Economy 4.0

Spending vs. savings during these unnerving times

David Brancaccio Aug 19, 2011

Into the teeth of this economic gale, I had to make quite a spending decision this week. It wasn’t a frivolous purchase – not the $5,000 carbon-fiber bike to replace my aluminum one. That would have been easy: Not now.

The spending decision at hand was the fall tuition, room and board payment for my daughter, entering her second year at college. The cost: $26,665. And that just covers through the new year. In our family, education is probably the most noble use of money, so we didn’t hesitate, despite the nausea-inducing size of the check.

What did induce some seasickness about education spending came later in the week. With Marketplace Money host Tess Vigeland away, I’m filling in as host and spent the week examining our theme for the show: spending vs. savings during these unnerving times.

I was interviewing a nice person from Chicago who had opted to get a masters degree in international relations after a successful career in human resources. Sadly, she had graduated into the economic meltdown of 2008 and couldn’t find work. Without work, she couldn’t pay her students loans, which hurt her credit report. On the verge of what might have been a nice job offer, that credit rating came back to haunt her.

If spending even on education can indirectly have such negative consequences, maybe we need to think long and hard about other less important kinds of consumption. Consumer advocates say we may also need to take a long hard look at growing fondness of companies using credit reports for hiring even non-financial jobs. Links between job performance and credit score are elusive.

Sure, many folks we talked to on the show preach savings as a strong default position for our personal finance posture. Yet what about the Paradox of Thrift: if many of us save at the same moment, demand dries up and the economy hits the skids. Such is one of the costs of an economy so based on personal consumption.

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