Damn those credit cards are easy. You just wave one in front of the cashier and poof! The thigh-high Sigerson Morrison boots are yours, hon! Just like that. And then one day you open your statement, expecting the worst, only to find, poof! They've increased your credit limit! Just like that.
Or, you go to the bank, just to see what kind of mortgage you might qualify for. You walk out armed with a license to spend more money than you've ever dreamed of earning. Princess of Purchasing Power? Or a debt disaster waiting to happen?
Let's consider this story of a woman who was blessed with a lot of spending power. In 1990, Patricia Kluge of Virginia divorced her husband, American media billionaire John Kluge. Her divorce settlement was rumored to be more than $1 billion. At the time, the interest on this would have generated around $1.6 million per week.
Ms. Kluge became known in the media as the "world's wealthiest divorcÃ©e." She was later eclipsed in this category by Anna Murdoch who received a $1.7 billion settlement in 1999, and Slavica Ecclestone whose divorce settlement in 2009 is said to be more than one billion and less than four. But that's another story.
The newly single Ms. Kluge spent her fortune grandly: on real estate, antique furnishings, spectacular jewels, foxes and hounds, the yoozh (that would be 'the usual' for those of you less refined). Week after million dollar week, she must have felt invincible.
But pretty things can get boring and Ms. Kluge wanted to do something more meaningful with her wealth. She thought Virginia ought to have a world-renowned wine region and she had just the kind of energy, connections and bankroll to make it happen.
As they like to say in the wine industry, "What is the quickest way to make a small fortune? Start with a large one and open a winery." Hello, foreshadowing.
Now, you'd think that someone earning $1.6 million a week would be the last person to need a bank loan. But Champagne consultants from France, oak barrels and aged cedar offices don't come cheap. And there's a good chance that Ms. Kluge's weekly expenses rose to meet or surpass her weekly income.
According to reports, Ms. Kluge spent at least $44 million on the winery, much of it borrowed from a bank. She borrowed another $8.5 million to develop a plot of land around the vineyard into high-end residences. The $100 million mansion she lived in was also financed.
It must have seemed to Ms. Kluge that surely she was wealthy enough to handle all this debt; after all, she was a billionaire. Certainly the banks that lent the money to her must have thought it was doable, no?
Although Chelsea Clinton was a fan of Ms. Kluge's sparkling rosÃ© (serving it at her wedding rehearsal dinner last summer), the rest of the world did not snap up the Virginia wines. Meanwhile, the American housing crash decimated the value of Ms. Kluge's real estate. Servicing the massive debt she took on suddenly became impossible.
Alas, today, the jewels, artwork and furnishings have all been auctioned off. The mansion has been sold. The banks have foreclosed on the vineyard. It is estimated that Ms. Kluge owes her creditors roughly $66 million.
It's tempting to think Ms. Kluge is unique because of the size of the numbers and that jaw-dropping divorce settlement. The sad reality is that Ms. Kluge's story is no different than those of friends and family that you've heard many times over. Many start-up businesses suffer a similar fate. In this case, there are just a few more zeros added to either side of the equation. Go back and re-read Ms. Kluge's situation and substitute "thousand" wherever it says "million". Suddenly hits a bit closer to home, hmmm?
Stephanie Holmes-Winton, president and CEO of The Money Finder in Halifax, says that a really big lump sum divorce settlement, inheritance or other windfall often ends up becoming a really large shovel - for digging a big hole of debt.
"It's a case of not knowing how much is safe to spend or borrow, no matter how much money you have," Ms. Holmes-Winton says. "A large income or a bonus can make you feel that you suddenly have the freedom to spend anything. If you fall short, your assets or net worth could give you access to even more credit, which you think you can handle, simply because you qualify for it."
In other words, just because you were approved for a loan to buy a Range Rover, doesn't mean you can actually afford to buy or drive a Range Rover.
"With any change in personal circumstances, it is essential to get professional advice on what you can comfortably afford, in terms of managing expenses or debts. It's too easy to think that because you have more, you can automatically spend more or borrow more and be totally safe."
The moral of the story is this: just because you have it, doesn't mean you can handle it. Find out what you can safely spend or borrow, far away from the margin of worry. Talk to a financial advisor and identify where your danger zone is (Holt Renfrew, anyone?), before you blindly wander into it and can't find a way back out. As the story of Ms. Kluge goes to show, a billion here, a billion there, pretty soon you're talking real money.
And babe, even a billionaire can go broke.