Every Sunday, The Simple Dollar reviews a personal finance book or other book of interest.
Chris Farrell, the author of the book, is a name I’m familiar with having been a long-time faithful listener of Marketplace Money (and it’s other Marketplace brethren) on NPR. I expected a well-written book that offered lots of insightful thoughts on the “new frugality” along with some practical tips.
That’s precisely what I got. Let’s dig in.
1 | The Rise of the New Frugality
Farrell opens the book by making a strong effort at defining what “new frugality” means. I think it’s best summed up as “seeking the best value, not the lowest price.” Quite often, frugality has meant the same thing as cheap, but the “new frugality” means something different entirely. It means finding ways to preserve exactly what’s important to you while minimizing the costs, with costs going far beyond just dollars and cents. The cost is about the environmental impact. It’s about the time impact. It’s about even the emotional impact. Really, the new frugality is simply being mindful of the many ramifications of the purchasing decisions we make.
2 | The Great Transformation
How did we get here? This chapter is basically a history of modern consumerism, particularly focusing on the housing bubble of 2008 and the rise in environmental and social awareness of people over the past decade. Farrell’s argument seems to be that the current economic stagnation along with a growing sense that our actions have ramifications far beyond ourselves add up to a new attraction to frugal, simple living for people. I can’t argue – I largely feel the same way.
3 | A Margin of Safety
What’s the result of all of that uncertain feeling? People have begun to desire a margin of safety – something many of us felt naturally until the events of the past decade have shaken that sense of a margin of safety right to our core. How do we get back that sense of a margin of safety? By living within our means and preserving the resources we have – but without abandoning many of the enjoyable perks of today’s life. We seek a balance that wasn’t there in the Depression and wasn’t there in the spend-spend-spend 80s and 90s.
4 | The New Frugality Rules
Keep it simple. Pay yourself first. Invest in yourself. Worry about the downside. Borrow rarely and wisely. Give back. These are the new frugality rules that Farrell proposes – and they pretty much describe a financially stable way of life that maintains that balance we all strive to have. I think the first one is key – keep it simple. The best way to do that is to make all of your saving as automated and straightforward as you possibly can, making it easy for you to make do with what’s left.
5 | Make Frugality a Habit
One big way to make all of this work is to simply make frugality a part of your everyday life. The best way to do that is to simply start being mindful of every dollar you spend. It’s fine if you want to splurge on yourself sometimes – that’s not the point. The point is to think about it first. At the same time, think about what you’re buying at the grocery store or when you go out to eat or anywhere else. Farrell offers tons of ideas on reducing your spending in sensible ways, but they all boil down to this one basic idea: think about what you’re spending and why every time a dollar leaves your account. The more you think about it, the more you’ll likely realize there are better ways of doing it that achieve the same result for lower cost. When you find those routes, that’s nothing but a big victory for you.
6 | Borrow Wisely
The best debt is no debt, of course. When you do borrow, however, make sure you’re borrowing to pay for something that will generate value (like an education) or will at least retain it (a sensible home purchase – meaning not a McMansion in a large metro area). Also, always borrow only when you have a margin of safety – in other words, don’t borrow money when you’re already hurting to pay your own bills and you don’t have any savings in the bank. There’s also a discussion about setting up your own debt repayment plan if you’re already under a heap of debt.
7 | Investing the Simple Way
The investment advice here is pretty straightforward. If you have a 401(k) available to you that offers a company match, jump onto that and get every drop of that match. If you don’t, get a Roth IRA. Put at least some of your money into something safe, like CDs or possibly treasury notes. If you want to take on more risk, buy some index funds – they’re low cost and help you to diversify your money very widely. Use dollar cost averaging – in other words, set up a regular automated investment plan that puts a certain amount into your investment every month.
8 | Live Long and Prosper
This chapter has the most honest answers about retirement I’ve ever read in a personal finance book. Farrell simply says that there’s no way to know if you have enough set back for retirement – and you don’t. No one knows when or how their number will be up. How can you save, then? Your best bet is to save as much as you possibly can. Then, when you retire, rediscover the simple pleasures in life. It’s a lot easier to cook yourself an inexpensive but amazingly delicious meal at home if you’re not running back and forth to an all-encompassing career.
9 | Home, Sweet Home
Should you rent or buy? Much of this chapter focuses on this question. Farrell seems to point people towards the P/R ratio, which is the price of a home you would buy versus the cost to rent similar housing for a year. That ratio should be somewhere around 16 – if it’s higher, you’re probably better off renting. Most of the actual advice on mortgages is very solid – only buy when you have 20% down (unless you want to be hammered on the mortgage(s)), make a “thirteenth” payment each year by making half of a monthly payment every two weeks, and don’t worry about the myth of maintaining a mortgage for a tax writeoff.
10 | The College Sheepskin
What about paying for college? Farrell argues that an education is very worthwhile, but the premium paid for a degree from a prestigious school rarely makes up for the huge difference in tuition costs. In other words, the huge additional cost for a typical student to go to Harvard versus their local four year state school will likely not be made up for after graduation. Your best strategy, actually, is to control costs (unless you get very lucky with a scholarship). He also recommends using a 529 savings plan if you’re saving for your child’s future education.
11 | Generosity and Gratitude
The book closes with a look at charity and the “keep it simple” mantra applies here. Identify charities that match your values. That takes time, because for many of us, a lot of charities sound good. What’s important is to figure out our true purpose in giving. What is our mission with the money we give? Let that specific mission lead your giving and you’ll find that you’re truly building a better world.
Is The New Frugality Worth Reading?
What makes The New Frugality stand out isn’t the advice. For the most part, the advice in this book is the standard personal finance stuff that you can find all over the place. What makes The New Frugality stand out is the broader awareness of the writing, which brings the book to life in a unique way.
I enjoyed reading this book for many of the same reasons that I enjoy listening to Marketplace on NPR. It takes information that I could get anywhere and places it in a social and cultural context that not only brings the ideas into a new light, but also makes clear the connections between our money and the broader world around us in ways that aren’t always obvious.
I enjoyed it if for no other reason than it cast some new lights and angles on a lot of the ideas I already knew. That type of book is always a refreshing read.