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Feeling wealthy can make you poor

As a nation, we have a negative savings rate, which makes us look like slackers when it comes to saving money. But, it's not quite as bad as it appears on the surface.

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Thanks to rising home values and burgeoning portfolios, our overall wealth is increasing. So we do have money in the piggy bank, even though we're spending more than we're earning at this time.

What's troubling is that the wealth effect is leading many consumers to a dangerous precipice. If you haven't sold your home or stock, but you're living a more expensive lifestyle based on those unrealized capital gains, you're on thin ice. What goes up can come down.

The problem is compounded by the fact that as those assets make us feel wealthier, we have a tendency to save less. When times are tight, we save more.

"People's spending has exceeded their net personal income," says Kurt Kunze, an economist with the U.S. Commerce Department's Bureau of Economic Analysis. "If the stock market goes straight north and housing resumes an upward trend, you can continue to have negative savings. If they've realized the capital gain, they're wealthier. But unrealized capital gains are much less robust than someone who has realized the gain."

A.G. Edwards, a brokerage and financial services firm, developed the Nest Egg Score, which is released quarterly. It looks at consumer saving and investing and how the economic climate affects the ability to build a nest egg. In calculating the score, several factors, including the often misunderstood and maligned personal savings rate, are considered.

Other elements include homeownership rate, cost of living, unemployment rate, asset allocation, participation in retirement plans, and savings and investing "propensity and outlook."

"Our goal is a more comprehensive indicator of wealth-building," says Sophie Beckmann, A.G. Edwards financial planning specialist. "A lot of people build wealth through the appreciation of assets they own. We consider it to be part of people's overall nest egg. What people already own may be just on paper, but it's an increase in their overall nest egg."

There have been three nest egg scores released since March 2006. The numerical scores translate into categories of poor, fair, good and excellent. So far, the indicator has never risen above fair.

"There's room for improvement," Beckmann says. "We haven't made it into 'good' yet."

If consumers spend with abandon when the wealth-building environment is only fair, one can only imagine what would happen if conditions improved to "good" or "excellent." Some financial planners say too many consumers have experienced feelings of euphoria upon seeing a sharp increase in the value of their homes and then have gone on spending sprees.

But Paul Becker, senior vice president of LaSalle Bank Wealth Management Group, based in Chicago, says homes should be looked at as a safety net.

"People should look at their liquid net worth -- assets that are liquid minus loans. Total net worth would include the home and assets that aren't easily liquidated. If I had to sell everything within seven days, what do I have and what do I owe? Your home is liquid in the sense that you can borrow against it quickly, but unless you have an emergency you shouldn't do that. You have to live in your home, and if you can't pay back the loan, you're on the street.

Next: "Be pragmatic about what you buy."
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