Reading the predatory lending thread got me to wondering just how people who come into millions of dollars end up losing it all and being worse off than when they started. How does one get into such a situation? I can see that a person would quit their crappy job with a big “Screw you!” to the boss. That could be a problem if they need to get a job again. But if you got $10 million, where does it all go?
Same with celebrities. Folks as varied as Bela Legosi and MC Hammer have ended up blowing it all away and ending up in dutch. Maybe I could see if one was an inveterate gambler or bought huge houses like they were candy.
One thing to remember, stardom is often fleeting. Many folks also like to think that their newfound wealth will last forever. Its amazing how fast 10-20 million can go in a world of 100 acre malibu estates and massive parties. Search for lottery threads for how many dopers would handle a lottery win. The fleeting nature of stardom can make it much like a lottery payout, a few years of nice numbers then nothing when it runs out unless you plan to make it last right out the starting gate. Carefully planned, most of us could live comfortably on a million for most of our lives without working as long as its a basic house in an average neighborhood, in anytown USA. Want a luxury park ave apartment on manhattan, its not going to last much more than a few years. For a nice example Chris Rock does part of an act where he points out he didn’t go out and buy a huge place, he lives in an upscale neighborhood with doctors for neighbors, not tycoons and A-list movie stars.
As far as regular folks, stuff happens, divorces, car accidents, major appliance failures, death of spouses, etc.
Well, Coleman’s parents basically stole his money, as he was a minor when he made it. Lugosi was a heroin addict. That can’t be good for the old bank account.
A lot of the stories I have heard have involved people getting ripped off by their lawyers and accountants. These celebrities are not financial wizards, so they trust their money to others and get taken advantage of.
Also, living the “superstar” lifestyle is very, very expensive. Keeping an entourage, buying huge houses and cars and jewelry can easily run to millions a year. I imagine a lot of these guys just piss it away as fast as they earn it, not thinking about the future. When the income stops coming in, they still want to live the lifestyle, thinking that the next hit record, or movie, or what have you is just around the corner. When it doesn’t happen, they are broke.
But also: buying bling to look rich, without putting in the foundations to be rich. Doing stupid stuff that cuts off your source of funds while your new mansions and cars and staff are draining that money every month.
To add to what’s been said already, many people who come into sudden money don’t realize that luxury items have upkeep costs that can exceed the initial purchase price. They think: “I want a mansion, a pool, and a Ferrari” without considering all the taxes, equipment, maintenance and labor (sometimes requiring a full-time staff) that go with them. Once you start adding in entourages, massive parties, and drugs, you may as well be burning hundred-dollar bills for heat.
If you look at a pile of money as a means of producing income, $1 million could last a lifetime without too much difficulty, and could easily become an even bigger pile of money. If you look at it as a bottomless pile of wishes, you can burn through $20 million in an amazingly short time (just ask Hammer). Planning out your finances takes work, patience and discipline, however, and not everyone can do it, wants to do it, or even realizes it’s necessary.
Basically, if you have a cow, do you work at taking care of it, use it for milk, butter and cheese, and breed it to produce more cows? Or do you say, “Yee-ha! Barbecue!”?
I was thinking about this yesterday, while listening to the radio dudes speculate about how much money Alex Rodriguez will make yealry on his next contract. If he makes $30,000,000 a year, I assume end up with less than half that after taxes. So how much of that remaining money goes right into other people’s salaries? “Alex Rodriguez” is much closer to a small business than an employee. Maybe part of the problem is that assumption that when you have a salary of $50,000 a year, you’re going to get between $30,000-$40,000 to spend how you will. If you’re running a business that pulls in $50,000 a year, you need to pay your overhead before you take a profit.
I think it is the book “The Millionaire Mindset” that talks about each of us having a “money thermostat.” Basically he means that we need to be taught how to maintain that level of wealth. If we didn’t know how to get to that level of wealth, we won’t know how to maintain it. (OK, I’m not sure I’m doing his point justice, but it made sense to me when I read it…)
Things to note, much of AR’s travel, legal and accounting fees are tax deductible because they are related to his career. I don’t know the nuts and bolts of sports contracts but I bet they are not actually employees but a collection of independent contractors providing their services to the team. In that case, just about anything related to baseball playing could become deductible, including having an office space with a small staff to deal with his business as well. Doing that, you take a serious bite out of your tax burden. Granted its always better to have the cash instead of just avoiding taxes on it, but you can get a tax bracket stepdown by spending a couple hundred grand on a business expense it could effectively become dirt because of the tax savings.
For an example of that, there are the girls from TLC.
CrazySexyCool eventually sold over 11 million copies in the U.S., becoming one of only seven R&B albums to ever receive a diamond certification from the RIAA, and won the 1996 Grammy Award for Best R&B Album. However, many were shocked when, in the midst of their apparent success, the members of TLC filed for Chapter 11 bankruptcy on July 3, 1995.
They declared debts totaling 3.5 million dollars, much of it because of Lopes’ insurance payments citing from the Rison arson incident and Watkins’ medical bills, but the primary reason being that each member of the group was taking home less than $35,000 a year after paying managers, producers, expenses, and taxes.
Keep in mind that some people get paid lump sums and forget they have to pay taxes at the end of the year/quarter. When Mike Tyson declared bankruptcy his liabilities included:
$13.3 million to the IRS
$308,749 to a limousine company
$173,706 to a jeweler
$382,028 to a law firm
$60,603 to a Ferrari dealership
MC Hammer has been pretty open about what happened to him. I recall an interview with him that asked “What was the most expensive thing you bought?” His answer? “Stories.” He admits he bought into every story told to him. Don’t forget, you get lots and lots of friends that show up when the money is there, and disappear when the money is gone.
No one loves you when you’re down and out.
I was accused of befriending someone for the money. The number of times I threatened to bury him myself if he left me a dime were too many to count. Of all the money grubbing relatives that were buzzarding around his dying body, in the end…well…they have to live with themselves and I get to remember my friend, happily.
Good answers so far. I think one aspect about having money that’s missed is the fact that having money allows one to get into debt easier. You can borrow money more easily when you have money. So you borrow to get into a bigger mansion, fancier cars, start new businesses, etc. And when the money stops coming in or if you get over-leveraged, the financial problems start.
I remember seeing Chris Rock in an interview years ago (no cite, just off memory hear), that when he first joined SNL, Lorne Michaels took him aside and told him that everyone loses their first real money. IN other words, what seemed like a fortune to Rock at the time was going to go away faster than he realized. That the trick was to make that kind of money a 2nd time, and learn how to hang on to it then once you knew what it was like to lose it all.
How can anyone live “comfortably” for the rest of their lives with only $1,000,000? I guess if you’re 55 already, or are able to earn 10% to 20% on that without risk, or willing to move to a third world country, then I see it as possible, but if I were to acquire $1 million (after taxes, even), It’d be nice but I’d definitely still have to work.
Depends on your definition of comfortable. Living on say 40K per year would be a large bump from my current lifestyle and would allow me to live comfortably with the ability to buy most of the toys I want, not have to budget for groceries and have some leftover to pay down current debts. If I stuck the rest of the million in a CD at 5% interest I’d get enough in interest to cover that. Of course, I’m single and childless. If I had kids my budget for comfortable living would be higher.
If you can’t live comfortably on $50,000 a year, then most people in the United States can’t live comfortably. And don’t forget, if you aren’t working you can save tons of money by doing things yourself. You can probably get rid of an extra car, you can mow your own lawn instead of paying someone to do it, you can fix yourself lunch instead of eating at McDonalds. And you aren’t tied to a particular location for you job, you can move away from the expensive cities and your cost of living plummets. And that’s with only a 5% annual return, and you don’t touch the principle.
Yeah, but you forget inflation: $50,000 a year is fine today, but what’ll it be worth in 30 years? What was it worth 30 years ago? You’d have to keep reinvesting some of your proceeds to keep up with inflation. If inflation is at 3% per year, your annual income is only worth 40% of what it is today. So your 6% return at $60K is only worth ~$23,000 down the road. If you reinvest, you can break even, but your spending cash is subsequently reduced.
Point taken about the reduction in work-related expenses and potential to move to a dirt cheap place, but then what are you going to do with your time? Will you be comfortable vegging out for the next 30 years, or want to be productive in something like run your own business? Hobby farm? Raise horses? These will all take cash away from your living expenses. Okay, this is strictly speaking outside the realm of “can it be done,” but living on just the proceeds for interest while keeping up with inflation seems like purgatory.
(Of course I realize that there are families that survive on household incomes at $23,000, but you can’t say that they’re bored or happy or comfortable).