Frugality has become a very hot topic lately because of the recession. In fact, it became the topic of Chris Farrell’s The New Frugality and one that I think was overlooked for far too long. Despite my Devil’s Advocate post saying that frugality was foolish, I believe the being frugal is exceptionally important, especially if you’re young.

When you’re young, you usually have very little money but a whole lot of time. You’re able to turn that time into money through your work and that’s generally where you make the bulk of your income. As you get older, your savings grow and are able to generate income and, hopefully, generates the bulk of your income. The more you can save when your young, the faster that capital accumulates and you can live off that income. You go from depending on your labor for income to depending on your capital. I’m frugal because I believe my dollars can work on my behalf if I can keep them in my wallet.

The second reason I’m frugal is because there are things I value and things I don’t. For the things I don’t value, I want to pay as little as possible. I don’t pay top dollar for a brand new car, I buy used and off Ebay to get the best deal I can on something reliable. I don’t need a $40,000 or $30,000 or even a $20,000 car (and the car loan that comes with it) because that isn’t important to me. I’m able to save there so that I can spend my money on the things I do care about.

As I’ve often said in the past, my lovely wife and I love to travel and when we do, I pay for quality and value. I don’t spend freely without regard but I certainly budget a large amount for the trip and spend close to it (if not more!). As Greg Karp once said to me, Experiences appreciate, things depreciate, and I fully intend to invest as much as possible in experiences.

Why are you frugal?

CNN Money reported last week that 43% of Americans have less than $10,000 in retirement savings, which is a statistic provided by the Employee Benefit Research Institute in their Retirement Confidence Survey (2010 results). If that figure isn’t scary enough, it appears that 27% of workers have less than $1,000. Both figures are increases from 2009, when 39% had less than $10,000 and 20% had less than $1,000 a year ago.

While the statistics are sobering, it does show how much the recession has hurt a lot of people. If you lose your job, the first thing to go after your emergency fund is probably going to be your retirement savings. Keeping a roof over your head and food in your stomach is going to take precedence over retirement tomorrow.

If you dig a little deeper in the statistics, you get a little more color on the situation and it’s not a good one. 56% of workers between 25 and 34 have less than $10,000 in savings, 46% between 35-44, 38% between 45-54, and a mind boggling 29% of workers over 55 have less than ten grand in their retirement savings. (on the other side, it’s pretty amazing that 10% of workers between 25 and 34 have over $100,000 in retirement savings, so it’s not impossible, which totally blows away both my expectations and what we know about average retirement savings)

If you’re one of the ones with less than $10,000 in retirement savings, don’t despair because 43% of Americans are there with you. We’re going through some tough times now but once we get back on our feet, retirement savings has to become a priority. Social security and other entitlement programs aren’t going to be here forever. It’s only a matter of time before they are replaced as defined benefit (pension) retirement plans are being replaced with defined contribution (401k) retirement plans (Math doesn’t care which political party’s name is written on your voter card, the current system is not sustainable).

If you’re in better shape, excellent, congratulations but don’t pat yourself on the back just yet. Share your tips with your working friends so that we can come back in five years and talk about how great it was we reversed the trend. We’re not getting many incentives to save for the future, just look at CD rates if you need a reminder, but that doesn’t mean we shouldn’t do it.

43% have less than $10k for retirement [CNN Money]

Nowadays the highest denomination bill you can find is the $100 but back in the early 20th century, the Bureau of Engraving and Printing was printing bills as high as $100,000 (1934-35). There aren’t any high denomination bills left, after printing was officially discontinued in 1969 by President Nixon. It was an attempt to combat organized crime and there while they are still legal tender, their value to collectors far exceeds their face value nowadays. There aren’t many left though, so if you find one, take very good care of it!

Let’s have some fun facts!
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If experiences appreciate and things depreciate, is there a way for us to separate the experience of a thing away from the thing itself? Of course there is – rent it. If we’re going on vacation, it makes perfect sense for us to rent a car rather than buy it (though in places in Europe, for long “rental periods,” you actually buy the car and sell it back) and we don’t think anything of it. So why don’t we do it for things we use only infrequently? We don’t realize it’s an option.

Whenever you consider the financial trade-offs between buying something and renting something, it really comes down to a few a few factors and here’s what I think they are.

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Reminiscences of a Stock Operator by Edin Lefevre was first published many many years ago and tells the first person fictional tale of Larry Livingston, a stock speculator in the early 1900s. It was widely believed that the character was based on Jesse Lauriston Livermore and in this version of the book, the connection is made concrete through annotations by Jon Markman.

Despite being considered an investment classic, I had never heard of it in part because it’s a classic in the sense that it gives a fantastic account of the financial system in the late 19th century and early 20th century. It’s more history than investing education though it has a healthy dose of both, especially with Markman’s annotations. You can preview it at Google Books and even the few pages of the preview give you a very good feel for how the book is.

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When GM was knocking on the doorstep of bankruptcy (who answered soon after), I thought it would be fun to try to buy a single share as a collectors item. It was under a dollar a share and I really only needed one, so I assumed it probably wasn’t going to cost all that much.

As I started to do more research on stock certificates, I finally understood why prices for stock trades had fallen so much in the last twenty years. The process for buying a certificate isn’t difficult, it just takes a bit of time, and there are a few options out there. Some of which are actually quite pricey, relative to the price of GM at the time (eighty five cents).

Did you know there’s a name for the “study and collection of stocks and bonds?” It’s scripophily and it’s a specialized field of numismatics, which is study and collection of currency. It’s appeal is in intricate designs and engravings of some stock certificates (and sometimes because of the signatures on the certificates, like John D. Rockefeller of Standard Oil Company).

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In personal finance, you have to make a lot of decisions with imperfect information. You contribute to a Roth IRA because you like the tax free growth and you believe that you will be taxed at a greater rate in retirement (otherwise it may be better to contribute to a Traditional IRA). You buy a house because you want to hedge against inflation by fixing your housing costs, both of which you assume will go up in the future. You take on a new job with more responsibility and more pay because, well, it’s better to have more of both, right?

At the core of many of these decisions, as sad as it may be, are taxes. It’s obvious in the case of the Roth IRA and Traditional IRA and less obvious in the housing (interest, property taxes, and such are tax deductible), but it’s present in many money decisions. Do I take that new job? Well, how much do I really get to take home? That will, in part, depend on taxes.

In the same way that it’s important for you to know the value of your time, it’s important for you to know your tax bracket.

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I’ve been investing in a few dividend stocks lately because savings account rates have been pretty abysmal. The prospect of earning a percent or two on my money is great for an emergency fund but lousy for anything long term.

One of the important ideas behind dividend investing is that you should reinvest the dividends if you don’t need the income. Public companies offered dividend reinvestment plans, or DRIPs, that let you buy shares directly from them and have your dividends reinvested for free. Nowadays, many brokers offer this service for free and I take advantage of them.

However, just because everyone says it’s a good idea doesn’t make it a good idea. Why should I reinvest my dividends?

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If you take the 120 minus your age investment allocation rule to towards retirement, the conclusion is that your investments should mostly be in safe “bond” investments and out of risky “stock” investments. Since you no longer have the time to wait out the volatile swings of the stock market, you are advised to be invested in “fixed income” investments, like bonds.

Unfortunately, even with all the strategies below, nothing replaces the dependability and safety of a high yield savings account. The days of exceptionally high yields protected by FDIC insurance are gone until we see the stock market reach its once lofty heights but hopefully some of these strategies can bridge the interest rate gap without introducing too much risk.

Fixed income investments are usually safe investments that give you a fixed rate of return. The safe part is really a relative term, as bonds are only as safe as the ability for the bond issuer to pay the fixed interest rate. The idea is that you pick stable companies or municipalities and you have a reasonable expectation that the interest will be paid. How do we use those principles to find similar “investments” to boost our savings rate?

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If you’ve ever watched a television in the last few years, you’ve undoubtedly seen the FreeCreditReport.com commercials with the guy playing the banjo. In recent months, Experian, the parent company of FreeCreditReport.com, has come under fire because:

1. The credit reports are free, if you remember to cancel the trial (big if!).
2. Consumers have been educated by the FTC that they can get a copy of their credit report for free once every 12 months, no strings attached… except they have to go to AnnualCreditReport.com, not FreeCreditReport.com.
3. Consumers are, knowingly or unknowingly, signing up for the trial service, getting their free credit score and reports, and then not canceling.

So, in early November, the Bucks blog on the New York Times wrote about how Senator Chuck Schumer of New York wants the FTC to force Experian to give you your free report and score before they ask for the credit card information. This was largely shelved because the CARD Act included a provision that required credit report services to include a disclaimer.

I understand the need to police overtly scammy negative option billing practices but how much intervention is too much? I think it was right for the FTC to force Experian to notify visitors to FreeCreditReport.com that they are not affiliated with the free credit report program. It’s also good that the site informs you that you are signing up for a free 7-day trial. It should also be clear that you will be charged for it after the trial because otherwise they wouldn’t ask for your credit card information! (to be clear, I’m fine with the regulation as it stands now… but I didn’t like Senator Schumer’s idea of forcing Experian to change their business practices in that way)

So at what point do we stop? At what point does common sense get completely thrown out and replaced with regulation? I’m curious to hear your thoughts on this.