`Let me tell you about the very rich,” F. Scott Fitzgerald wrote in his 1926 novel “The Rich Boy.” “They are different from you and me. They possess and enjoy early and it does something to them . . .” It makes for good fiction, but it’s not quite true.
The “very rich” appear to have the same problems as the rest of us, just on a grander scale. The working person who just got a nice pay raise or performance bonus may very well go out and use the money on a new car; the movie star who just inked the big contract uses a chunk of that money for “another” car.
But if you think that great wealth means never worrying about money again, you should examine the lifestyles of the superstars who have fallen from financial grace.
A recent cover story in People magazine focused on the financial woes of more than a dozen stars, from actors Burt Reynolds and Kim Basinger to athletes Bjorn Borg and Dorothy Hamill, to musicians Meatloaf, M.C. Hammer and Wayne Newton.
Somewhere in their tales are lessons for the rest of us.
To find those lessons–rather than merely gawk at the prodigious spending and awesome mismanagement–we first must consider a few riches-to-rags stories.
– Singer Wayne Newton filed for bankruptcy in 1992, around the time he was making $260,000 per week–or more than $13 million a year–on the casino circuit.
He told People that he suffered from a malady common to the stars and the super-rich: He had grown disconnected from his money. “I had never signed a check in my life,” Newton said.
That can make anyone susceptible to the kind of bad advice that led Newton to his financial distress. (Newton has since recovered financially, but owes a great big danke schoen to Donald Trump and his advice on dealing with creditors.)
– Burt Reynolds, in court papers, has claimed about $6.6 million in assets against $11.2 million in debts. He got into troubles through risky business ventures that failed and his own flagging star power.
– M.C. Hammer filed for bankruptcy last April with debts of $13.7 million, compared to assets of $9.6 million. The problem appears to have been his lifestyle, which included 17 cars, racehorses and plans to add indoor and outdoor pools, a softball field, bowling alley and $68,000 worth of mirrors to his California home. Couple that with declining earnings and you’ve got debt that, in Hammer’s own words, is “too legit to quit.”
You seldom hear about the financial woes of neighbors or friends. Plenty of people live large and celebrate their success, but survive paycheck-to-paycheck behind closed doors. Experts say it happens far more frequently than is admitted.
“People see pursuing the American dream as an event, not a process,” explains Eileen Sharkey, a financial adviser with Sharkey, Howes, Wagner & Javer in Denver. “They think that striking it rich–in the movies, the lottery or in landing the big job or the pay raise–means they have made it. It makes no difference if you are M.C. Hammer or Joe Smith working on the assembly line, you can’t spend more than you make and expect it to go on forever.”
Here are four lessons we can learn from the lifestyles of the no-longer-so-rich-and-famous:
– It’s not your salary that makes you rich, it’s your spending habits.
All too often, people use salary as the indicator of how well they are doing. The trouble is that many people earn more right now than they ever expected to earn, and figure that makes them well off.
For a big how-am-I-doing gut check, look at your net worth–the value of your assets, minus your liabilities. Add up the value of everything you own, then subtract the value of everything you owe. It’s an exercise worth doing at least once each year.
Another way to measure success is a cash-flow analysis, comparing monthly income to expenses to determine what is left over for investment, savings and wealth building.
In both cases, you want the result–your net worth or your positive cash flow–to increase in step or at a faster pace than your income. If your salary goes up 10 percent in a year but your net worth and available money do not, you could be in a long-term downward financial spiral.
– Live like prosperity will be here today and gone tomorrow.
The down-and-out-in-Beverly-Hills never figured this out. Burt Reynolds’ star power may last forever, but his earnings potential is diminishing; same thing for Hammer.
“If you learn anything from these people, it is that anyone with extraordinarily high income over a short period of time would be wise to expect that things aren’t going to last,” says James P. Owen, managing director of NWQ Investment Management in Los Angeles, a firm that counts a few stars among its clientele.
– If you need help, get it–but stay involved.
Advisers to the stars note that many of these people never had money to manage until they hit it big, then had so much that they could take one of two paths: either hiring someone to help them with it, or not worrying that it could ever run out.
You may not have the seven-figure income, but if you are making enough to be concerned about blowing it and believe you can’t manage it on your own, seek out qualified financial help.
Even then, stay involved in the process.
If you become disconnected from your money, a la Wayne Newton, there’s a good chance your money will become disconnected from you.
– Financial success is a process, not a one-time strike-it-rich event.
If you wake up tomorrow with the winning lottery ticket on your nightstand or with Ed McMahon and the Publishers Clearinghouse crew on your doorstep, then you have achieved your goals in one fell swoop.
Even if you land on Easy Street, you will find that it takes hard work to stay there.
“People who want the pot of gold at the end of the rainbow have delusions of grandeur,” says Harold Evensky of the Coral Gables, Fla. advisory firm Evensky, Brown, Katz & Levitt. “They extrapolate their luck and success and believe it will last forever. With that attitude, it doesn’t matter whether you have $5 million or $50,000, you have lost touch with reality.
“Most of managing money–the savings and spending part–is simple stuff,” he adds. “Whether you have a lot of money or a little, the lesson on spending it is clear: Don’t be stupid.”
