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Practical: Finances

Budgeting effectively is even more essential in tough times, writes financial expert Bruce Vass.

A Charles Dicken's character, Mr Micawber, said: "Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery."

Unfortunately we are rarely reminded of this quotation but it still applies, but today's finance-driven world allows us to spend beyond our means because it is good for business.

For most of us, sailing comes under the heading of discretionary spending. Let's face it, unless the yacht is our primary place of residence, we can get by without it. Allocating sufficient resources to fund this activity can be difficult at the best of times and in a downturn, the problem simply gets a lot harder. You are fortunate if your earnings from your personal efforts have continued at previous levels. For retired yachties, relying on income from investments (my situation), they are likely facing a drop in income and assets value, at least in the short-term, because of the current world economic situation.

Essential living expenses constitute the largest expenditure category. This usually includes items such as paying off and maintaining a house, paying off and running costs for one or more cars, educating children, health costs, food and clothing, household appliances and furniture and entertainment. We may well believe that our boating activity is essential to our well being of mind and body. It does provide a major physical activity and frequently exercises the mind in solving the many and varied problems which one faces, whether sailing or maintaining the boat.

Ownership options

Ownership normally implies sole ownership, which means we have the freedom to use the boat at any time, make any changes or improvements we desire, together with full responsibility for the purchase price and the operating costs. In most cases this means the costs can be very substantial, and as we know many boats sit in marina for long periods without being used. Before we look more closely into these costs it is appropriate to mention some alternative types of ownership that can reduce the overall costs of your sailing.

Share schemes can be a valid option. The boat is owned by a unit trust with perhaps 10 units. There may be 10 owners or less if an owner wants greater user rights. The boat is usually sold at the end of three years and the proceeds, less costs, are returned to the unit trust owners. The unit trust owners are allocated with equitable use over the year including weekends and weekdays for day-sails and periods for longer cruises. The major advantage with this system is clearly that the cost of purchase and monthly operating fee are a fraction of sole ownership. It also means being freed from maintenance duties, and this will be very attractive to time-poor owners. The major snag for many will be that they do not live within a reasonable distance of the shared boat operators. These schemes will be operating in high-demand locations and it follows that they are very desirable cruising locations.

Bareboat chartering is another option, whereby you become an investor with a charter boat operator; however, we are talking significant outlays. This involves the purchase of a selected type of boat and placing it in a charter fleet. The boat is operated as part of the charter fleet with the owner receiving income from the charter of the boat. The most popular location for the bareboat activity yachts is the Whitsundays. This option will again appeal to time-poor owners wanting an investment and a professionally maintained boat in ideal cruising locations.

SailTime is a membership-based share scheme coming to Australia, proving popular in the US.

Boat costs

Boat ownership is expensive and under extreme pressure the only option is to sell up. However, it is worth doing the sums to see how much the boat is costing you and along the way you will no doubt see some savings.

The major boat owning costs:

1. Finance. Even though you most likely financed the boat from your savings, it is still important to assess the lost income from the purchase. I don't think you can use the word investment here, because in my view, investment applies only to assets that are acquired with a realistic expectation of capital growth or regular income - this does not apply to boats. For this calculation, take the current market value and apply an earning rate based on the rate that your money could earn in a cash management account, or alternatively if you have a mortgage, the rate you are paying, which is likely to be higher. (The boat sale proceeds could pay off the mortgage, hence the income foregone should be the higher mortgage rate.)

2 .Depreciation. This is the big cost, particularly when the purchase is new or near new. Much the same as a car - the first few years of ownership incur very high depreciation.

3. Berthing. If we are dealing with fixed-keel craft, the cost of a marina berth is substantial. Making savings here is going to be difficult, but in some instances you may be able to move to a mooring. Some clubs provide hardstands for half the cost of marina berths. If you own the berth this would need to be factored into the "finance" category. In this instance you could consider selling the berth and leasing but in terms of assessing your costs it is not going to make a significant difference. However, it may provide some cash flow and this may be important.

4. Insurance. This is a significant cost but one that I would never forego. Seeking competitive quotes is about the only way to reduce this but keep in mind that if changing to a new insurer they require a survey and this will quickly negate any savings.

5. Annual slipping. This is a major cost for most owners, and I suppose if you are not using the boat you can choose to delay the cost. Most of us have tried to delay this task, at some time or other. Diving on the hull to clean the weed and other marine growth is not a pleasant task and unfortunately once you start this process the antifouling is degraded and the time between dives becomes shorter and shorter. The other aspect concerns the maintenance of the prop or sail-drive. Delaying the replacement of anodes will possibly lead to additional expense. In my view examination of the hull below the waterline at least once a year is an essential safety precaution. The only realistic scope for saving in this category is to do the work yourself - but not if injuries sustained and subsequent medical costs outweigh the savings.

6. Engine maintenance. Delaying the task of changing filters, water pump impellers, engine anodes, checking belts, changing oil, adjusting tappets, cleaning air filters etc is not conducive to safe boating. However, I do recommend that boat owners should learn to do these tasks themselves. The important issue here is that only by doing these jobs will the boat owner become familiar with the workings of the engine and thus improve the odds of making repairs when stuck with a dead engine miles from a diesel mechanic. Clearly doing this work yourself will save money.

7. Equipment maintenance and replacement. Unfortunately with boats, nothing is worse than having equipment failure when miles away from the marine chandlery. When the toilet fails to flush and you don't have any spare parts, when the battery goes dead and you can't start the engine or use any other electrical gear, it will quickly take the shine off any cruise. I think it is obvious that before you leave port you should know that all equipment is in good working order. The other aspect is the need to keep important spares and tools - I won't go into details here because it is a subject on its own. The only savings that can be made in this category is by learning to do the maintenance yourself - a wise option for the same reason as doing routine engine maintenance.

8. Rigging and sails. Perhaps there is some leeway when it comes to this category. Sails at least may show signs of wear and yet be good for a few more seasons with proper repairs. Rigging does not have a rigid expiry date. However, it is essential to closely inspect on a regular basis and seek professional advice at the first signs of corrosion or damage.

9. Enhancements. When it comes to improvements which are in the nice-to-have category it is easy to defer these expenses.

10. Boat registration. No opportunity here to suspend this cost.

11. Fuel. Not a big cost on most yachts, but certainly not using the boat will save a few dollars.

12. Incidentals. Clothing, club membership fees, travel cost to and from the marina, etc.

The unfortunate aspect with boats, more so that almost any other item, including motorcars, is the problem of wear from the weather elements. Sitting in salt water makes for a lot of maintenance and whether the boat is used regularly or once a year makes little difference to the operating costs. Our marinas are filled with boats which rarely venture to sea, and it is hard to understand why the owners continue to hold on to them. Many of these boats are not being maintained, but they certainly are depreciating. Proper maintenance if delayed will inevitably lead to greater expense and higher depreciation, but conversely good maintenance will help to slow depreciation. Being retired gives me little excuse from not doing the bulk of my boat's maintenance, but I realise that working for a living places different priorities on owners and perhaps it is just as well that other owners will continue to employ people to do the work.

The numbers

To put some numbers on the above cost items I have taken my own situation, based on a 10-year-old, 10m fibreglass yacht. I do most maintenance work myself, with help from sailing friends. I have rounded the costs in all cases, not wanting to give the impression that this exercise can be too exact. The other qualification is that we are talking South Australian costs, which may be lower than many places across Australia.

Cost and savings

Is this total surprising? Many will be surprised and no doubt some will deny that the boat costs this much. My guess is that this is a conservative figure and in many places around Australia you would add at least $5,000 to these numbers, mainly for higher marina and slipping costs, and if you pay others to do most maintenance jobs, add at least another $2,000. I suspect that my situation is closer to the norm and have excluded these costs from the list above. However, if you like to provide employment for others the list should total $17,500.

Options if you need to reduce ownership costs

1.Do the maintenance yourself, cut out the discretionary, defer some costs, save $4,000.

2.Keep the boat but not use it for say the next 12 months, basically deferring all maintenance, save $6,800. Consider a hardstand or moorings if these options are available.

3.Consider shared ownership or chartering.

4.Sell the boat, in a depressed market, take the loss (second-hand boats are now going for about 10 percent less than before the GFC although the market is still strong), save $17,500 plus pocket the proceeds for other uses.

The problem with boat ownership is the level of fixed costs, which in the example I have used represents at approximately 70 percent. For newer, more expensive boats, the figure would be much higher, perhaps 90 percent.

Budgeting is about setting priorities and perhaps the task here is to look at total outgoings rather than focusing solely on the boat. We may have to review expenditure such as holidays, car replacement and home improvements. We may be in the habit of paying people to do things that are not beyond our own abilities.

Annual cost of boat ownership $

1.Finance cost - based on a depressed market valuation of $70,000 @ 4 percent interest 2,800

2.Depreciation - based on a guess, say 5 percent p.a. (much higher for newer boats) 3,500

3.Berthing - SA public marina rates of $60 per week 3,200

4.Insurance - replacement cost $93,000, $460 excess 900

5.Annual slipping - own labour 600

6.Engine maintenance - own labour, mainly oil, filters, anodes, belts, impellors etc 500

7.Equipment maintenance and replacement - can vary greatly from year to year 1,000

8.Rigging and sails - can vary greatly from year to year 1,000

9.Enhancements - this is wholly discretionary 1,000

10.Boat registration - SA rates 300

11.Fuel - based on weekly use and two weeks away pa 200

12.Incidentals - doesn't include club fees in my case 500

Add $2,000 if you pay others to do the maintenance

Total $15,500

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