Wednesday, Aug. 26
Posted 11 a.m. EDT
First we get the news that Michael Jackson owed at least $300 million at the time of his death this summer. Now we read that Annie Leibovitz, the house-proud celebrity photographer, is $24 million in debt, and in danger of losing her New York homes and the rights to some of her work. She managed this much debt on an income well into the seven figures, by the way.
When British poet Edward Hodnett wrote the forehead-slappingly simple: "If you do not ask the right questions, you do not get the right answers. A question asked in the right way often points to its own answer," he probably wasn't writing about budgeting, but nevertheless, it fits.
The economic Maelstrom that has us spinning has numerous culprits, but in part was brought about by many of us asking the wrong question.
Even in good times, the fiscal question should have been, "What can I afford?" Instead, it was "What do I want?" and while a two-decade long economic upswing lulled many into thinking those two questions were one in the same, the realities we're dealing with now tell us they aren't. Too many people are financially straitjacketed because they asked -- and answered -- the wrong question.
The well-heeled shared in a misdirected optimism fueled by easy credit. Financial planners for the affluent tell me that when a $900,000 home was affordable, their clients often stretched their finances and traded up to the $1.6 million mansion with the climate-controlled wine cellar and home theatre. And now the wealthiest enclaves are proving to be just as susceptible to foreclosures. Reportedly, Leibovitz and Jackson put very few limits on their prodigious spending.
But descending into schadenfreude for the rich doesn't do anyone any good. A dose of reality rooted in financial basics does.
When credit took its flight of fancy, people began to think it was relatively easy to get what they wanted, and the easier it got, the more they took, but by maxing out credit, they ended up with very little ownership -- and that formula translates into "easy come, easy go," according to Ronald Wilcox, professor of business administration at University of Virginia, and author of "Whatever Happened to Thrift?"
For instance, Wilcox says the lack of equity in housing is one of the major reasons people are walking away from mortgages -- even if they can afford to pay. When housing prices dropped, those who financed without a down payment were underwater immediately. "But if you have 20-percent skin in the game, it's harder to walk away," he adds, even if you are underwater.
There is a generation with a financial philosophy that doesn't include putting skin in the game and living within their means, say some financial planners. Parents who built their fortune the old-fashioned way are now struggling with how to teach old-fashioned financial prudence to their debt-laden children and grandchildren.
It will be a hard lesson, but unfortunately, not merely pedantic in the wake of the latest recession.
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