how is a magnet not free energy? does the magnet 'wear out' as its used?
The magnet is as much an "energy" as gravity or a coil spring. It only pulls something together when you pull it apart. In other words, it can store a little bit of energy if you pull two magnets apart, and use it up when you let the two magnets come back together, but you can't get energy out of setting up magnets in some weird configuration any more than you can out of stretching rubber bands in the exact same configuration.
The only reason electricity, actual energy, works from magnets is because a mechanical force can use magnets to shove electrons around inside a wire. Mechanical energy (usually a steam engine) moves magnets around, those magnets attract electrons and move them inside a wire, and magnets on the other end of the wire are attracted to the same electrons, and move after them too. In a way, it's exactly like a pulley system: move the wheel on one end, and it tugs at the ropes and moves the wheel at the other end. That's how all electrical motors work. All that the magnets do is attach themselves to electrons. The energy to move those electrons has to come from somewhere, and it's not the magnets themselves.
