The New Frugality: How to Consume Less, Save More, and Live Better

185 Pages·2009·1.06 MB·English

by  Chris Farrell

The New Frugality
How to Consume Less,
Save More, and Live Better
Chris Farrell
BLOOMSBURY PRESS
New York Berlin London
Contents
Acknowledgments
1. The Rise of the New Frugality
2. The Great Transformation
3. A Margin of Safety
4. The New Frugality Rules
5. Make Frugality a Habit
6. Borrow Wisely
7. Investing the Simple Way
8. Live Long and Prosper
9. Home, Sweet Home
10. The College
11. Generosity and Gratitude
Acknowledgments
I owe an enormous debt of gratitude to many people. I’d like to thank Suzanne
Woolley, senior editor in the personal-finance department at BusinessWeek. She’s
a wonderful editor, a constant source of insight and cheer. She helped me im
mensely with the book. Michael Mandel, chief economist at BusinessWeek, is a
friend and fount of ideas that influenced the shape of this book. Mark Alfuth,
chief financial officer at American Public Media, carefully went through the
manuscript with me. His advice was invaluable. Stephen Smith, executive editor
and host of American RadioWorks at American Public Media, is a good friend
and colleague, always wise in counsel, with a knack for knowing when it’s time
for some humor. He also wields a good red pencil. I received perceptive
comments on a rough work in progress from Peter Clowney, Laurie Stern, Ron
Jepperson, Robert Barker, and Lisa Kane.
Marketplace Money is a one-hour personal-finance show nationally syndicated
by APM. I learned a lot from a terrific group of colleagues, host Tess Vigeland,
senior producer Deborah Clark, and assistant producers Stephen Hoffman and
Eve Troeh. J. J. Yore, vice president of programming and executive producer at
Marketplace, cheerfully supported the project (occasionally shaking his head and
saying, “If you really want to do this to yourself. . .”). I’m grateful for the
support of APM, especially Bill Kling, Jon McTaggart, Judy McAlpine, and
Kate Moos.
There are so many people that I’d like to thank for their counsel and ideas
about personal finance over the years. I can’t list them all, but there are a few I’d
like to highlight. Among the financiers that have instructed me are Professor Zvi
Bodie of Boston University, Professor Meir Statman of Santa Clara University,
Professor Burton Malkiel of Prince ton University, and Professor Jeremy Siegel
of the Wharton School. In addition, I am indebted to Jack Bogle, the found er of
Vanguard; Ross Levin, certified financial planner and head of the financial-
planning firm Accredited Investors; Ruth Hayden, financial educator at Ruth L.
Hayden Associates; Eric Tyson, personal-finance author; and Michael
Mauboussin, chief investment strategist at Legg Mason Capital Management. A
special thanks to the late Peter Bernstein, economic historian and phi los opher
of risk.
I am extremely lucky to work with the book agent Joelle Delbourgo. Thanks
to Peter Ginna, publisher at Bloombury Press and Pete Beatty, associate editor at
Bloomsbury. I enjoyed their editing and comments. They managed to stay
cheerful and supportive even as deadlines were missed. The only reason I even
had the opportunity to write this book was the medical care I got after being
diagnosed with colon cancer in spring 2007. Following colon surgery and six
months of chemo, I’m doing well. I can’t sing the praises enough of the nurses
and doctors at Abbot Northwestern Hospital and Minnesota Oncology. Primary-
care physician Scott Flaata, surgeon Dr. Karim Alavi, oncologist Dr. Burton
Schwartz, nutritionist Lisa Kane, and all the nurses and doctors that treated me,
thank you.
Finally, I’d like to thank the two best young men I know and love, my sons,
Peter and Connor.
CHAPTER 1
The Rise of the New Frugality
A dollar is not value, but representative of value, and at last, of moral values . . .
Wealth is mental; wealth is moral.
—Ralph Waldo Emerson
I’m a card-carrying optimist, but it had been a rough patch in February 2009. It
was cold, which isn’t surprising since I live in Minnesota and during winter a
slight pall of gloom touches everyone living on the frozen tundra. Even Garrison
Keillor, the radio bard of A Prairie Home Companion, seemed more Lutheran-
tinged depressed than usual during his shows in St. Paul. But the “February in
America” pessimism ran far deeper than the weather and season.
The stock market kept hitting new bear-market lows. Companies were laying
off workers at a dismaying rate. Colleagues at American Public Media, the St.
Paul–based public-radio programming behemoth, were coming by my office
worried about their jobs and retirement savings. More listeners than ever were
seeking financial advice from Marketplace Money, the nationally syndicated
public-radio show I work on as economics editor and financial adviser. Many of
the stories were heartbreaking: a foreclosed home; a small business gone belly-
up; an aged parent struggling to get by on a shrunken portfolio; a college
graduate with no job and lots of student loans. And my car was making strange
noises. I knew an expensive bill lay in my near future.
In other words, it was time for a beer. I headed off to the Local, an Irish pub in
downtown Minneapolis, a favorite spot of mine. The beer came, and it tasted
good. I can’t really say why, but, one eye on a televised sporting event, I started
thinking about an afternoon with my dad toward the end of his life. Tall, with
broad shoulders, he had a big Irish head with white hair, and an erect, military
bearing. Of course, that’s how I remember him.
But that day he was eighty-three years old and frail in Georgetown University
Hospital. His leg had been amputated. The surgery hadn’t gone well, and the end
was near. My mom, my oldest son, and I sat around his hospital bed. Normally
reticent, he reflected on his life with an occasional prompt from my mom. He
talked about his grandparents’ leaving Ireland and illegally entering the United
States by walking across the Canadian border; growing up in the Irish section of
Yonkers, New York, in the Depression; running aground in the Red Sea during
World War II as a navy midshipman; the naval battle of Leyte Gulf near the
Philippines; surviving a kamikaze attack; running spies into Eastern Europe and
Russia during the Cold War; and the mob on the waterfront. Some of his stories I
had heard before, but much of it was new to me. What was comfortably familiar
was his laughing so hard at times that tears came.
For us sitting around the hospital bed, it was like listening to a reading of a
novel, except it was all true. Still, what I’ve carried with me ever since is the
moment when he looked at us and said matter-of-factly, “I’ve lived a good life.”
He was right, and remembering that, I wasn’t gloomy anymore. But not until
that evening at the Local did I realize just how much he had influenced me when
it comes to my attitude toward money. He had lived through a depression and
many recessions as well as long economic booms and bull markets. He had
served in two wars and was involved in several other conflicts, was married
happily for more than half a century and raised four kids, enjoyed twelve
grandchildren, loved his career in the navy and shipping. Dad also had his
setbacks and grief, such as losing a daughter to breast cancer.
Here’s the thing: Through it all I never remember him succumbing to the dirge
of the apocalypse pop ular during busts or the siren song of a new era during
booms. He wasn’t cheap. He wasn’t extravagant. He saved, took calculated risks,
provided a home, educated his children, enjoyed his money, and gave back to the
community. He lived “a good life.”
The Money Head Fake
We all know that managing money takes time and effort. It’s easy to get lost in
personal finance poring over 401(k) statements and life insurance policies,
struggling to figure out whether it’s smarter to set up a traditional IRA or a Roth
IRA. It’s tough to resist speculative manias when it seems that everyone else is
making money. It’s also hard to avoid the paralyzing pull of fear when the
economy turns down and the unemployment rate surges higher.
Yet a conversation about personal finance is actually something of a “head
fake.” The term is from a lecture given in the fall of 2007 by Randy Pausch, the
Carnegie Mellon computer scientist. It was a humorous, moving talk entitled
“Really Achieving Your Childhood Dreams.” During the lecture Pausch openly
discussed the pancreatic cancer that would kill him in less than a year. The talk
became an Internet phenomenon. Here’s an example he gave of a head fake:
“When we send our kids out to play football or soccer or swimming or whatever
it is . . . we actually don’t want our kids to learn football. I mean, it’s really nice
that I have a wonderful three-point stance . . . But we send our kids out to learn
much more important things: teamwork, sportsmanship, perseverance.”
In other words, a head fake is when it seems we’re learning one thing, yet
we’re actually gaining a different—and far more important—type of knowledge.
What’s the head fake when it comes to personal finance? I’ll discuss a number
of critical and classic money topics, such as investing in stocks, getting out of
credit card debt, and taking out student loans. Yet personal finance is really
about deciding how to live your life, figuring out what you really cherish and
value, then putting your money behind those goals and beliefs. It’s about trying
to create a good life. That’s the spirit and the purpose informing this book.
The New Frugality
The Great Recession marks a major inflection point in managing our money. Our
love affair with consumer debt is over. The embrace of what I’m calling the New
Frugality signals that half a century of people spending with abandon and
borrowing as much as possible is done. Profligacy is out. Frugality is in. We’ve
already made dramatic strides. Government statistics show that the personal
savings rate is up sharply from its near zero level in 2007. “The country has
drifted away from the concept of thrift to our detriment,” says Robert Frank,
economist at Cornell University. “We are clearly talking about the end of the
consuming generation of reckless spenders,” says Henry “Bud” Hebeler,
formerly president of Boeing’s aerospace unit and now a passionate proselytizer
for sensible financial planning.
The change toward saving runs deep. The painful lesson of two recessions,
two bear markets, a credit crunch, and a government bailout of the financial
system in less than a decade is that job and income insecurity is a part of
everyday life. A generation has learned the hard way the dangers of borrowing
too much. The turn toward financial conservatism will be reinforced by anemic
income growth and weakened household balance sheets. It will be a long time
before the battered financial system is healthy enough to lend freely.
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 savi ngs, 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. The security part of the margin-of-safety equation will dominate
our thinking over the next few years with disturbing memories of the Great
Recession still fresh.
But a margin of safety involves much more than taking out an insurance
policy against tragedy and trauma. By finding the right balance between caution
and boldness, 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
Here are examples of managing money with a margin-of-safety
approach.
A down payment of 20 percent or more on a home
A thirty-year fixed-rate mortgage
An emergency savings fund covering twelve months or more of
expenses
Spending less than you earn
Earning a college diploma
Paying off the credit card bill in full
Life insurance for your family