Thrift is the new black
Every year, I look forward to newspapers’ “what’s in/what’s out” lists.
High up on the financial “what’s out” list in 2009 is “leverage”—borrowing money to make a bigger bet, whether on housing, commodities, currencies, collateralized debt obligations, or corporate buyouts.
And the “what’s in” list has to have a home for thrift. The notion of saving for a rainy day tends to come back in fashion whenever we’ve been through the kind of economic downpour that has hit investors in 2008.
After a drop of 40% in the stock market, even disciplined savers and investors may have to ratchet up savings to restore our portfolios. Among those who had been saving only a bit—and national statistics indicate that’s a very large percentage of households—the need for a return to thrift is even greater.
I thought it might be helpful to ask the experts—successful Vanguard investors—for advice on thrift. For these investors, thrift has never gone out of style. They’ve amassed sizable nest eggs by living beneath their means and steadily saving a good slice of their incomes, month after month, in diversified portfolios. They didn’t “lever up” by putting everything in stock funds, or by using home-equity loans to dabble in the market. They don’t carry balances—at least big ones—on their credit cards.
So, Vanguard experts, how about sharing techniques that you’ve found helped you to save? Not the names of good fund or stock picks, but the methods you’ve relied upon to salt away funds for that rainy day.
I’m not naturally disciplined, so like many other people, I rely on the “artificial discipline” of having money (in addition to my 401(k) contribution) automatically taken from my pay before I have a chance to spend it. To prevent myself from “raiding” these long-term accounts, I put them in a sort of mental Fort Knox—and simply pretend that I can’t have that money until I retire. Yeah, I could take it out, but I imagine all sorts of alarm bells going off if I did. Goofy, yes. But it works for me.
What works for you?
(I’ll discuss a few of your best savings tips in an upcoming post.)
Notes
Investments are subject to risk.
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In my twenties, I read the book “Your Money or Your Life” (by Vicky Robin and the late Joe Dominguez), which I recommend to everyone. It made me realize the connection of money and “life energy” as well as the concept of “enoughness,” a term that they coined to emphasize that conspicuous consumption does not make people happy and, of course, is incompatible with building wealth. So is debt. – I have none and paid off my mortgage by age 40. Of course I have an emergency fund and use a budget (spending and investment plan). Every dollar that is not allocated to bills and other cash-flow items is swept into a money market account and then invested. I buy reliable cars (for cash) and drive them for 10 years. I wear things out if possible, which is both frugal and good for the environment. In fact, I often find that “going green” in some areas saves me some “green” as well. The interesting thing is, without expensive debt, living below our means is easy. We can save a lot and still live the good life.
I was raised to “fix it if it breaks” so we have learned to do many things ourselves, such as gourmet cooking, home improvement and repair, gardening, banking and investing , and sewing. A lot can be saved by not hiring others. Most of our recreation involves the great outdoors which is free for enjoyment after some investment in basic outdoor gear and most of our vacations have involved camping some of the time, which besides saving money is also a nice way to meet people and fun to cook over an open fire….fillet mignon on a stick anyone?
Choosing to live in a smaller house not only means a smaller mortgage, it also means smaller utility bills, and perhaps most importantly, a smaller amount in the budget category called “stuff.” It makes it easier to distinguish between things that serve a lasting purpose and those that mainly just take up space. It also encourages cashing in on things no longer used instead of allowing them to linger and disintegrate in an unloved corner.
1/ Amen to the smaller house: smaller mortgage means it’s paid off a lot quicker, thus smaller anxiety over mortgage.
2/ I agree with Craig Stock that it’s great to have money taken out quickly from your paycheck/bank account for the 401K and the Roth IRA, which can really add up, if you do both.
3/ And using coupons and eating generic food (when taste difference is small) can also add up to money for you to save. Iron your own shirts. Sew in your own buttons. Use “coat thread” which is quite heavy linen thread (or dental floss) to sew on buttons so they stay on forever.
Good luck to everyone in saving!
Direct deposit(out of sight etc.), window shopping & projecting into the future to when I would get that big bill for an item I thought I really needed. Chances are the thrill of impulse buying is not as great as the relief of knowing I don’t have to pay for it at the end of the month… and sometimes motivates me to possibly make the item myself, depending on what it is. Recycling cuts down on what I spend and leaves more money to save or invest. Example: plastics are toxic and expensive so I save glass jars for storage. We went though a financial tsunami about 25 years ago when computerization went from main frames to PC’s…it was very difficult but we survived. I think of my kids in this world after I’m gone and that motivates me to save more. I’m with Vanguard and I have faith that I picked the right investing institution.