(MONEY Magazine) – Last Christmas, as kids all over the country tore into piles of brightly wrapped presents, the Edels of Rochester, Minn. sat down to a rather more restrained gift exchange. For six-year-old Zachary, there was a basket containing shampoo and a pretend shaving kit. Seven-year-old Elyse got one stuffed animal. And 12-year old Madison received a single CD. All the children got new socks and underwear, packed in recycled gift bags and hand-me-down wrapping paper from their grandmother's closet. "Everything for each child cost under $20," says their mother Miranda.

It's not that the Edels couldn't afford more. Miranda, 34, is a graphic design professor in the University of Minnesota system, and her husband Jonathan, 29, is a doctor--a surgical resident at the prestigious Mayo Clinic. Together they make over $90,000, an income that could easily triple once Jonathan completes his residency. And despite having four kids (there's also a two-year-old, Gavin) and a fifth due in October, they save more than half their gross pay. In other words, they have no financial reason not to spoil their kids at Christmas--or buy new cars or trade up to a big house or indulge any of the other familiar American consumer impulses. They simply choose not to.

Instead, the Edels have taken what they see as a more ethical path, rejecting consumerism and trying to buy as little as possible. To them, spending more than you need is a waste of resources--yours and the planet's--that is doomed to leave you neither happy nor fulfilled. In March the couple took their vision of simple living a step further by joining The Compact, a recently formed online group whose members pledge not to purchase anything new for a year. So apart from food, medicine and some basic clothing (underwear and socks, for example), for the next 12 months the Edels will borrow what they need, buy it used or do without.

Not surprisingly, this way of life poses challenges. The Edels' austerity exasperates some friends--a few colleagues think they're downright nuts--and it has at times strained their own relationship. And then there are the children: No matter how strict Miranda and Jonathan are, they find that their kids want the same clothes and gadgets their peers have--and as the kids get older, it grows more difficult to deny them. In 21st-century consumer America, the Edels are learning, the simple life can be a complicated thing.

THE PATH TO SIMPLICITY

Raised in a free-spending household in northern Minnesota, Miranda admits that she isn't frugal by nature. "Shopping was an adrenaline rush," she recalls of her student years, which were marked by a weakness for shoes, makeup and art-student-funky clothes. Her first marriage crumbled a year after Zachary was born, and for the next year, as a single mother of three and a full-time student, she struggled to make ends meet. By the time she met Jonathan, she owed more than $50,000 in student-loan and credit-card debt.

Jonathan, on the other hand, was reared by a single mom who was thrifty by necessity, and he grew up extremely, even compulsively, tight with money. He worked his way through college, and thanks to an almost fanatically abstemious lifestyle--he occasionally ate nothing but bean soup for days on end--he graduated from medical school not a penny in debt.

When he and Miranda married four years ago, he made paying off her loans their first priority. Among his money-saving ideas: heating only one room of their northern Minnesota home through a long, cold winter. Once, recalls Miranda, Jonathan upbraided her for buying a $2 container of fat-free chocolate milk. "I mean, come on, $2?" she says. Shrugs Jonathan: "Okay, I was extreme. But it worked." Sure enough, the debts were paid off in less than two years.

With that incentive gone, however, Miranda began to weary of her husband's militant penny-pinching. Last November, after Jonathan got upset over her spending $75 on work clothes at Target, Miranda had had it. "I was like, come on, look how much money we make now. I needed a reason to live like this."

Then, early this year, she found her reason. A morning news program about The Compact started her thinking about the folly of heedless spending and consumer culture's impact on the environment. "I loved the idea of choosing to live with less," she says. About a month later, she told Jonathan that she had signed up. "Now," he marvels, "she's more gung-ho about not spending than I am."

LIFE IN THE COMPACT

From the outside, the Edels' simple life looks a lot like the suburban life all around them. With a kids' clubhouse in the backyard and a Volvo in the driveway, the trim four-bedroom cottage fits perfectly into its middle-class neighborhood. But walk inside and you quickly realize that this is not the average American home. Instead of a wide-screen TV, the most conspicuous presence in the Edels' living room is a wood stove, one of two that heat most of their home. (Estimated fuel savings: $1,200 a year.) Forget about a pool table or exercise machines in the basement; instead, there are 400 pounds of unground wheat berries stored in six-gallon pails, which will provide the family with whole wheat bread for at least six months. (Cost: $72.) Conveniences like cell phones are out of the question, of course. Even in the kitchen, where Miranda spends much of her day, a worn KitchenAid mixer is the only appliance in sight.

The Compact has inspired the Edels to pare back even more. These days Miranda walks to the grocery store instead of driving ("It saves on gas, and can only buy what I can carry"). She refills shampoo and lotion bottles at a local store that sells bulk foods, and has planted a vegetable garden. Jonathan, who commutes to work on a 115-miles-per-gallon moped, recently bought a 1979 Mercedes diesel sedan, which he plans to convert to run on vegetable oil salvaged from local restaurants. "We may smell like a deep fryer," jokes Miranda, but they'll be fueling the car for free.

Curiously, the Edels have given comparatively little thought to what to do with the prodigious amounts they save. Some $200 goes into an extra monthly principal payment on their mortgage, a 30-year loan fixed at 5.6%, but the rest mainly piles up in their checking and savings accounts. The two now have a combined balance of $75,000. Jonathan had invested $15,000 in a mutual fund, but after it lost half its value in the crash, he swore off the stock market. "I like to keep money where I can see it," he now says. "In the bank or in my home."

BRINGING ALONG THE KIDS

Keeping their children on the simple path may be the toughest part of the Edels' challenge. Though the kids aren't held to the no-new-purchases rules of The Compact, they have to earn money they want to spend by working around the house. (That's in addition to a regimen of daily chores, such as doing dishes, vacuuming and cleaning the bathroom.) When Zachary wanted to buy a $10 beach towel earlier this year, for example, he earned most of the money pulling dandelions from the front yard at a penny per weed. "I don't want kids who feel entitled to everything," says Miranda. "I want them to learn how to do without."

As their oldest child enters her teen years, the Edels face their first real test of how well those lessons have sunk in. Miranda and Jonathan frequently talk to Madison about The Compact ("I point to something in her room and say, Did you need that or just want it?" says Miranda). It's clear the child is torn. "I think, when I buy things, it doesn't make me happy," Madison dutifully tells a guest. Jonathan laughs. "Can I get that on tape, for the next time you ask about an iPod?" he teases. "Well, I want an iPod," Madison admits. She also wants new clothes. "There are girls at school who say, you wore that outfit last week, you can't wear it again," Madison says. So far she hasn't rebelled against her thrift-store wardrobe, but she's not above accepting forbidden gifts. The last time Madison visited her paternal grandparents, for example, she returned with a shopping bag of new clothes, including sunglasses and a bikini. She had to have the latter, she explained, because all the other girls had one. Miranda was furious but decided to let Madison keep her haul, rationalizing that she could hand it down to Elyse. "I figured at least we'll get a lot of use out of it," says Miranda.

THE ADVICE

On MONEY's invitation, Edina, Minn. financial planner Ross Levin weighed in to help with the money side of the simple life, while Jon and Eileen Gallo, authors of Silver Spoon Kids: How Successful Parents Raise Responsible Children, commented on raising kids in a consumer culture. On both questions, the experts' first advice to the Edels could be summed up in two words: Lighten up!

"I think money almost has a stranglehold on Jonathan and Miranda," observes Levin. "It's so important to them that they don't want to take any risks investing it, but what it can buy is so unimportant to them that they don't want to spend it either." His advice: Budget some cash to spend on fun--a computer game, for example, or a baseball outing. Miranda replies that both she and Jonathan already set aside $20 a month to spend on whatever they want, though she admits Jonathan rarely uses it. "Force yourself," Levin says. "Don't deprive your family of experiences they'll value." Then he adds: "And budget more than $20."

Similarly, the Gallos suggest that the Edels go a bit easier on the kids. It's great to ask them to earn money for things they want to buy, says Jon. But he recommends paying per project rather than, say, a tiny amount per weed. "That can be discouraging," he says. Eileen adds that once you agree to let kids spend the money they've earned, you've got to let them buy what they want. "Respect their choice," she says, "even if it makes you cringe." Otherwise, they'll never learn from their mistakes.

Moving to conventional financial issues, Levin outlined these steps:

• DON'T RUSH THE MORTGAGE Debt-hating Jonathan wants to kill their home loan as soon as possible. But Levin thinks the $200 a month they now overpay on the mortgage would be better put toward retirement and college savings. Their interest rate is 5.6%; in their 30% joint state and federal tax bracket, the after-tax cost works out to just 4.3%. "In the long run, they'll do better in a diversified investment portfolio," he says.

• MAX OUT ON ROTH IRAS The Edels have no retirement savings except in their bank savings account, now paying a mere 2%. With the tiny amount they spend each month, Levin says, there's no need for them to keep more than $10,000 there as an emergency fund.

Both, needless to say, should fully fund their retirement plans at work as soon as they're eligible. In addition, Levin suggests they put $4,000 each into Roth IRAs this year, investing in a Vanguard lifestyle fund, which holds both stocks and bonds and rebalances those assets each year to maintain a constant investment mix. Noting their skittishness about the market, Levin recommends Vanguard LifeStrategy Moderate Growth (ticker symbol: VSMGX), which maintains a conservative 60-40 blend of stocks and bonds.

• START 529 COLLEGE SAVINGS PLANS After funding their retirement plans, they should spread the remainder of their savings among Minnesota 529 plans for their kids, allocating the most to Madison since she'll need it first. Any funds she doesn't use can be rolled over into the accounts for her siblings.

While still nervous about stocks, Jonathan admits Levin's logic. "We've always said retirement and college are our top priorities," he says. "I guess it took an outsider's perspective to make us put our money where our mouths are."

The Bottom Line

Whether or not the Edels' life is simple, it certainly is frugal. By paring spending to the bone, they save 51% of their income.

Steps to Simplify

Wish your life were less expensive? You probably aren't willing to go quite as far as the Edels, but you don't have to. Here are three things to do instead.

KNOW WHERE IT GOES

The first step to cutting back is knowing what you're really spending money on. Track all your expenses in a notebook or on the computer (sticking to a single credit card works too). At the end of the month, go over the list, asking yourself whether each purchase added to your satisfaction and whether you could have lived without it.

START SMALL

Think of one change you could make that would be relatively easy to accomplish. Perhaps you could ride your bike to work once a week, or eat another meal or two at home. "If you start with a small change, you can pinpoint how it makes you feel," says Stan King, who runs simplicity groups in the Bay Area. Feel good? Try adding another change.

THINK IT OVER

Before you buy a luxury item, give yourself time--ideally, a few months--to reconsider. Ask yourself some hard questions: How much will I use it? Can I do without it? Is there an equivalent item I could borrow from a family member or friend? If you still really want the item after a few months, go ahead and buy it. And enjoy.