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FarNewf10-06-086 |
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The
New Frugality How
to Consume Less, Save More, and Live Better Chris
Farrell Bloomsbury
Press, 2010, 229 pp. ISBN 978-1-59691-660-9 |
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Chris Farrell is the personal-finance expert and
economics editor for American Public Media’s Marketplace Money. He
recommends a lifestyle of less waste, lower environmental impact, and deeper
satisfaction. But mostly it’s about
how to spend less and build capital. A margin of safety means putting more of our
earnings into savings, paying off debts and borrowing less. A healthy buffer helps you survive economic
downturns and take risks to pursue opportunities that arise. Here are some suggestions:
Plenty of culprits are to blame for the financial
crisis, but two factors, stagnant incomes and lender profligacy, help account
for the staying power of the New Frugality. (28) “What many lenders actually did in the
2000s is abandon reason and ethics…allowing consumers to borrow far too
much.” “Wall Street’s math whizzes
became increasingly creative at making securities from home mortgages,
student loans, auto loans, and credit cards.
Financial alchemists transformed risky loans into triple-A-rated
securities. Financiers were making so
much money that no one wanted to stop.” (29)
Incomes will stagnate or grow slowly according to
the long-term trend. More than 70% of
both spouses work compared to 38% in 1968.
It will take years to make up what has been lost. “The pendulum in the 2000s swung way too
far in debt’s direction. It’s now
working its way back toward savings. … But it takes a long time to pay down
that borrowed money. That is what we
have to do.” (32) The American Dream has had a dual meaning and
it’s moving from the material side to a good life engaged in the community,
expanding our minds and enriching our souls.
(33) Suggestions for sustainability: (34)
“A margin of safety is the most valuable concept
for individuals and families managing their money. … A classic example is to
have an emergency savings fund that would pay for your household’s expenses
for up to a year. That’s a margin of
safety against a layoff. The same cash
cushion gives you the financial freedom to switch jobs.” (42) When it comes to retirement, lock in a standard
of living for your old age with a conservative investment strategy. You don’t want to be seventy years old with
a portfolio that has lost half its value.
(42) “The Roth IRA is unique, and it’s almost the
perfect margin-of-safety product. The
reason: It’s both a long-term retirement savings plan and a parking place for
emergency money. The contributions you
make to the Roth are with after-tax dollars.
The limit is $5,000 [per year].
It’s $6,000 if you’re fifty or over.”
(43) Steer clear of high-risk assets such as options,
futures, and collectibles. Medium risk
includes real estate, equity mutual funds, and corporate bonds. Low risk: government bonds, bank savings
accounts, CDs. (45) Common pitfalls in money management: credit card
debt, not saving, not investing for retirement, borrowing too much for house,
car or college, spending more than you earn, not having a will, not having
life or disability insurance, and ignoring the cost of investment fees. Make simple investments. “Most complex financial products and
cutting-edge money tactics … have turned out to be bad for your financial
health.” (52) Stick to what is simple. Participate fully in your retirement savings plan
at work. Begin making contributions as
early as possible. The earlier you
start saving the better the odds of making good money over the years. Say no to debt and focus on building up your
savings. Establish a lower family
budget and stay within it. Arrange for
automatic savings deposits. Sell
things you don’t need. Downsize your
home. Buy with cash. Rule out cars, cell phones, or iPods for
children. Reduce the cost of your TV,
internet, and phone services. Turn
down the thermostat. Refinance. Some investment mistakes: (59)
Borrow rarely and wisely. Debt is potentially dangerous. If you borrow, be conservative. Do not use credit cards to spend more than
you make. Pay off the bills every
month. Don’t borrow against your
home. “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.” (61) Give back.
Give to charity. Volunteer. Make frugality a habit. Even small sums of money add up. Compound interest makes it easier to create
a margin of safety. Change your
spending habits. “Clip coupons. Watch for sales. Trim cable, cell-phone, and internet
costs. Don’t pay ATM fees. Find no-fee checking and savings accounts. …
Feed your family home-cooked meals and take the leftovers for your
lunch at work. Reduce. Reuse.
Recycle.” (70) Learn what fits
with your lifestyle. Can you use a
clothesline instead of a dryer? Share
books with others rather than buying them all yourself. Make frugality a challenge and enjoy
finding new ways. Buy cars with cash or borrow as little as
possible. Buy a smaller car, drive it
forever, and find a good mechanic to help you keep it running. Avoid cars with steep repair charges. Avoid cars too expensive to insure. Rent a pickup or van if you have to, rather
than owning one. Comparison shop for
insurance; take a higher deductible; drop collision or comprehensive on older
cars. Develop a budget and live within it. See how on p. 80. Cary low-cost, blue chip, ‘term’ life
insurance. And disability
insurance. Do you need long-term (nursing care)
insurance? The cost of nursing care
makes it compelling. But the cost of
insurance isn’t compelling. It’s a
complicated, expensive product. The
more affordable pared-down products don’t offer meaningful protection. “It’s a product worth investigating, but
I’d be skeptical.” (87) A will is written instructions that say how your
property is to be distributed when you die.
Probate is not as bad as it’s often alleged. And in far too many cases trust are sold to
people who really don’t need them.
Questions to ask about a trust are on p. 88. Bankruptcy can relieve an onerous debt burden and
give you a chance to start over. But
not all debts can be forgiven. Here
are some that usually can’t: student
loans, child support, debts from a divorce settlement, consumer debts for
luxury goods in the months leading up to bankruptcy, fines and penalties for
violating the law, debts from a fraudulent or illegal act (like drunk
driving), income taxes from recent years.
(93) Debt may be wise or foolish. Using credit cards for frivolous spending
is bad debt. Using credit cards to pay
all your bills to collect airline miles or cash returns while paying the
credit card bill in full every month can be wise. (98)
Here’s a credit card tip. Freeze the credit card. Put it in an ice cube tray, fill it with
water, and freeze it. If you really
need it, you can thaw it out and use it.
Meantime you will have time to think over whether you really want to
use it! (104) You can get a free copy of your credit report
once a year from each of the three credit-reporting bureaus, Experian,
TransUnion, and Equifax. Go to
AnnualCreditReport.com. Get your one
free report to monitor your credit. If
you work it right, you can get a report 3 times a year, one from each
bureau. (108) Invest in two categories: your safe money (set
aside for everything from a car breakdown to college tuition) and investments
at risk (stocks, bonds, whatever fluctuates).
Investing is critical and the biggest mistake is to not save and
invest for the long haul. The key rules of investing: · You can’t consistently beat the market. · Trading is hazardous to your wealth. · Managing risk is key. (117) The practical implications are:
“Be careful about buying individual stocks or
actively managed equity funds. Most
employees know little about the markets.
A steady stream of scholarly research on finance makes a persuasive
case that most of us aren’t wired to invest well.” (122) Recommended:
The Little Book of Common Sense
Investing by John Bogle. (125) “Mutual funds take small bits of money from
thousands of individuals, pool that money, and invest it in stocks, bonds,
cash, or some combination of assets.
The bulk of the money is actively traded, meaning the funds are run by
professionals who promise to beat the market. … That’s the promise. Problem is, most actively traded funds
don’t do well compared to the market, and they charge hefty fees to boot. …
In the final analysis, the benefits of active management accrue only to the
fund management company, and not to the investor.” (125) “An index fund duplicates the performance of a
particular stock market index. … The most famous equity index fund is the
Standard & Poor’s 500. It is made
up of stocks of the five hundred largest publicly traded U.S.
companies.” (130) “If you’re investing in a taxable account, the
case for low fees, little trading, and low taxes is dramatic.” (131) “By periodically investing in an index
fund, adds Warren Buffett, the know-nothing investor can actually outperform
most investment professionals.” (131) Don’t put all your eggs in one basket. “The first investing rule of thumb is that
the fixed-income portion of your portfolio should equal your age. If you are thirty years old, fixed-income
securities should be 30 percent of your portfolio….” (145) “The idea of investing overseas to cushion swings
in the U.S. market has fallen into disfavor.
The world used to be made up of national markets” but the markets are
too interconnected to make that much difference now. (145) Up until 2010, you could only convert a
traditional IRA into a Roth IRA if your modified gross adjusted income was
under $100,000. The income limit lifts
in 2010. When you convert from an IRA
to a Roth you owe income taxes on the amount converted. With a Roth, there is no required minimum
distribution at age 70 ˝ as there is with a regular IRA. (147)
“To answer the question ‘How are your investments
doing?’ the best measure is ‘total return.’
For stocks, the total return comes from the sum of dividend payments
plus any price appreciation—or loss.
With bonds, the total return is based on interest payments plus price
changes. In addition, you want any
return figures adjusted for inflation, especially for long-term investments.”
(150) “Most of us can’t save enough for old age. We will end up working well into our golden
years. The history of retirement is
giving way to a story about work in old age.” (153) Financial planning tools. The author likes Hebeler’s Social Security
calculator, www.analyzenow.com and Boston University economics professor
Laurence Kotlikoff and www.esplanner.com. He has a basic plan for free that takes
into account many aspects of our finances.
(167) “For many retirees, adding an immediate annuity
to their investment mix often makes sense.
You get a predictable monthly income (or quarterly or annually
depending on which payout option you chose) on the money for the rest of your
life. Consider inflation-protected
immediate annuities. (168) There is a chapter on Generosity and
Gratitude. “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 possession. In other words, generosity and gratitude
are part of the New Frugality, just as much as are
thrift, planning, and discipline.” (209) |
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