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 "made it" are in serious financial trouble. It's easy to blame the current economic conditions. After all, even the biggest, most trusted corporate entities are collapsing.

However, the pandemic economic problems we are experiencing have their roots in a decidedly 20^th century paradigm ... overleveraging. It started when Detroit hooked us as 20^th century teenagers and we are seriously paying for it now.

It's the same story over and over -- a middle-class 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 part-time job to pay for gas, insurance, maintenance, etc. And, he will. We live in a "car-oriented" 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 ever-escalating 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 money.

At some point, he will need a specific salary to cover his lifestyle. Let's call it $200,000 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 hard-working years, it is not an unreasonable amount of money.

Let's say that this kid is now a man of 30 years. He's 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 big.

One 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. It's a start up, but if they bootstrap, beg, borrow and steal, in a couple of years the new venture will be worth millions.

There's only one little problem. In order for our hero to go to work with his friend, he'll have to take a $100,000k pay cut and leave his current $200,000 salary behind.

The game is over before it starts. There is no way that our hero can capitalize on this once-in-a-lifetime opportunity, he can't 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. There's no way out. He must make enough money to cover his lifestyle or change it.

Sadly, he can't change it. There's 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 take-home 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 can't 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. I've never met anyone who has done so.

This is pandemic in our society. I've met very few individuals who live within their means and have any significant savings. Most "rich" people I know, make a lot of money, spend a lot of money, but actually can't spend what they've earned -- that's why they're rich!

You may think the moral of this story is "live within your means." That's 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 company's 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 growth.

As we enter the global digital economy of the 21^st century, technology will afford some of us the ability to leverage our assets more efficiently – 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 3.

Shelly Palmer is the host of MediaBytes with Shelly Palmer, a daily show featuring news you can use about technology, media & 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 21^st Century Economy. (2009, Lake House Press). Shelly is also President of the National Academy of Television Arts & Sciences, NY (the organization that bestows the coveted Emmy Awards). For information about Get Digital Classes, visit http://www.shellypalmer.com/seminars