Feeling
wealthy can make you poor | | |
| "Californians have always rented their
homes through a mortgage and that's something that has swept the country. People
don't stay in a house long enough to own it and they move on to more house than
they would have bought under more prudent circumstances given their income level."
Charles Lieberman, an economist with Advisors Capital Management
in Paramus, N.J., says statistics indicate that consumers use more restraint than
they're given credit for when it comes to borrowing gains that haven't been realized. "Any
time individuals leverage their accounts it increases their risk. They need to
take appropriate risk. Put risk into the context of what other assets are available
to the individual. Assets are growing faster than debt. We don't have a good idea
of where the money goes when consumers borrow against their homes. We don't know
whether they bought something for consumption or whether they reinvested the proceeds.
"I take enormous solace in the fact that during
the period when mortgage rates fell sharply and household refinancing
was very high that the savings rate, even as poorly measured as
it is, declined relatively little and gradually. That suggests that
the growth in consumer spending was only a little stronger than
the growth in consumer income, so most of the consumer spending
was paid for out of current income."
Lieberman says he believes that relatively few homeowners
are in over their heads, but that many people don't understand their
own financial conditions. He recommends that consumers look at how
much it costs on a monthly basis to service their debt versus how
much they have in monthly income to cover those costs and meet other
cash needs.
Becker, who says people spend too much, advises consumers
to do more, or better, budgeting and to be realistic about the lifestyle
they can afford.
"Be
pragmatic about what you buy. Break down your spending and learn how you spend.
If you got $50,000 last year, where did it go? Did you do a good job of using
the money you had? Most people aren't using their money effectively. Mortgage
isn't the serious problem; it's the car payments and credit cards. People buy
BMWs. You can't get caught up in those things. Look at cash flow and make sure
you're living within your cash flow."
Being a millionaire, or a "hundred-thousandaire,"
on paper should give you optimism about where you are financially
and where you're going. But don't put yourself in a position where
you must rely on markets that are beyond your control to constantly
skyrocket.
Housing and stock market downturns happen frequently, and
sometimes they're prolonged. Make sure you can handle the debt you incur without
selling assets you would prefer to hold. | 
