5 Easy Ways To Apply Frugality to Your Investment Decisions

Subscribing to my site guarantees you don't miss any new content. Choose either E-Mail Feed or RSS Feed. Thanks for visiting!

When I first started writing this blog in no way did I have the word frugal on my brain.

I knew what the word meant, but it wasn’t until I became a part of the PF (personal finance) blogging world that I really started to appreciate and understand the significance of this simple word.

Here’s a part of the definition Wikipedia offers up for Frugality:

“Some of the main strategies of frugality are the reduction of waste, changing costly habits, suppressing instant gratification by means of fiscal self-restraint, seeking efficiency, avoiding traps, defying expensive social norms, embracing free (as in gratis) options…”

A deeper meaning

I think that definition is pretty accurate. I also think it’s kind of ironic how I used to attach a negative connotation to that word (which I think most of the general public still does) and how I now look at it in a completely new light.

If you go through my blogroll, many of the blogs that I subscribe to talk quite a bit about frugality - heck one of them has it in the name - Being Frugal. And I have to say, over the past 6 months, I have developed a new found appreciation for the benefits of a frugal lifestyle and have learned an awful lot from reading pro-frugality blogs.

A eureka moment

Originally, I couldn’t see how Chance Favors would have anything to do with frugality, but it dawned on me that I have a lot more in common with the sites in my blogroll than I first thought. They deal with liability (debt) and lifestyle issues, where I tend to focus more on the asset management side of the frugality coin.

If you apply much of the content on my blog versus the (above) Wikipedia definition, it seems to match up quite nicely. So, continuing in that vein, I’d like to list…

5 ways I advocate applying the principles of frugality to your investments:

Seek efficiency

When it comes to investing, you are presented with so many different avenues to go down. I suggest making ETF’s your #1 portfolio option. If ETF’s are not available to you (i.e an employer sponsored retirement plan) then look for the most cost effective funds you can find.

Take advantage of incentives

Uncle Sam has given all Americans the gift of a Roth IRA. Look to open and fund this account ASAP. Either fund the account via eligible contributions or start preparing for a 2010 Roth IRA conversion.

If your employer offers a retirement plan where they are willing to match your investment contribution, take advantage of that incentive to the best of your ability.

Change costly habits

Reduce your exposure to mutual funds that are very expensive, eliminate the costs associated with frequently trading individual stocks and educate yourself on financial markets, so as to avoid costly mistakes in the future.

Defy expensive social norms

If you’re investment savvy then look to manage your own investments, otherwise look for the most cost effective way to hire an honest and capable financial advisor.

Suppress instant gratification

Don’t swing for the fences every time, instead look to consistently hit singles. Proper portfolio diversification and periodic re-balancing will insure your success in the long run, even though you may miss a few high flyers (aim to be the Tony Gwynn of investing, not the Jose Canseco).

As long as the overwhelming majority of your investments are well spread out, then I have no problem with investors selectively looking for a little instant gratification from time to time.

In conclusion

To steal from Wikipedia one last time, frugality is:

“…individuals practicing both restraint in the acquiring of and resourceful use of economic goods and services in order to achieve lasting and more fulfilling goals…”

In order to achieve these goals you have to know what they are, whether it be the successful elimination of debt, building an emergency fund or building an asset base for the future, etc.

I would recommend listing your goals (to the best of your ability), completing an informal financial plan and then doing your best to follow the road map to success.

Happy Frugaling!

Tags: 2010 Roth IRA Conversion Event, Financial Planning Retirement and Now!, Roth IRA Conversion