As the recession dragged on, frugality came into vogue, and many commentators believed a new and lasting way of life had begun. The savings rate went up, people held onto their cars longer, and second hand stores became all the rage. In 2010, 63 percent of people said the recession had “forever changed” the way they spend and save, according to a Citigroup survey.
That was then.
Today, the savings rate has taken a southward turn, people are loosening up in their use of credit, and it’s getting tougher to find a parking place at the mall. As for all those people who said they were forever changed by the recession, apparently “forever” doesn’t last as long as it used to. A more recent survey found that 52 percent of people see themselves that way.
Why are so many people shifting away from their frugal ways? In part, I blame the word “frugality.”
What’s Wrong With Frugality?
To be sure, I know there are many people who think of themselves as frugal, and for them, it’s a good thing. They simply hate to waste things. They’re not living by some temporary set of rules brought on by economic tough times. Frugality is a worldview that shapes their use of money in very positive ways.
However, with apologies to those who do frugal well, I’ve never cared for the term. For me, it’s always conjured up images of dumpster diving, refusing to tip any more than 15 percent, and dogmatically avoiding coffee shops as if spending a couple of bucks on a good cup of coffee is immoral. Okay, I’m exaggerating, but not by much.
Mostly, I’ve thought of frugality as not much fun, where the overarching principle is to spend as little as possible. That, I believe, is the main the reason we’re seeing a shift away from saving and toward spending. People just don’t like being frugal. They’ll do it while they have to, but not a moment longer.
A better financial path begins with a better term, and the one I prefer is “money-smart.” Money-smart people:
- Use a cash flow plan
- Give generously
- Get their biggest spending decision right, keeping their monthly housing costs to no more than 25 percent of gross income
- Ditch or avoid all other debt
- Build and maintain an emergency fund stocked with at least six months worth of living expenses
- Invest 10-15 percent of monthly gross income for their later years
- Know how to get great stuff at great prices, all the while realizing that the cheapest option may not actually be the most cost-effective option
- Are really good at making trade-offs, happily choosing to spend less in one category in order to spend more on something else that’s more important to them
And they do these things all the time, not just in response to a financial crisis. If everyone took these steps, what a difference it would make!
A Money Plan for All Types of Economic Weather
We can’t control the economy, but we can control our personal finances. By following the approach I just described at all times, there will be no need to make major changes when times turn bad.
To my frugal friends – those who wear the word well – carry on. But for everyone who’s been gritting their teeth through a season of forced frugality, let’s put an end to all the financial binging and purging. Let’s re-brand ourselves as money-smart and get on a more sustainable and enjoyable path toward financial success.
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By Matt Bell
Matt Bell is Sound Mind Investing’s Associate Editor. He is the author of three personal finance books published by NavPress, leads workshops at churches and universities throughout the country, and has been quoted in USA TODAY, U.S. News & World Report, and many other media outlets.