Overleveraging: An Unsustainable Strategy (Excerpted from my upcoming book "Get Digital: Reinventing Yourself and Your Career for the 21st Century Economy") - Shelly Palmer Report

For the first time in decades people who have quotmade itquot are in serious financial trouble It39s easy to blame the current economic conditions After all even the biggest most trusted corporate entities are collapsingHowever the pandemic economic problems we are experiencing have their roots in a decidedly 20th century paradigm overleveraging It started when Detroit hooked us as 20th century teenagers and we are seriously paying for it now It39s the same story over and over a middleclass kid from an average American household turns 16 and somehow finds a way to get a car It may be a gift from his relatives or he may actually have saved up enough money over the years to get something with four wheels that will pass inspection The moment the car keys become his he assumes a set of financial responsibilities that will never go away He will probably need to get a parttime job to pay for gas insurance maintenance etc And he will We live in a quotcarorientedquot culture and what we drive is a large part of our presentation of self in everyday life From this day forward he will either need more money for the car or more car for the money As soon as he is old enough he will add a house or other living space to his financial responsibilities in an everescalating dance that will not end until his death As soon as he gets more money he will trade up Trading up will require him to make more moneyAt some point he will need a specific salary to cover his lifestyle Let39s call it 200000 per year At this writing there are still jobs to be had at that pay grade If you went to an institution of higher learning and put in a few hardworking years it is not an unreasonable amount of moneyLet39s say that this kid is now a man of 30 years He39s married has a kid on the way and is living large in the suburbs of some edge city somewhere in the Northeast Life is good and he is thinking big very bigOne day his best friend comes over for dinner Afterwards the two budding entrepreneurs repair to the drawing room to discuss how they will take over the world The plan is flawless The two of them will go into business together It39s a start up but if they bootstrap beg borrow and steal in a couple of years the new venture will be worth millionsThere39s only one little problem In order for our hero to go to work with his friend he39ll have to take a 100000k pay cut and leave his current 200000 salary behindThe game is over before it starts There is no way that our hero can capitalize on this onceinalifetime opportunity he can39t afford to No savings just an average American lifestyle to show for his efforts He will have to move laterally from job to job and occasionally get a promotion until he retires or gets fired There39s no way out He must make enough money to cover his lifestyle or change itSadly he can39t change it There39s no amount of scrimping and saving that he can do to afford himself the opportunity to change Why Go over to your checkbook and see how much discretionary money you actually spend in any given month 80 of your takehome pay goes to things like mortgage rent light heat car gas insurance healthcare and grocery items Assuming you lived on a total austerity budget never went out to dinner never took a vacation never bought a toy or gadget and nothing like a major appliance breaks you can39t possibly save more than 20 of your income In order to do so you would have to seriously change the way you live You would need cheaper housing lower real estate taxes drive a lower quality car be willing to eat less expensive food etc Cutting more than 20 from your budget requires a sacrifice that the average person would not willing make Obviously if you are downsized or fired you might have to make such changes to survive But to willingly make them is a different story all together I39ve never met anyone who has done soThis is pandemic in our society I39ve met very few individuals who live within their means and have any significant savings Most quotrichquot people I know make a lot of money spend a lot of money but actually can39t spend what they39ve earned that39s why they39re richYou may think the moral of this story is quotlive within your meansquot That39s good advice But it is not the way of the world Anyone who has ever built a business has done so by leveraging their assets The enterprise value of a company the true measure of a company39s value is calculated by taking the market capitalization plus debt and preferred shares minus cash and cash equivalents Debt and its associated risks are each cornerstones in the foundation of economic growthAs we enter the global digital economy of the 21st century technology will afford some of us the ability to leverage our assets more efficiently amp8211 to lower costs in ways our competitors cannot The most successful will use technology to leverage the currency of their intellectual property To do so they will build business models that will enable them to translate value into wealth as we shall discuss in Chapter 3Shelly Palmer is the host of MediaBytes with Shelly Palmer a daily show featuring news you can use about technology media ampamp entertainment He is the author of Television Disrupted The Transition from Network to Networked TV 2008 New York House Press and the upcoming Get Digital Reinventing Yourself and Your Career for the 21st Century Economy 2009 Lake House Press Shelly is also President of the National Academy of Television Arts ampamp Sciences NY the organization that bestows the coveted Emmy Awards For information about Get Digital Classes visit httpwwwshellypalmercomseminars

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