The New Frugality By Chris Farrell

The New Frugality

The New Frugality Embraces a Margin of Safety

The New Frugality means accepting the wisdom of always managing our finances with a “margin of safety” in mind. In practical terms, creating a margin of safety is siphoning more of our earnings into savings, paying off debts, and borrowing less. A healthy financial buffer offers shelter against terrifying downturns in the economy and upheavals in the financial markets. It’s a household money cushion against life’s inevitable setbacks, such as a layoff or medical illness, a margin of safety allows for sensible risk taking over a lifetime. A healthy house hold balance sheet lets us pursue intriguing opportunities when they come along, to take risks that might lead to a more satisfying career, to embrace changes in our lives that.

Values Matter

We don’t make financial choices in a vacuum. Savings isn’t just money. It’s a tool that’s critical for creating the kind of life we want to lead. 

Frugality isn’t cheapness. You can be frugal and a generous host. 

Frugality is sustainable. Cheapness isn’t. The Latin derivation of the word frugal is frugalis, which means “virtuous, thrifty.” See also, The art of frugal feeding a family on a budget.

A Word on Perspective

I don’t believe anyone who says he has a surefire quick moneymaking formula, from Donald Trump to Robert Kiyosaki. Paying attention to the siren song of wealth with no money down is a certain path toward wasted time and lost money.

The Great Transformation

Long ago, Americans were a thrifty people. The New World was built on a culture of thrift, self-denial, and hard work. Taking on debt was a moral failing. “The second Vice is Lying; the first is Running into Debt,” said Benjamin Franklin. But then, the story goes, we lost our way. Americans went on a debt binge in recent decades.  Debt became a way of life. “A new lifestyle of gratification rather than restraint represented the modern wisdom,” writes historian David Tucker in The Decline of Thrift in America.

Table of Contents

It’s a Wonderful Life

Lending is an act of trust.  Borrowing is a strong statement of optimism. The borrower has faith that the future will be good enough for him or her to repay the debt.

The Wages of Debt

Michael Boyle was a salaried employee in St. Paul, Minnesota, in the late 1880s. “I am powerless because I am in debt and clearly my first duty is to get out of that condition. This is the harvest one reaps when one sows in extravagance and dissipation.”  The merchants of debt promote the convenience of credit but hide the true costs. Through various methods they hike rates and fees on consumers. “It is the life of quiet desperation, the ceaseless tension, the fear of ultimate impoverishment that haunt so many, who because of modest means find themselves chained to the treadmill of never-ending debt,” wrote journalist Hillel Black 

A Margin of Safety

The margin-of-safety idea is most closely associated with Benjamin Graham, an investing legend.

In The Intelligent Investor, Benjamin Graham writes in great deal on MARGIN OF SAFETY. Graham always wanted to buy stocks for less than they were worth. He didn’t want to pay too much for an investment, whether it was a bond, a stock, or a home. “You don’t try and buy businesses worth $83 million for $80 million. You leave yourself an enormous margin,” said Buffett in a 1984 talk.

When you build a bridge, you insist it can carry thirty thousand pounds, but you only drive ten- thousand-pound trucks across it, that is margin of safety at work.

The New Frugality Rules

“Straightforwardness and simplicity are in keeping with goodness.” —Seneca (Feel free to read Seneca On shortness of Life)

The save-more-and-borrow-less mantra of the New Frugality signals a dramatic change from our past. Here are 41strategies for saving more.

Keep It Simple

Simplicity also means knowing yourself. An approach to money that does wonders for a colleague or neighbor may not be suited to your temperament or circumstances. One of my favorite stories’s for illustrating the importance of knowing yourself involves J. P. Morgan, the great nineteenth-century financier. The tale goes that a man was in a panic after putting all his money into the stock market. He wanted to be rich, but if the stock market crashed, he was financially ruined. He couldn’t sleep. One day, seeing the imposing figure of Morgan on a street, he summoned up his courage, and asked, “Mr. Morgan, I’ve invested all my money in the stock market and I can’t sleep. I’m a wreck. What should I do?” Morgan replied, “Sell down to the sleeping point.” What is your sleeping point? You want to control your money. You don’t want your money to control you. Stick to what is simple. You’ll be better off financially and you’ll have more time for the important things in life.

Pay Yourself First

This is another way of saying, save. There’s no getting around it. Saving means making trade-offs. Mick Jagger was right when he sang, “You Can’t Always Get What You Want.” Whenever you make a decision to do something—such as save—you foreclose other options. Economists call the value of the goods and services you sacrificed in making a choice an “opportunity cost.”

How much should you save? There are no hard-and-fast rules. The standard rule of thumb was to salt away some 10 percent to 15 percent of income. In recent years that figure has been upped to 15 percent to 20 percent, largely reflecting greater income insecurity and rising health care costs. However, what’s really important is to get started.

Invest in Yourself

Our most important investment is in our education and career, skills and knowledge—what economists call human capital. The returns on human capital include your income from your job and Social Security (which is based on your earnings history). It includes the skills you need to advance in your career, or to embark on a new venture.

“A raw human being has about as much economic value as an uncultivated piece of land in the wilderness,” writes Fischer Black, the late financial genius. “Through his own efforts and through the efforts of others, a person takes on education, socialization, and experience that increase his economic value just as surely as roads, sewers, utilities, and buildings increase the value of a piece of land.”

Training, specific-industry seminars, and other lifelong learning programs pay off. It is worth it to develop networks, too. The more connections you’ve developed over the years the more you’ll get paid and the greater your opportunities.

Worry About the Downside

One of the most powerful ways to protect your finances from catastrophe is to diversify. The basic idea is simple. As Miguel de Cervantes put it, “It is the part of a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket.”

To be sure, diversification doesn’t offer investors much protection during extraordinary financial crisis, such as during the recessions of 2007–09 and 1973–74. The financial carnage is widespread. This is where another related technique for managing risk comes into play. It’s called “hedging.”  

Borrow Rarely and Wisely

Debt is potentially dangerous. For far too many young people personal finance has meant getting out of debt, from credit cards to student loans. Middle-aged workers are burdened by their mortgages and home-equity loans.  It would be easy to say, don’t borrow. I’d like to write that. But that’s the wrong lesson to take from the recent debacle. Instead, the message is if you do have to borrow be “conservative and wise.”

My strong belief is that we should only take on debts that add to our economic choices and quality of life. For instance, most of us can’t afford to buy a home and earn a college degree without taking on debt. Both of these investments offer a return over time. Still, you should weigh the risks and be conservative with your borrowing.   A traditional benchmark is that no more than 8 percent of a college graduate’s income should go toward paying off student loans.

You want to take a vacation you can afford, not a trip you can’t pay for without taking out a home-equity loan. Buy a cheaper car. The goal is to be debt free over time, and the younger you can be without debt the better. Paying off debt is as important as setting aside savings.

Think Big and Give back

Your goals and desires will change over time.

Even a loose plan helps keep you focused. Talk about your ideas with friends and family. And don’t forget to take your dreams seriously.

Make Frugality a Habit

The noblest question in the world is, What good may I do in it? —Benjamin Franklin “Don’t spend more than you earn” is an insight from the ages. Leon Battista Alberti cautioned, “Your expenditure should never exceed your income.”

Charles Dickens, “Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”  

Compound Interest

The money you set aside grows over time. It builds on a simple, but powerful dynamic, what Albert Einstein is said to have called the “most powerful force in the universe”: compound interest.

Automate Your Savings

The simplest, most effective way to pay yourself first and tap into the power of compound interest is to “automate” savings. 

Where’s the Money?

Trim cable, cell-phone, and Internet costs. Don’t pay ATM fees. Find no-fee checking and savings accounts. In the winter, turn down the thermostat, and in the summer, use ceiling fans instead of air-conditioning. Feed your family home-cooked meals and take the leftovers for your lunch at work. Reduce. Reuse. Recycle.

These days my friends and I are sharing books. For me, it’s both frugal and fun.

Planning Is Crucial

It’s easier to be frugal with research and forethought. We all end up spending more when we’re rushed, make travel plans at the last minute, or even go to the grocery store in a hurry. Planning is a constant theme in the frugality literature.

Downsize

Sometimes you need to make a bigger break in your spending pattern to boost savings or pay down debt. The answer: downsize. Small homes are financially smart. Large homes cost significantly more to maintain. Property taxes are higher.

Budget

A budget is simply a way to seize control over financial chaos. It helps us stop spending more than we earn. We know we’re wasting money, but we’re not sure on what. The payoff from a budget is that you end up spending your money where you want and save for what you would like to do.  What goes into a budget? Everything.

Borrow Wisely and with a Margin of Safety

Living debt-free is wonderful. But sometimes borrowing is a savvy move. The key to avoiding the debt trap is borrowing with a margin of safety.

A popular distinction was drawn between “consumptive debt” and “productive credit.”

Borrowing money for ‘gratifications of the moment’ was the only kind of debt strictly forbidden by the money ethic. 

The terms I prefer are wise debt and foolish debt.  The difference isn’t the type of debt, but the margin of safety.

Investing the Simple Way

The reward of a thing well done is to have done it. — Ralph Waldo Emerson

Savings is what’s left over after you’ve paid the bills. It’s helpful to divide our savings into two broad categories. The first is your safe money. It’s usually the money you’ve set aside for everything from a car breakdown to college tuition bills to blood pressure medication. It also includes the retirement money you don’t want at risk to the whims of the market when you say good-bye to your colleagues for the last time.  The other broad-brush category is investments. Investments such as stocks and bonds fluctuate in value, and while you hope to make a profit on them, you might suffer a loss.

You Can’t Beat the Market, So Join It

The solution is to invest in index funds. Forget about putting money into actively managed mutual funds. You don’t need to bother with them. Keep it simple.

Indexing is commonly referred to as passive investing. No professional money manager is trying to beat the market, rapidly buying and selling stocks. Yet index funds routinely outperform most actively managed funds. Why? A big advantage is their low cost.

Buy and Hold

Remember, you don’t have a clue what any investment will do going forward, and neither do the experts. That’s why I believe essentially in a buy-and-hold approach that avoids market timing. Instead, your portfolio becomes more financially conservative over time as you age.

Use Dollar-Cost Averaging

Technically, dollar-cost averaging means putting the same amount of money into an investment regularly over a long period.  When the market is down, you can buy twenty shares. The real benefit of dollar-cost averaging is that it takes emotion—fear, greed, and panic—out of investing. You are dollar-cost averaging in retirement savings plans such as 401(k)s and 403(b)s, since a portion of your paycheck is regularly invested in the markets.

Rebalance Your Portfolio Regularly

The other market truism is that regularly rebalancing your portfolio gives you a higher return with lower risk.

Generosity and Gratitude

We make a living by what we get. We make a life by what we give. —Winston Churchill

The New Frugality is about understanding how money is connected to the rest of your life—saving and spending mindfully, not just counting dollars and cents for their own sake. From this perspective, one of the most valuable and sensible things you can do with your money is give it away. Giving is central to managing our money. The mindfulness of giving, and the connections it forges, remind us that when you think about what matters most, it’s usually relationships, experiences, and the sense of making a difference, not money and possessions.

Giving back to your community—whether you define that as your neighborhood or our planet—is a way of acting on that gratitude, and it rewards you as well.

The New Frugality: How to Consume Less, Save More, and Live Better by Chris Farrell was published by Bloomsbury Press by 2009. It has 240 pages.

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