Stay Off the Frugal Path to Disaster
Frugality is a great tool. But if your approach to frugality is to pare away everything non-essential, you're setting yourself up for failure. (See also: Ruthless Frugality)
If you're already living at the lowest acceptable standard of living, what happens when you suffer a negative event — an injury or an illness or a recession or a theft or a natural disaster?
The capacity to tolerate negative event is resilience, and for an economic unit, the key enabling factor for resilience is to use inputs no faster than the environment supplies them.
You already know a form of that rule — live within your means. But that's a simplistic version of the rule, one suited to the decades between the New Deal and the Great Society, but now rapidly becoming obsolete. In a world where no job is secure, it's no longer safe to take the view that you're okay as long as your spending is well under your take-home pay.
The environment doesn't provide inputs at a steady rate, so you can't just assume that your current income is reliable. You need additional tools.
Frugality is a useful tactic for dealing with variability, as long as you avoid the trap of targeting the lowest-acceptable lifestyle. Through frugality, you produce a gap between your income and your spending. Especially if, like most people, you spend all you earn (or, like a lot of people, spend more than you earn), it's a starting point for accumulating a bit of a surplus.
On the face of it, self-sufficiency would be the perfect tactic for insulating your household from the vagaries of economics or politics. In practice, of course, self-sufficiency is much too hard a way to live. It takes capital, skills you probably don't have, and long hours of difficult, dirty, and often dangerous work, all to produce a standard of living lower than minimum wage.
But strategic partial self-sufficiency is a great idea. If you can cover at least a fraction of your household's most essential needs — water, food, shelter — outside the money economy, then you can tolerate those negative events, as long as they're transitory.
The downside of self-sufficiency comes from the "self" part. The more you try to do for yourself, the less you're able to benefit from specialization. That's why living in the global economy produces a much higher a standard of living than living as a subsistence farmer.
But the downsides of living in the global economy have been made abundantly clear over the past few years.
The safe strategy is to aim for the middle — localization. Don't try to produce everything you need yourself, but live someplace where the community can produce at least the essentials.
I've been following the work of John Robb on resilient communities. (In fact, it was his post on the difference between thrift and frugality that started me thinking about these issues this way.) I think he goes awry in suggesting that frugality is at root an unsuccessful attempt to get by on nothing. As I said above, I view frugality as a tactic for matching your resource demand with the resource supply provided by the environment in a world where the resource supply is highly variable.
But despite that misstep, Robb is clearly right that a resilient community is the right strategy if you want to have a high standard of living without being terribly vulnerable to negative events. There are lot of ways to start making your community more resilient. Shop locally. Share things with your neighbors. Make common cause with the people around you.
Those sorts of tactics, together with some frugality to match your resource demands to the reliable supply and some strategic partial self-sufficiency to buffer your household from external shocks, will make your household a lot less vulnerable.