As the recession of 2008 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.
Just one year later, the savings rate took a southward turn, credit card debt started picking up again, and parking spaces at the mall became hard to find. When Citigroup re-ran its survey, the percentage of people who said the recession had “forever changed” the way they spend and save fell to just 52 percent.
Apparently “forever” doesn’t last as long as it used to.
It happens a lot. Economic times get tough and people tighten the belt. Things get better and they spend more. When gas prices are low, SUVs fly off car dealer lots. When the price goes up, EVs look better. I call it “binge/purge” money management.
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 money. 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 refusing to tip any more than 15 percent, dogmatically avoiding coffee shops as if spending a couple of bucks on a good cup of coffee is immoral, and generally living a Scrooge-like existence. 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 one of the main reasons we see such a rapid shift away from saving and toward spending when economic tough times turn into economic good times. 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—preferably no more than 20 percent
- 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 best option may not actually be the least expensive 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 ever grit 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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