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



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:

  • When you buy a home pay 20% down and get a 30-year fixed rate mortgage.
  • Build up an emergency savings account to cover 12 months of expenses.
  • Spend less than you earn. 
  • Pay off your credit card bills
  • Carry life and disability insurance.
  • Save for retirement.


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)

  • Eat less and more healthy food
  • Exercise more
  • Get rid of the car.
  • Spend more time with family.
  • Move closer to work.


“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)

  • Lack of a plan or strategy
  • Fail to diversify
  • Follow the crowd
  • Act on tips or market-timing advice
  • Not paying attention to cost
  • Short-term thinking
  • Chasing returns while ignoring risk
  • Selecting investments without considering your time frame
  • Failing to admit mistakes


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:

  • Keep fees razor thin.
  • Own low-cost, broad-based index funds.
  • Own quality ‘full faith and credit’ bonds, bills, savings bonds, and the like.  Blue chip corporate bonds and tax-exempt securities are good.  Steer clear of high-yield, high-risk debt. (118)


“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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