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Beating the leverage 'trap'
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July 3, 1998: 2:32 p.m. ET
Many people with big houses and fancy cars are really 'cash poor'
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NEW YORK (CNNfn) - You live in a four-bedroom house with a pool and a manicured lawn. You drive a sleek German car and your kids go to private school.
Every year, you vacation in Europe. You always bring the nanny along.
It might sound like you're living the good life, but financial advisers say you may have fallen into a dangerous 'leverage' trap.
Too many Americans are spending their cash on luxuries instead of putting it in the bank. And while some people are struggling to reverse the trend, fueled by guilt because they realize they're not saving enough for their children's educations and their retirement, most are continuing this latest round of conspicuous consumption.
Living beyond your means
"We have a saying here, 'You can't judge a client by what they drive up in or what they're wearing,' " said Altair Gobo, a certified financial planner with U.S. Financial Services Corp. in Fairfield, NJ.
Sometimes, the guy in the rumpled clothes and beat-up Oldsmobile is worth $10 million, Gobo said. But the guy with the Rolex has his net worth wrapped around his wrist.
The statistics are glaring. The U.S. economy is on the crest of a stellar bull market. Unemployment and interest rates are low. But survey after survey shows Americans aren't saving enough and bankruptcies are at record highs.
The problem is being 'cash poor' means you won't have enough for emergencies, Gobo said. Nor will you have any money on hand if the market dips and there are good buying opportunities, he said.
Even worse, you won't have much time to do anything but work-- and you'll have to work later in life before you can afford to retire, said Adriane Berg, author of "Your Wealth-Building Years," and editor of the newsletter "Wealthbuilder."
"Overspending is a very attractive trap," Berg said. "If people like what they're doing, despite the worry of debt, they won't do anything about it."
The roots of bad spending
Karl Graf, president of Graf Financial Advisors in Wayne, NJ, said the problem is baby boomers haven't experienced an extended down market.
Even the market crash in 1987 rebounded within about a year and a half, Graf said. When the Dow Jones industrial average fell 550 points in one day in October 1997, it quickly regained its losses. There was nothing like the Great Depression.
"The desire for nice things never goes away, and people who are overextending themselves now obviously didn't have the same kind of upbringing as their parents," Graf said. "They're looking toward their inheritance to bail them out."
Plus, the U.S. stock market has made millionaires out of the unlikeliest people. As it did during the booming 1980s, the strong bull market of the 1990s has encouraged more spending.
"There's a lot of wealth that people didn't expect from stock options," Graf said. "People think they have a lot of risk tolerance, but when the market is going up, where's the risk?"
Fight the leverage problem
Meanwhile, people keep spending more as they accumulate bigger mortgages and credit debt. But it isn't as daunting as it may seem to fight 'cash poverty.' Berg said.
"People immediately think budgeting means getting rid of the things they love the most," Berg said. They think they'll have to give up their vacations, for example. In truth, a vacation doesn't eat up most of your income, she said.
One trick to easing the cash crunch is to figure out what takes up most of your income and chip away at it, she said. Most likely it's home expenses, or credit card debt.
For example, if your biggest costs are with a lavish house, consider making repairs yourself, or shop around for lower insurance rates. That might be a more direct solution if living within a strict budget seems too scary, Berg said.
There's another, more intimidating, danger tied to crazy spending habits, Graf warned. The next time there's a market correction, that fellow in the rumpled clothes and the beat-up Oldsmobile might be living in your fancy house.
Americans who are spread too thin won't be able to keep up their monthly expenses -- and they'll have to sell their possessions. Who will be the buyers? The people who haven't been spending these days.
"If you have cash, you have options and you can take advantage of the mistakes and misfortunes of others," Graf said. 
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