transmission. If you know that it will cost $1,000 to get the transmission fixed, then in theory, the car is now worth $9,000 because it will cost someone $1,000 to convert it into a working $10,000 car. However, if you don't fix it and you go to sell it for $9,000, you will find that it will be very hard to make the sale at that price. Unfortunately, a working car with an asking price of $10,000 is not really the same as a broken car with a $9,000 asking price and a repair estimate of $1,000 from a garage. Buyers will want a greater discount than the repair price to compensate for several unknowns: (1) The repair cost might end up being higher when all is said and done. (2) Other repairs might be necessary, and those repairs might not be obvious until the car is drivable. (3) Since there is no working vehicle, the whole thing could be a scam. (4) It's not clear how much time and hassle will be involved to complete the repair. It's probably also obvious to most people that a nonworking car is a nonstarter for most buyers. The vast majority of people won't touch it. These same people may spend considerable time researching and negotiating the price of a working car, but they are not going to touch a nonworking car. They are not going to consider that $10,000 car with the broken transmission even if you list it for $5,000. This means you will have a very small pool of potential buyers, and realistically, perhaps no actual buyers for your particular car at your particular location and time.

This all seems so clear with a vehicle, doesn't it? Well, the math and the economics aren't really much different when it comes to a home. The money is mainly lost on breakages and depreciation, and you will need to discount your house to sell it if you expect others to perform repairs and/or upgrades.

But instead of continuing to dwell on the negative aspects of avoiding maintenance, here are some practical, positive ideas to consider:

* When things break, the loss is incurred mainly on the breakage, not the repairs. Don't be afraid to fix things.

* Depreciation can't be avoided. However, high quality stuff yields a long depreciation life. Consider high quality items.

* Don't upgrade stuff too frequently because you incur unnecessary losses when you junk stuff that still has a lot of value.

* Buy less stuff! Less stuff usually means less depreciation. This is, of course, the ultimate money saving idea. Don't buy a 6 BR house and skimp on repairs. Buy a 3 BR house instead.