Wednesday, April 3, 2013

The Importance and Limits of Frugality

“Frugality is the quality of being frugal, sparing, thrifty, prudent or economical in the use of consumable resources such as food, time or money, and avoiding waste, lavishness or extravagance.” (Wikipedia)

What is normally termed frugality in personal finance literature conjures images of Suze Orman’s rants against the daily $5.00 latte at Starbucks. Let’s do the math. Five dollars a day multiplied by 365 is $1,825 in for real after tax American Dollars. That is the limit for frugality in this particular instance, or is it? Frugality is the foundation of wise money management. It is not an attempt to avoid spending money. It is a strategy that will give you better options for the use of your money.

It is unlikely that you will put that $1,825 under the mattress in your spare bedroom. Perhaps that money could be invested. With a little luck after a year of so that $1,825 might well become $2,000 or more, not life changing but a step in the right direction. This is the major criticism against those of use who champion frugality as a way of life. The critics observe that denying myself an inexpensive simple pleasure, like Starbucks, really doesn’t change much of anything. I would answer, “A single snowflake is irrelevant but enough of them can paralyze a city. Frugality is not a single decision it is a way of life.”

There is merit in that criticism. $1,825 is not a big life changing win. The biggest wins typically are found on the left hand side of the money equation, money in. If a teenager saves $1,825 he can spend it on a cheap car or he could buy a couple of used lawnmowers and a string trimmer. Given current levels of teenage unemployment in this area that is probably a pretty good option. If he signs up 5 neighbors (this would be pretty easy in my neighborhood) at $25.00 a week for 24 weeks, he will have $3,000. If he is smart, he could add various options of opportunity as they present themselves, “Mrs. Smith, that hedge in your backyard sure could use trimming. Would you like me to take care of that for you?” Let’s say our industrious young man pulls down another $2,000 in work and tips over the course of the growing season. $5,000 can buy a pretty decent car and he still has the lawn care equipment for next year. Or $5,000 could just about cover a year’s tuition at Montgomery County Community College, the beginning of an education that could change his life.

“In behavioral science, frugality has been defined as the tendency to acquire goods and services in a restrained manner, and resourceful use of already owned economic goods and services, TO ACHIEVE A LONGER TERM GOAL.” (Wikipedia)

Frugality is not an end in itself. It is a conscious decision to use our money in a manner that maximizes our pleasure, not just in the moment, but over the course of a lifetime. Depending on who you are or what you value $1,825 might mean an airplane ticket to Hawaii, a child in a private school, early retirement, or even a daily $5.00 latte at Starbucks if that is what you really want. If you have 3 children under 6 years old and a wife who breeds Chihuahuas, time spent at Starbucks with your laptop or newspaper might make the difference between sanity and the cost of inpatient psychiatric care.

I am pleased to announce that we who champion frugality are finally starting to have some effect on our nation. Just this morning U.S.A. Today reports, “Survey: Frugality Reigns 5 Years After Crisis.” The article covers the results of a survey undertaken by Fidelity, a respected investment house. Perhaps, at least some of us have learned something from the 2006-2008 disaster.

Here are some findings directly quoted from that survey:

— 56% reported their financial outlooks changed from feeling scared or confused at the beginning of the crisis to confident or prepared five years later.

— 42% increased the amounts of regular contributions to workplace savings plans, including tax-deferred retirement savings accounts or health-savings accounts.

— 55% said they feel better prepared for retirement than they were before the crisis. However, among the group of survey participants who reported they continue to feel scared, just 34% said they're better prepared for retirement.

— 49% have decreased their amount of personal debt, with 72% having less debt now than they did pre-crisis. Just 31% of those who indicated they're still scared reported that they have reduced debt.

— 42% have increased the size of the emergency fund they've established to meet large unexpected expenses. Among those self-reporting as scared, only 24% have a bigger emergency fund than they had pre-crisis.

—78% of those saying they're prepared and confident said the financial actions they've taken are permanent changes to their behavior.

I can’t end this article without a tip of the hat to Trent Hamm, author of The Simple Dollar, book and blog. He literally earns his living writing about living a better life for less. Here is a link to his frugality archive. Explore it at your leisure. You will surely find something of value that could be applied to your life.

The Simple Dollar Frugality Archive

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