Becoming Rich Vs. Staying Rich

richJuly

24 Jul Becoming Rich Vs. Staying Rich

Actor Johnny Depp is one of the latest public figures to join a long list of film stars, sports stars, and lottery winners to have gone broke.

Depp became a teen idol in the 1980s after staring at the TV series 21 Jump Street. He later found box office success in the fantasy swashbuckler film Pirates of the Caribbean, which grossed $3 billion, Alice in Wonderland, which grossed $1 billion and Charlie and the Chocolate Factory, which grossed $474 million.

During his career, Depp earned a staggering $650 million, yet according to Rolling Stone magazine, all that money is gone! He is now suing his management company for failing its fiduciary duties. The gory details of the suit include an unauthorised transfer of $7 million to Depp’s sister Christi and a $750,000 transfer to his assistant, Nathan Holmes. Add to that, $5.6 million in late tax payment charges to the US Tax Authorities.

The moral of the story here is this: even large fortunes can be squandered in no time. Making money is one thing, but keeping it is another. It doesn’t matter how much money you make, without careful management, much of it can be lost very quickly.

Bloomberg columnist Barry Ritholtz sums it up rather nicely:

“We have yet another cautionary tale of what happens when too much money meets too little financial savvy. If it sounds familiar, well, that’s because it is. Lottery winners, pop performers, sports stars and other recipients of sudden wealth often fall into the same trap. They react emotionally to the windfall; they don’t think long-term or strategically. There is no plan for the future, only the unrealistic expectation that the firehose of earnings will last forever. These sorts of unforced errors leave a permanent mark on their emotional and financial well-being.”

So, here are two simple ideas to help prevent this type of financial car crash:

1. Have a financial plan
2. Keep your investments simple

As financial planners, we often come across high-income earners who think that they don’t need any sort of plan, who are under the illusion that their income will account for any unsustainable spending habits. I make it a point of duty to remind them of the saying: if your outgoings exceed your income, your upkeep will be your downfall.

One common issue we see with film and sports stars is their tendency to get lured into complex investment products. Just because an investment vehicle’s intricacy may paint a picture of a product that only the wealthy have access to and thus must be of significant value, often this is not the case. This is why we advise our clients to invest primarily in global, publicly-listed stocks and bonds that offer the highest level of transparency.