It’s the first of April. You know what that means. Spring is here! Your friends and family are pulling April Fools’ Day pranks. And my tree allergies are kicking my butt. Every year, tree pollen makes my life miserable. This year is no different.
Facebook kindly reminded me this morning that three years ago, Kim and I were in Asheville, North Carolina. After wintering in Savannah, Georgia, we’d resumed our tour of the U.S. by RV.
While in Asheville, we toured the Biltmore Estate, the largest home in the U.S. This 250-room chateau contains 179,000 square feet of floor space — including 35 bedrooms, 43 bathrooms, and 65 fireplaces — and originally sat on 195 square miles of land. (Today, the estate “only” contains 8000 acres.)
“This feels like Downton Abbey but in North Carolina,” I said as we walked the endless halls. Just as Downton Abbey documented the excesses of British upper class, so too the Biltmore sometimes feels like an example of how rich Americans indulged in decadence.
George Washington Vanderbilt II, the man who built Biltmore, was a member of one of the country’s wealthiest families. His grandfather, Cornelius Vanderbilt, was born poor in 1794, but by the time he died in 1877 he had become one of the richest men in the world. During his lifetime, he built a fortune first from steamships and then as a prominent railroad tycoon.
By family standards, grandson George didn’t have a lot of money. He inherited about $7 million, and drew income from a $5 million trust fund. He decided to use the bulk of his fortune to build a huge house high in the Appalachians. Work on the Biltmore Estate began in 1889, when George was 26 years old. Six years and $5 million later, he moved into his palace. (That $5 million would be roughly $90 million in today’s dollars.)
Strolling the grounds of the Biltmore Estate got me thinking about the stories we hear of wealthy people who squander their riches. How and why do they do this? Are there lessons from their stories that you and I can put to use?
We hear all the time about the “lifestyles of the rich and famous”. Today, on April 1st, let’s look at some lifestyles of the rich and foolish.
There are so many stories of athletes and entertainers who have blown big fortunes that it’s tough to know where to start. Who should we pick on first? Since I’ve never been a fan of Nicolas Cage — and since he seems to be especially bad with money — let’s use him an example.
Over a period of fifteen years, Cage earned more than $150 million. He blew through that money buying things like:
Fifteen homes, including an $8 million English castle that he never stayed in once.
A private island.
Four luxury yachts.
A fleet of exotic cars, including a Lamborghini that used to belong to the Shah of Iran.
A dinosaur skull he won after a bidding contest with Leonardo DiCaprio.
A private jet.
It’s not fair to characterize Cage as “broke” — he’s still a bankable movie star — but his net worth is reportedly only about $25 million. (That’s like someone with an average income having a net worth of roughly $25,000.) He could be worth ten times as much but his foolish financial habits have caused him woe.
Cage got in trouble with the IRS for failing to pay millions of dollars in taxes. He’s been sued by multiple companies for failing to repay loans. His business manager says that he’s tried to warn Cage that his lifestyle exceeds his means, but the actor won’t listen.
Cage is but one of many celebrities who have done dumb things with money. Other prominent examples include:
MC Hammer sold the rights to his songs to raise money after being bankrupted by his lavish lifestyle. Hammer earned more than $33 million in the early nineties, but spent the money on a $12 million mansion (with gold-plated gates), a fleet of seventeen vehicles, two helicopters, and extravagant parties. [source, source]
Actress Kim Basinger paid $20 million to buy the town of Braselton, Georgia in 1989. When Basinger filed for bankruptcy just four years later, she was forced to sell the town. [source]
On the night of 01 February 1976, Elvis Presley decided he wanted a Fool’s Gold Loaf, a special sandwich made of hollowed bread, a jar of peanut butter, a jar of jelly, and a pound of bacon. He and his entourage flew from Memphis to Denver. The group ate their sandwiches and then flew home. Price: $50,000 – $60,000. [source]
Even authors get in on the act. Writer Mark Twain made tons of money through his work, but he lost much of it to bad investments, mostly in new inventions: a bed clamp for infants, a new type of steam engine, and a machine designed to engrave printing plates. Twain was a sucker for get rich quick schemes. [source, source]
When it comes to frittering way fortunes, it’s hard to compete with sports superstars. In a 2009 Sports Illustrated article about how and why athletes go broke, Pablo S. Torre wrote that after two years of retirement, “78% of former NFL players have gone bankrupt or are under financial stress.” Within five years of retirement, roughly 60% of former NBA players are in similar positions.
Boxer Mike Tyson earned over $300 million in his professional career. He lost it all, spending the money on cars, jewels, pet tigers, and more. He eventually filed for bankruptcy. [source]
When Yoenis Cespedes signed a new $75 million contract with the New York Mets, he drove a new vehicle each day during the first week of training camp, including a Lamborghini Aventador ($397,000) and an Alfa Romeo 8C Competizione ($299,000). [source]
Basketballer Vin Baker earned $100 million during his career. He’s now worth $500,000. He manages a Starbucks store in a small town in Rhode Island. (To be fair, Baker sees to be turning his life around, which is awesome.) [source]
Hall-of-fame pitcher Curt Schilling earned $112 million during 20 years in the big leagues. It wasn’t enough to keep up with his spending. Plus he lost $50 million through the collapse of a company he owned. In 2013, he held a “fire sale” to avoid bankruptcy.
It can be tough to sympathize with these folks. Used wisely, their immense fortunes could sustain them and their families for a long time. Instead, they squander their money on fleeting pleasures and the trappings of wealth.
Still, I believe it’s best to keep the schadenfreude in check. “There but for the grace of God” and all that, right? I’ve seen plenty of examples of average folks who have wasted smaller windfalls. In fact, this sort of thing seem to be the rule rather than the exception.
But why does this happen? The answer might be Sudden-Wealth Syndrome.
Lottery winners have the same kinds of problems. A 2001 article in The American Economic Review found that after receiving half their jackpots, the typical lotto winner had only put about 16% of that money into savings. It’s estimated that over a quarter of lottery winners go bankrupt.
Take Bud Post: He won $16.2 million in 1988. Within weeks of receiving his first annual payment of nearly half a million dollars, he’d spent $300,000. During the next few years, Post bought boats, mansions, and airplanes, but trouble followed him everywhere. “I was much happier when I was broke,” he’s reported to have said. When he died in 2006, Post was living on a $450 monthly disability check.
In 2012, ESPN released a documentary called Broke that explores the relationship between pro athletes and money. How does sudden wealth affect young men? What happens when highly-competitive athletes with high incomes hang out together? Lots of stupid stuff, as it turns out.
Here’s a nine-minute montage from Broke in which wealth manager Ed Butowsky talks about why athletes get into trouble with money:
Broke is an interesting film. The players speak candidly about the mistakes they’ve made: buying 25 pairs of shoes at one time, buying fur coats they never wore, buying cars they never drove. They’re not proud of their pasts — some are ashamed — but they’re willing to talk about the problem in the hopes they can help others avoid doing the same dumb things in the future.
Curious how much your favorite actor or athlete earns? Check out Celebrity Net Worth, a website devoted to tracking the financial health of people in the public eye.
Broke does a good job of explaining why our sports heroes can’t seem to make smart money moves. The problem is Sudden-Wealth Syndrome. Essentially, young folks who earn big bucks don’t get a chance to “practice” with money before they’re buried with wealth.
The typical person earns a little when they’re young, but watches their salary grow slowly with time. Their income peaks during their forties and fifties. As a result, they get time to make mistakes with small amounts of money first which means (in theory) that they’re less likely to blow big bucks down the road.
On the other hand, athletes (and entertainers) have a completely different earning pattern. They leave school to instant riches. For a few years, they earn great gobs of money. But usually their income declines sharply with time — until it stops altogether.
Here’s a (pathetic) chart I created to help visualize this phenomenon:
Athletes and entertainers need to figure out how to make five years of income last for fifty years. This never occurs to most of them. “[A pro athlete] can’t live like a king forever,” says Bart Scott in ESPN’s Broke. “But you can live like a prince forever.”
Sudden-Wealth Syndrome doesn’t just affect athletes and actors. Lottery winners experience it too. So do average folks who inherit a chunk of change or business owners who sell their companies.
The fundamental problem is that nobody ever teaches us how to handle a windfall. Windfalls are rare, and in most cases they can’t be planned for. (Some folks might be able to plan for an inheritance or the sale of a business, but these situations are relatively uncommon.) As a result, when the average person happens into a chunk of change, they spend it.
Here’s what you should do instead.
How NOT to Waste a Windfall
When you receive a windfall, whether it’s a tax refund, an inheritance, a gift, or from any other source, it’s like you’ve been given a second chance. Although you may have made money mistakes in the past, you now have a chance to fix those mistakes (or some of them, anyhow) and start down the path of smart money management.
It can be tempting to spend your windfall on toys, trips, and other things that you “deserve,” but doing so will leave you in the same place you were before you received the windfall. And if that place was chained to debt, you’ll be just as unhappy as you’ve always been.
If you receive a chunk of cash, I recommend that you:
Keep five percent to treat yourself and your family. Let’s be realistic. If you receive $1,000 or $10,000 or $100,000 unexpectedly, you’re going to want to spend some of it. No problem. But don’t spend all of it. I used to recommend spending one percent of a windfall on yourself, but from talking to people, that’s not enough. Now I suggest spending five percent on fun. That means $50 of a $1,000 windfall, $500 of a $10,000 windfall, or $5,000 of a $100,000 windfall.
Pay any taxes due. Depending on the source of your money, you might owe taxes on it at the end of the year. If you forget this fact and spend the money, you can end up in a bind when the taxes come due. Consult a tax professional. If needed, set aside enough to pay your taxes before you do anything else.
Pay off debt. Doing so will generally provide the greatest possible return on your investment (a 20 percent return if your credit cards charge you 20 percent). It’ll also free up cash flow; if you pay off a card with a $50 minimum monthly payment, that’s $50 extra you’ll have available each month. Most of all, repaying debt will relieve the psychological weight you’ve been carrying for so long.
Fix the things that are broken. After you’ve eliminated any existing debt, use your windfall to repair whatever is broken in your life. Start with your own health. If you’ve been putting off a trip to the dentist or a medical procedure, take care of it. Do the same for your family. Next, fix your car or the roof or the sidewalk. Use this opportunity to patch up the things you’ve been putting off.
Deposit the rest of the money in a safe account. It can be tempting to spend the rest of your windfall on a new motorcycle or new furniture or new house. Don’t. After attending to your immediate needs, deposit the remaining money in a new savings account separate from the rest of your bank accounts — and then leave this money alone.
To successfully manage a windfall, you must allow the initial euphoria to pass, getting over the urge to spend the money today. Live as you were before. Meanwhile, calculate how far your windfall could go. Most people have unrealistic expectations about how much $10,000 or $100,000 can buy.
In 2009, I received an enormous windfall. The old J.D. would have gone crazy with the money. The new, improved model of me was prepared, and made measured moves designed to favor long-term happiness over short-term happiness.
Today, the bulk of my windfall remains in the same place it’s been for the past five years: an investment account. That cash eases my mind. It helps me sleep easy at night. And that’s more rewarding than spending it on new toys could ever be.
Setting a Good Example
Not everyone who gets rich quickly does dumb things with money. Especially as the plight of pro athletes becomes better known, there are prominent examples of young superstars making savvy money moves. They’re learning from the lessons of those who came before.
Take Toronto Raptors superstar Kawhi Leonard, for instance. This 27-year-old NBA MVP earns $23 million per year — but still clips coupons for his favorite restaurant. He drives a 1997 Chevy Tahoe. Sure, he bought himself a Porsche, but he’s not interested in flash and bling. “I’m not gonna buy some fancy watch just to show people something fancy on my wrist,” he says. [source]
Jamal Mashburn has made wise use of his wealth. So has LeBron James, who takes his investment advice from Warren Buffett:
Here are other superstars who act as money bosses:
During his 12-year career in the NBA, Junior Bridgeman never earned more than $350,000. Unlike most players, however, he planned ahead. He recognized his basketball income would eventually vanish. He bought a Wendy’s fast-food franchise and learned the business inside-out. He became a hands-on owner. He expanded from one store to three to six — and then to a small empire. Today, twenty-five years after retirement, Bridgeman owns more than 160 Wendy’s restaurants and 120 Chili’s franchises. His company employs 11,000 people and generates over half a billion in revenue every year. His personal net worth tops $400 million. [source]
Patriots tight end Rob Gronkowski — who just retired last week — is a shining example of how to handle sudden wealth correctly. The 29-year-old earned over $53 million for playing on the field — and hasn’t spent any of it. Here are his own words: “To this day, I still haven’t touched one dime of my signing bonus or NFL contract money. I live off my marketing money and haven’t blown it on any big-money expensive cars, expensive jewelry or tattoos and still wear my favorite pair of jeans from high school.” [source]
Oakland Raiders running back Marshawn Lynch has a similar story. During his twelve-year NFL career, Lynch has collected nearly 57 million from his contract. Reportedly, he hasn’t spent a penny of that money. Instead, he’s been cautious to live only off his endorsement earnings. Whether this is true or not, Lynch is known to be a good example to his teammates, helping them with their 401(k)s and other financial issues. [source]
Sometimes superstars who have been poor with money have a flash of insight and they’re able to turn things around. Former NFL player Phillip Buchanon is a perfect example. After watching ESPN’s Broke, he realized he was headed for trouble. He mended his ways and started managing his money wisely. Now he’s written a book with advice for other folks who are fortunate enough to encounter a windfall. [source]
When people make a lot of money, they’re able to spend a lot of money. Sometimes the super-rich can afford to build a place like the Biltmore Estate. The problem isn’t a single extravagant purchase, but a lavish lifestyle in which they spend more than they earn. Real wealth isn’t about earning money — it’s about keeping money.