We've all felt the economy's breathtaking changes rattle our money lives, and it's hurt. But Chris Farrell, economics editor for American Public Media's Marketplace Money and contributing editor for BusinessWeek, says there's a lot of good to come from it all.
Farrell is the author of a new book, The New Frugality: How to Consume Less, Save More, and Live Better. The 55-year-old Minnesota writer outlines a plan for saving more and borrowing less and achieving those goals by going green.
Greener living, Farrell says, is the key to financial success in a post-recession world, especially for middle-aged consumers who may have made missteps in the past. He explains in an interview with SecondAct.
SA: How does going green help you save?
CF: If you say what we need to do is save more, we know that, but how do you go about doing that? A lot of the green tips out there will help you save money, and of course a lot of the savings are small, but savings compounds over time. Small steps. It's a basic of personal finance. If you're trying to get out of debt, it's small steps. If you're trying to save money, it's small steps.
By being green and frugal, you're accomplishing other goals, too.
SA: How do those of us who were not raised with a green mentality get on the green bandwagon?
CF: There seems to be generational divide, and the green message seems to resonate with young adults. They've grown up with a green mentality. For middle-aged folks, which is who this book is really geared toward, they're the ones who have made mistakes. Income prospects are not great and they think "I don't want to go through this again." This is the generation that borrowed a lot and it's the generation that's struggling to get out of debt. When you get to your 40s and 50s, you can't help but think about your older years, and I think this book is a very positive message for how to deal with troubling messages like that.
SA: The message of frugal versus cheap: The word cheap has often had a negative connotation, but frugal is different. How so?
CF: It used to be that being frugal was being cheap, and if you're being cheap out of necessity, that's not the way you want to live your life. It's making a choice. Sustainability has moved from the fringes of society well into the mainstream.... A lot of people during the recession looked around their homes and their apartments and said "At one point this stuff mattered to me but now, why do I need all this stuff?" We're not going to stop buying things, but we can buy differently. We can buy things that we value and are going to use for a long time. We're also recycling things, taking the things you no longer need and getting them into the hands of those who do need it.
SA: What inspired you to write this book?
CF: Part of it was in response to the Great Recession, and that got me to thinking about the margin of safety and people borrowing too much and not saving enough. Originally the book was a history of consumer credit and consumer debt, and one of the things that struck me was that borrowing is an act of optimism. After the Great Depression, they borrowed. At some level you believe you're going to be employed and you're going to pay the mortgage off in 30 years. Then I looked at magazine and newspaper articles during previous recessions, and people would always be avowing to be more frugal, and we'd come out of the recession and we'd borrow more.
SA: How do the times and this frugality mind-set play into long-term goals?
CF: Those original goals are still there, but the questions are "How do you achieve them?" and "How do you reach for them?" Most of what makes good personal finance is good habits. That's why I talk about why giving should be at the core of a financial plan. It shouldn't be the biggest chunk of money--hopefully the biggest chunk is going to retirement or emergency savings. Giving is a relatively small portion, but it's a core part. If you make it part of your money conversation, it answers all the right questions: Why am I working? How can I make an impact? Is that good for the community? And that spills over into your other finances.
SA: Americans are getting used to new rules for credit and new lending practices among banks. Do you have any tips for borrowing money so we can protect ourselves and borrow smart?
CF: We are all aware that our personal financial safety nets were too thin. Now people are struggling to pay the credit card debt, mortgages, home equity lines. It's easy to take on the debt, but it takes a long time to pay it off. We went through a very brief time where we thought we could avoid a lot of trade-offs or decisions by borrowing. The No. 1 number that struck me was in college financial aid. A quarter of folks with college tuition bills paid by using home equity loans. That was a way to avoid dealing with the cost of college, and at a great cost.
There is still such a thing as wise debt. Getting a college education is still big, so the message isn't don't borrow to go to college. The message is you can't borrow any amount and think a college education is going to pay it all [back]. Graduates are earning less and having more debt, so you have to borrow smart.
It's the same thing with borrowing for a home. The two greatest lies of real estate are that renting is throwing money away, and you should borrow as much as you can to buy as big as you can. Most of us are going to have to borrow, and you need a conservative spending structure. For many, renting is a viable option. The rule of thumb was if you're not going to be in the house for more than three years, don't buy. I think that's changed to five years. So many people are locked into a house and they find a job in another part of the country but they can't go. For them, renting would have been a better option.