Cost of our Utilities over a period of 5 years

Returning to the immediate question, which is "how are we coping with the price increases". Here are the numbers for the actual out of pocket costs for utilities at our household:

2004 = $2,255.74, plus internet access = $2,821.19
2005 = $3,004.51
2006 = $3,270.98
2007 = $2,977.51
2008 = $2,060.22 for 8 months, probably $3,090.33 for the year.





Some notes about the above numbers. They include our household's definition of utilities, which include natural gas, electricity, water, sewer, telephone, basic cable TV and basic internet access via cable. 2004 did not include the cost of internet. So this should be adjusted to add the difference, which was $566.16 in 2005, to make a valid comparison with 2005. We do have central air conditioning and we use it. We did upgrade our hot water heater to a more efficient unit in 2006. We do annual preventative maintenance on our HVAC so it is in good condition and I change the filters quarterly. We also use a set-back thermometer. I've made no attempt to account for differences due to weather from year to year.

So what does this indicate? Here are the changes per year, expressed as a percentage, with 2004 as the base 100%. Years with utility costs higher than 2004 have a number greater than 100%. Years with utility costs less than 2004 have a number less than 100%:

2004 = 100.0%
2005 = 106.5%
2006 = 115.9%
2007 = 105.6%
2008 = 109.6%

Costs, while increasing, are not as great as I assumed. 2008 is on a trajectory to be about 10% higher than costs in 2004. That might seem like a lot, but consider inflation, which is historically expected to be in the range of 3.5 to 4.5% per year. Here is what my costs would be if my utility prices increased at the lower annual rate of inflation of 3.5%:

2004 = 100.0%
2005 = 103.5%
2006 = 107.12%
2007 = 110.87%
2008 = 114.75%

This compares fairly well to the actual costs over the past 5 years. Actual out of pocket "utilities" have cost my household $15,164.52 over the period 2004 through projected December 2008. Using the percentage increases based on a low inflation rate of 3.5% I would have spent $15,128.54 over that same period.

My conclusion? Surprise. Based upon what I have heard in the media, I expected my actual out of pocket costs to be higher than what they actually were. Over a period of 5 years, there had been continuous, but moderate increases. There are some spikes. 2006 was 15% higher then 2004 and about 9% higher than 2005. So it would seem that my budgeting needs to be tailored to accommodate large jumps from time to time. Other than that, I feel pretty good about the outcome. One caveat: to get a better handle on true "energy" costs, electricity and natural gas costs should be seperated from the other costs.

Looking toward the future, I expect that the next 5 years will have steeper increases than the previous 5 years. But who knows?

Basic Utilities Only

I did an analysis on just the energy components of the utilities; that is, natural gas and electric. The year 2004 was unusually low. Possibly due to milder weather. So I have included the year 2003 to determine if 2004 was an anomoly, and I believe it was. Here are natural gas and electric costs only:

2003 = $1,056.13
2004 = $ 884.92
2005 = $1,120.17
2006 = $1,186.58
2007 = $1,109.69
2008 = $ 714.53 for eight months, probably $1,071.80 for the year.



Options for Decreasing Utility Costs

If at some point I decide that the costs are "intolerable" I have a few options. Internet access in our area has become more competitive and I could switch from my current provider to another. This would decrease the cost for one or two years. Something worth considering. Another possibility is changing our phone service. We use AT&T with a robust package which yields unlimited calling within the US. We could downgrade to a local service and an internet telephony service, or a local service and an upgraded cell phone service. Either approach would lower our annual costs. So we have some options and we can use them to control our costs. As for the future, who knows? Of course, cable TV and internet access are ultimately "discretionary" expenses and we could limit or eliminate them altogether.

I have tracked all of the gasoline consumed in one of my cars. I'll post that in the next installment.

Coping with the Onslaught of Price Increases – Part II

I assume the limits of my spending will be reached when I have spent all of our free cash flow (all of our income) and I can no longer tap our credit cards, etc. However, we can voluntarily pull back before we reach that cliff. If we don’t and we continue to spend, then we face the possibility of another financial meltdown.

Of course, as we approach that cliff, any unanticipated price increase or unexpected expense, will nudge us closer to the financial precipice or over it. I guess that is why the financial experts recommend a personal cash emergency fund. Assuming I had such a fund, I could dip into it, should unexpected things come up.

That leads me to the definition of “unexpected’ which is similar to a discussion about “accidents”. In our culture, we use very broad brush strokes with the word “accident”. I’m driving 30 in a 20mph zone and I have to swerve to avoid a child, a dog in the road or another driver. If damage is the result, we call this event an “accident” although I was driving 50% faster than the posted speed limit. Similarly, if I am living my life on the financial edge, and additional expenses rear their ugly head, be it a chipped tooth, broken automobile or whatever, we call this an “unexpected” expense. This flies in the face of the notion that human beings frequently experience illness, and automobiles, being machines, have wear parts and do on occasion break down.

The definitions appear to be subjective. An "unexpected" expense was just so, because I never expected this would happen. Is is truly "unexpected" or was it simply poor planning on my part? I need to be honest with myself and my spouse. This also applies to “discretionary expenses”. What are they? I have seen a broad definition as an expense beyond necessities. Unfortunately, one man’s necessities are another woman’s requirements (just trying to be fair to the sexes here).

For example, one could argue the merits of cable TV. If having a television is considered a necessity, then I suppose that includes “basic” cable. However, many people would probably argue that HBO or Cinemax, ESPN1 or ESPN2, Sci-Fi and similar “premium channels” are a necessity.

I disagree. I view necessities as those things that are necessary for survival. Anything after that is discretionary, and is negotiable. Looking good, or even maintaining a standard of living is not a necessity. Over the years, I’ve had this conversation with many people. My view seems to be in the minority. Once, my youngest son needed a new pair of gym shoes. What followed was such a conversation. I agreed to get him a pair of good quality shoes. He vigorously insisted on a pair of Nike Air Jordan’s. Ultimately, I agreed to the purchase but with a stipulation. I’d provide the $70 which was the equivalent price of the pair I was willing to purchase and he would provide the cash difference. In the money he received for his allowance, performing his chores, etc. I always insisted that a percentage be saved. I suggested he take the difference from his “nest egg” to fund this absolutely necessary purchase. I gave him the money we agreed upon and interestingly, he never did purchase the Air Jordan’s. He purchased a different pair, and he may actually have been able to pocket some of the cash by purchasing something for even less. Had he manipulated me or had he decided that the Jordan’s were not a necessity? I don’t know his motivation but I know the result.

So it is with many "necessities". We find we can live without some things and some things we cannot. My spouse needed a new purse. A quality, made in the USA leather purse she decided was a necessity. A Louis Vuitton was not.

And so it goes. I decide I need a new car. Why? Because the one I have has 60,000 miles, or because I am tired of it? Because the dealer offered me a good deal on a new one? Recently, I took my Subaru in to the dealer for scheduled maintenance. He pointed out that I was approaching the time when I would need new brakes and quoted me $550 to do the job. I declined but authorized only the immediately necessary work. I decided to do some comparative shopping for the brakes. Upon completion of the absolutely necessary work, I returned and picked up the car. There was a conspicuous tag on the rear view mirror offering me a deal. “This could be the last maintenance you need to do on this car” the sign said. It offered a guarantee of $15,000 for a trade-in on a new one! Looked tempting, but I did a few quick mental calculations and realized that I would be taking on about $10,000 in debt. I have learned to do some comparisons to a mental “want” list that I have. It keeps me from making rash financial decisions. In this case, I quickly calculated what I else I could buy with that $10,000. I could retire debt, or purchase a flat screen TV and eight years of $1,000 vacations. I could purchase new living room furniture and (3) or so $1,000 vacations. The list went on and on,. Then I thought about why I didn’t have that flat screen TV. It was because I had said to myself that “I couldn’t afford it”. So how on earth could I afford a new car? The obvious answer is, I can't. Or I can, but I would be compromising my integrity.

To Be Continued......