How Do Celebrities Go Bankrupt?

Have you ever been confused about how celebrities lose their money so quickly? Has one of your favorite musicians or athletes just filed for bankruptcy even though they just signed a multi-million dollar contract?  How do lotto winners lose their money so quickly and end up worse than they started?  All of these situations happen because these celebrities aren’t watching their expenses. They know they have a lot of income, but they rarely track their expenses. This is an important lesson we all can learn from.

Let’s consider a musician, 19 years old, who has $3M in income and he purchases, in cash, a $2M mansion and a $100K car.  In his mind, he has $900K to live a lavish lifestyle and his recording company is telling him, “It’s just the beginning.”

But what these musicians don’t realize is it’s expensive to have a lot of money once taxes, insurance and maintenance is included. Think about your own car insurance compared to what you drive and your age and then consider how expensive it would be for a 19-year old with a $100K car or two $100K cars. Property tax is based on the value of the house, so the more expensive house, the more taxes. 

But even including all the recurring expenses, our musician would still have a lot of income compared to our standards. Most musicians have money managers handling their finances but never actually see the income and expenses. The money manager may recommend to our musician to stop spending so much, but the lavish lifestyle is addicting and the industry promotes “keeping up” with other celebrities. Eventually, the mathematics catch up and it happens quicker if the musician stops selling records, or the celebrity falls out of popularity, or the athlete gets released.

While we may not have any sympathy for those making $1M or more every year, we can be able to learn from their mistakes and apply to our own income levels. Here are some lessons learned from celebrities:

1.      Know where your money is going. Try my 30-day challenge I discuss in this blog post: http://militaryfinrep.blogspot.com/2014/02/the-secret-to-becoming-financially.html

2.      Sometimes our income is out of our control, but almost always, our expenses are within our control. Like we’ve all seen with celebrities, we’ve seen plenty of “rich” people go broke and I’ve seen plenty of “not rich” people live financial sound lives. Our income determines how much we make but our expenses determine how much we have.

3.      If someone, like your spouse or money manager, tells you to control your spending, then you might want to listen.

4.      “Keeping up” with other people can be a very expensive habit. If you’re concerned with “keeping up” with what other people are spending, then be equally concerned with what they are making to be in line with them.

What’s the most surprising or crazy celebrity, athlete, or lotto winner, financial story you’ve heard?