What I Learned During the Year of Penury

Well, assuming all goes as planned (big assumption, I know!), according to my financial management software this year I should see a combined earned and passive income of about $52,000. That’s only $13,000 short of my late, great full-time editorial salary, and $8,500 more than I earned teaching full-time. And it’s a far cry from what crossed my bank account’s threshold last year, about $28,000.

I learned a lot of things by trying to live on 43 percent of my pre-layoff salary, very valuable things:

If you’re not in debt, you can live on a lot less than you think you need.
If you are in debt, you’d better have a good stash of emergency savings to cover payments.
You can live frugally and still be reasonably comfortable, most of the time.
No matter what anyone says about the alleged tax advantages of carrying a mortgage, when you’re unemployed a paid-off roof over your head is your second-greatest asset.
Your third-greatest asset is a paid-off car.
Your greatest asset is good health, should you be so lucky to have it and keep it.
Beans, rice, and pasta are splendid things to eat.
Chard growing in the garden goes a long way toward putting a nice meal on your table.
A stand of lettuce helps, too.
With careful planning, it’s possible to stay out of stores for surprisingly long periods.
Raising the deductible on your homeowner’s insurance comes under the heading of penny-wise and pound-foolish.
When budgeting for irregular income, it may be good to create longer budgeting periods than a month. At times, two- or three-month budgets may work more effectively.
When money is tight, that is when every unplanned expense in creation crashes down on your head.

Despite fears to the contrary, I managed to stay in my home and live without too much deprivation by budgeting carefully, stockpiling food, conserving energy, and putting less money in savings.

It’s surprising how little it takes to get by when you’re not working. I would have done OK on even less, had I been inclined to shop in thrift stores and low-end grocery stores. It’s also clear that I could have cut living expenses still further by moving out of my present home, which has relatively high operating costs, and going to Sun City, where taxes and insurance premiums are significantly less.

What kept me in my home was not having a mortgage. Some years ago I decided to defy conventional wisdom by paying off the mortgage I had on my last house. It occurred to me that each monthly mortgage payment I did not have to pay represented a return on investment of exactly that much. I owed about $70,000 on the house and was paying about $860 a month, which, when the alimony ran out, was more than half my monthly take-home pay. Less than $200 of the PITI comprised tax and insurance. My investments earn about 7 percent; 7 percent of 70 grand is $408. So despite the protestations of two investment advisers, it seemed to me that little would be lost by investing a chunk of savings plus an inheritance in residential real estate.

Over a ten-year period, the house’s value more than doubled, allowing me to buy my present house, a somewhat nicer place in a quieter part of the neighborhood, and pay for it in cash.

If I hadn’t owned the house outright, I can’t imagine what I would have done last year. Although the house has dropped $35,000 in value since I bought it, you don’t realize a loss until you sell, and because I didn’t owe anything, I wasn’t forced to sell or default. There’s simply no way I could have paid $10,320 out of a $22,000 net income and survived. It was extremely lucky that I made that choice all those years ago, and that I’d managed to accrue enough savings to pull it off at the time.

So, I learned that a smart decision can pay off a long time after you make it. And I learned that it is not a bad idea to pay off a residential mortgage.

Having a lot of savings rescued me from the potential disaster posed by the mortgage on the downtown house. I used the tax-free portion of a whole life insurance policy to pay my share of the monthly payments in 2010. Because we managed to get a temporary loan modification, a couple thousand dollars of that remain to help defray the 2011 PITI.

There were some difficult moments. The cost entailed in falling and hurting myself was a bit startling. It would have been even more startling had I consented to surgery that would have caused the loss of an entire semester’s pay. Living through the summer with the thermostat turned up so high that my friends wouldn’t come inside the house was uncomfortable, and I’ll be happy not to have to swelter like that come next July.

When I would run out of cash, not spending a dime for a week or ten days at a time was a challenge. And the summer months, during which income did not cover base expenses, were nightmarish. Even though I’d saved enough from teaching income, theoretically, to squeak through May, June, July, and August on Social Security, by the time fall semester started I was running out of money. Classes started sometime after mid-month, we didn’t get paid until the last of the month, and that was only a partial paycheck. The summer stipend didn’t help much, because most of it wasn’t disbursed until long after I needed it. Being paid for only two classes during the first eight weeks of the semester didn’t help things much, either.

By December, the money pile had not recovered from the effort to get through three and a half months with less income than outgo. Fortunately, though, the stock market had recovered. The strategy of delaying a drawdown from savings had worked, and my IRA and brokerage accounts had returned to something close to their pre-Crash levels. At that point, my financial adviser and I decided it was safe to start a 3 percent drawdown, which, until inflation kicks in, will guarantee enough in the checking account to pay the bills, exclusive of earned income.

In retrospect, I learned that I would have been better off if I’d put all my summer survival savings into my regular cash flow account at the end of spring semester, rather than setting the money aside in a savings account and doling it out to myself in monthly “paychecks.”

Instead, I should have treated the summer as one three-month budget cycle. This cycle should have contained three months’ worth of expense budget: three months’ worth utilities, insurance, etc., plus three months’ worth of spending money. On the credit side, it would have included all my spring-semester survival savings plus projected Social Security. Subtracting debits from the summer-long total, not from one month’s worth at a time, would have allowed me to see at a glance how much remained to get by on until salary started again. This would have relieved a great deal of worry engendered by fretting about how to get by from month to month. I still would have been in the red at the end of the summer…but I probably would have stressed about it only once, instead of three or four times.

It really would have helped not to have had a $165 palm tree trimming bill in June, a $30 copay to the Mayo in July, a $105 electrician’s bill in August, and a $120 plumbing bill in September. I suppose that when you foresee a financially tight time coming, you should add about $150 to your regularly budgeted expenses to cover Murphy’s Law.

The economy is improving. Eventually most of us will get jobs again, although probably not at what we used to earn. The Fall of the Bush Economy is not the last recession we’ll see. There’ll be more, and they may be worse. By way of preparing for those, I think, the take-away messages are as follows:

Live within your means, even in good times.
Within your means, live frugally, even in the best of times.
Build savings. Don’t limit savings to your IRA or 401(k).
Distribute savings wisely between cash and investment accounts.
Pay off debt. That includes mortgage debt.
Avoid accruing new debt. Use savings to help pay for big-ticket items in cash.
Take care of your health.
Expect the unexpected.

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frugalscholar January 22, 2011 at 12:08 pm

Very reassuring. Make sure you read this when you go into panic mode. I know I will.

Are you including investment appreciation in your income assumptions?

FB @ FabulouslyBroke.com January 22, 2011 at 5:25 pm

You have had fantastic foresight to paid off your mortgage as soon as possible. That’s really amazing. Congratulations.

Barb January 22, 2011 at 8:36 pm

Wonderful, thoughtful piece Vicky. I am working on accepting exactly how little of what happens in our own small world is really within our control – maybe 5% (our reactions to events and that’s it). Sometimes it takes us a while to really figure things out.Sounds like your reflection is doing exactly that. These observations/lessons should go a long ways toward reducing stress.

Shelley January 23, 2011 at 3:42 am

“You can live frugally and still be reasonably comfortable, most of the time.” That’s my favourite part of this post. It’s not a concept that most people seem to grasp.

Maciej January 26, 2011 at 11:11 am

I’m offended that you consider 28,000 dollars in a year penury. My wife and I have lived quite comfortably on 15,000 dollars this year, without any sort of government aid, and we pay about 1/3 of our monthly income on rent. We even manage to save a few hundred dollars each month. I could live like a king on 28,000 dollars!

How are you spending your money, that you consider a good income poverty? I apologize if I have misjudged you. I linked over from simple dollar and don’t regularly read your blog, and thus I am not fully aware of your situation.

funny January 26, 2011 at 12:26 pm

@ Maciej: Welcome to FaM! The Simple Dollar is a great site and always a lot of fun to read–glad to have Trent’s readers visit.

Is $15,000 your gross or your net? And where do you live? Some parts of the country cost less than others. By and large, the bigger the city, the higher the cost of living. My hometown is now larger than Los Angeles, with a sales tax rate nearing 10% and new taxes on food, too.

I live in a nice house with a pool and a big yard, which I paid for in cash. While I was employed (and I intended to stay employed until age 70, six years beyond the date I was laid off my job), I had no problem covering the cost of living in and maintaining such a house and covering the stiff bills for taxes and insurance. My summer electric bills, for example, run around $225/month, and that’s with the thermostat turned way up to a temperature most people consider uncomfortable. I’m not kidding when I say some of my friends will not come in my house during the summer, nor am I kidding when I say that in the winter I wear a fleece jacket around the house.

My car is also paid for in cash. It is 11 years old, and I intend to drive it until it falls apart, mostly because the cost of registration and insurance here is very high on newer cars. My zip code has one of the highest car insurance rates in the nation. Gasoline is now around $3/gallon here; I get about a 15 cent/gallon break by shopping at a Costco in a low-rent part of town, but it still costs $40 to fill the tank, and I need at least two tanks of gas a month to commute to my part-time contract teaching job.

I don’t eat processed, packaged, or junk foods. Fresh meat, vegetables, and fruit are expensive. No doubt of it, I could eat for a lot less if I grazed off coupons–which mostly apply to products I don’t eat. But I’m not interested in putting my health at risk with a diet of salty, sugary, processed foods.

Other than concocting home-made window cleaner, tile cleaner, furniture polish, air freshener, bubble bath, and body powder, I don’t indulge in frugalities like making my own laundry detergent, as Trent likes to do — for a single woman living alone, the saving is not worth the mess. I do not make do with glasses that I can’t see through for the sake of paying less, nor do I try to order prescription glasses online. I no longer let my hair fall lank around my shoulders to avoid going to the hairdresser, and I no longer substitute olive oil for face cream and skin conditioner. Probably if I were willing to do those things, my costs would be slightly lower.

Why a person would be “offended” because $28,000 represents a tight budget for someone else escapes me. Why does that annoy you? And, given the comment about “government aid,” do you feel I should be ashamed for accepting Social Security and Medicare, programs into which I have paid for more than 40 years? Why?

Maciej January 26, 2011 at 3:11 pm

15,000 is gross income, for a graduate student in a very inexpensive area of the USA (except those darn food taxes).

I didn’t mean for my comment about being offended to be offensive itself. To me, the term penury calls to mind the modern homeless or feudal serfs, not a moderately low income.

There is also no shame in accepting money from a system into which you have paid your entire life. I have studied economics, and you have probably paid far more than you will ever get back in return. Yet for my culture, it is wrong for a healthy young person to accept help from the government when he could work himself. I could get a job as a laborer, but I choose to go to school. Your blog is interesting and I will continue reading.

Bargnhtng January 26, 2011 at 4:12 pm

I agree with Maciej. If you don’t have a house or car payment, what are you doing with $2300 a month and still consider yourself in poverty? $2300 a month should cover one person’s food and monthly expenses easily.

funny January 26, 2011 at 5:22 pm

@ Bargnhtng: To start with, 20% of that (bare minimum) is withheld for federal and state taxes. Another $110 is withheld by the SSA to cover Medicare Part B. Medigap is $90 a month, and Medicare part D is $20 a month. So we start the month with $1,620. Next, $325 a month has to be set aside for annual property taxes, homeowner’s insurance, car registration, automobile exhaust testing, and car insurance. This leaves us with $1,295 to live on for a month.

In May, June, July, and August, when utilities are at their highest, nonnegotiable, can’t-get-out-of-it, base expenses run $1,245. That is BEFORE we’ve bought groceries, before we’ve spent $80 on gasoline, before we’ve covered the occasional unexpected plumbing or veterinary or dental or medical bill.

If that’s not penury, m’hijitos y m’hijitas, what the fu*k is it? Or, to put it another way, if you can feed yourself and your dog and your car on $50 a month, I sure do wish you’d explain how.

BTW: In the “homeless” department, it should be noted that if you can’t pay your property taxes, the county will take your home away from you and evict you.

funny January 26, 2011 at 4:23 pm

@ Maciej: OMG, you’re a grad student? You’re doing pretty well for a graduate student, at 15 grand.

My young things made about 26, BUT they were on 12-month research assistantships. They were the only graduate students in Arts & Sciences with such generous assistantships. Despite the tuition waiver, GDU found every which way from Sunday to nick them for whatever it could get.

Don’t do the laborer thing, kiddo. It’ll just lead you to a lifetime of minimum-wage jobs. Hang in there, and sooner or later you’ll get some return on your effort.

Do note that even with an undergraduate degree in French from a respectable university and two graduate degrees in English from a laughable university, in my dotage I’m generating about 10 grand more than Arizona’s median household income working part-time and freaking blogging and getting paid to read mystery novels!. In 2009, when the Great Desert University could still afford full-time editors, my AGI was 85 grand, and in the work department, that year I was McCavity the Mystery Cat.

Graduate school is a bizarre time. Keep the faith. And do check out Frugal Scholar (click on the link in the Blogroll), who has much to say about what happens to She (or He) who survives graduate school.

No offense taken. ;-)

Mel January 26, 2011 at 6:31 pm

I get that $28K may represent a tight budget for your location and the standard of living you wish to have. However, your suggestions for cutting back and tightening budgets? Would require me to LOOSEN my budget impossibly, and I am no means poor, frugal or in penury–I’m in in better-than-average financial shape for my situation (and renting–yes, many people do not own houses). So yeah, I am a little offended that someone fortunate enough to own a house and a car (with a pool! pools are expensive, optional luxuries any way you slice it), who had a savings cushion, is calling that “penury” when there are people in actual poverty out there who don’t have roofs, or food, or access to medical care.

I’m sure your tips will be useful for other people in your situation. They’re not useful for people in actual poverty, who never had nice houses or cars in the first place, who don’t have the ability to stockpile food, who never had the option to live in expensive locales with high property taxes–or even people who had those things, and ended up having to sell their nice houses and move into cheaper ones, or rent, or relocate to less expensive parts of the country.

You were able to keep your house and car; you were able to avoid compromising on food quality; you didn’t have to shop at thrift stores or go to food banks. That’s not penury. You yourself said you were “reasonably comfortable, most of the time”–reasonably comfortable is not the same thing as extreme poverty, destitution, or insufficiency. Simply having greater outflow than inflow of cash does not negate the fact that you had more assets to cushion you than most people will ever have.

But I guess “What I Learn During the Year of Living On Less Than I Usually Make” doesn’t have the same ring to it, although it would be a lot less expensive to actual poor people.

funny January 26, 2011 at 6:34 pm

@ Mel: On my planet, we call the difference between having $50 a month to live on after the nonnegotiable bills are paid and “penury” a matter of “semantics.” :-D

Kathy Card January 27, 2011 at 7:52 am

How do you get paid to read mystery’s?? I would LOVE that job.


Dan Brantley January 27, 2011 at 8:18 am

This conversation reminds me of when Clint Murchison Jr sold the Dallas Cowboys, it was reported that he was “broke,” because he only had $5 million dollars. It’s all a matter of perspective.

Remember, if you live in the USA, you automatically spend more, consume more and waste more than about 80% of the rest of the world.

One last note FWIW, we live in a nice area of town, and during financial squeezes we have been as much as 6 mos behind on the water bill totaling about $500 (we paid, just not enough, or often enough) But there are many homes in this area whose monthly bills run over $500 a month, We kind of slid beneath the radar until we got caught up.

Regarding advice/methods/experience/tactics from this or any blog, to paraphrase a 12 step program tenet, “Take what you want, and leave the rest.”

Terry January 27, 2011 at 4:12 pm

I skipped over from Trent’s site and enjoyed this and will keep reading. I so appreciate your not compromising on food and hair cuts and skin care — I was laid off a little over a year ago and took a big cut so my circumstances are much the same as yours. I am earning more now, but still below what I was making and still eat mostly organic, free of junk, get haircuts when I need them and buy good skin care products that actually nurture my skin. I live in a part of the country where it is cheaper and I’m grateful for that. Thanks for your blog!

Jennifer January 31, 2011 at 9:22 pm

Thank you for the post. I did live on much less for the last 10 years (several where I was on my own and living on $3,000 a year). I agree with you- I was pretty content. I do have to admit that I have been feeling like I live in luxury now that I am making $30,000 a year again, and have used that to pay off all debts. I had thought, perhaps foolishly, that once I had a house that was paid for I wouldn’t need that much income if I didn’t want it. I am getting a little concerned. Thank you for the post though, and congratulations on your success overcoming your obstacles.

funny January 31, 2011 at 9:48 pm

@ Jennifer: Thirty grand, if you’re living in a place that’s paid for and in an area where the cost of living is less than exorbitant, should keep you in beer & skittles without too much trouble. The net on $30,000 would cover my costs for my house, car, insurance, property taxes, and daily expenses with a little over a thousand dollars to spare.

At one point, I figured I could live in Sun City, where tax and homeowners & auto insurance are much lower, on a gross of about $24,000 or $25,000. However, SDXB (Semi-Demi-Exboyfriend), who lives there and who raises frugalism to professional heights, thinks that a gross income of $24,000 is too low to live comfortably, even there. I do not live as frugally as he does — he is extremely talented at cutting costs — and so I think if he says a figure is too low for comfort, he’s probably right.

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