Making Change: Money Matters

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Americans are more in debt than ever, and that's a problem. Not because debt itself is a bad thing, according to Dave Altig, research director at the Federal Reserve Bank of Cleveland. In fact, he says, debt is a necessary component of today's economy.

Dave Altig: If it wasn't for debt, none of us would own houses. Most of us wouldn't have college educations. We wouldn't own automobiles. I mean debt is one of those things that really increases the ability of an economy to function.

But in 2004, for the first time since the Federal Reserve Bank began tracking such matters half a century ago, the average Americans' personal debt outstripped their disposable income. Many Americans are teetering on the brink of insolvency. Savings are down across the country. And that's a problem for everyone, Altig says.

Dave Altig: Low savings rates contribute to things like higher interest rates in the short term. And in the longer term, what you're really doing is reducing the rate at which the economy is adding to its capital stock. That means, everything else the same, lower growth prospects for the the future.

At its most basic, this means your decision to buy six CDs every month-instead of socking a hundred dollars away, let's say-compounded by similar spending habits practiced across the country, could put an otherwise affordable mortgage just out of reach of a prospective homeowner, and could ultimately slow down the economy. It also leaves you with precious few defenses against a financial crisis. Does that mean quitting CDs cold turkey? Not necessarily. Buy them used; borrow them from the library. The key, experts say, is to get disciplined and get creative.

Sonja Renzenbrink: I started by bringing my own pop to work.

Sonja Renzenbrink works at the Council for Economic Opportunities in Cleveland. A couple of years ago, following a seminar on saving money that she attended at work, Renzenbrink began making small changes to increase her savings and reduce her debt.

Sonja Renzenbrink: I'd buy a carton of pop at Marc's, and it would be a couple of dollars, and it would last me almost two weeks, instead of spending, you know, a dollar and a quarter every day for pop.

She also brought in her own coffee, and started parking farther away from the office to save money. Within a year, she had amassed three hundred dollars this way. Now, she has the Council send a portion of her salary directly to savings. It's the kind of behavior Frances Torres encourages in money management workshops she conducts with kids. Torres is a program assistant for Ohio State's 4-H.

Frances Torres: This is the spending game and it's a really fun, good game that I have with the kids. Basically, they start off with like housing, phone, furnishings, everything that has to do with life.

The kids develop informal budgets by checking boxes next to their choices. Transportation, for example, works this way: Planning to walk or bike? That's zero boxes. Buying gas for the family car? One box. Buying a used car ? That's two. At first, she tells the kids they have unlimited resources. After they make their initial choices, however, Torres yanks the rug out from under them.

Frances Torres: I tell them, 'Okay you lost your job,' you know. Or, 'You have no income now.' So they only have to end up with 13 boxes. So they have to go back and rearrange everything. And so that's basically what life is about. You have something, and then you don't, and you have to compromise. You know?

Mark Campbell does. He went through bankruptcy twice and lost his first home to the bank. He's not alone. Ohio was eighth in the nation in bankruptcies in 2003, and has some of the highest foreclosure rates as well. But Campbell decided not to be a statistic, and a couple of years ago started turning things around when he enrolled in a money management class at the Cleveland Housing Network.

Mark Campbell: In the budgeting class, one of the things you have to do for the first three or four classes is track everything you spend. Whether it be a pop at the store or at work or whatever.

It's a typical exercise in beginning money management, and it tends to surprise people.

Mark Campbell: We realized that we were spending a lot of money on nothing. We had nothing to show for it, and we had no savings, or anything.

That's no longer true, Campbell says. He and his wife are busy saving money-with the goal of buying a house this year, and maybe investing in some rental properties. Regardless of the outcome, the fact that they are saving sets the Campbells apart, according to the Cleveland Fed's Dave Altig. He says it's always been typical for savings to be low (even negative) early in life, higher through middle age, and low again during retirement. But savings are down across the lifespan, Altig says, and this is cause for concern.

Dave Altig: You're sort of borrowing against your future. It's just like for an individual, when an economy is not socking some funds away to provide for our well being down the road, our well being down the road obviously is diminished a bit.

In Cleveland, Cindi Deutschman-Ruiz, 90.3.

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