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Personal Finance FAQ

So Rich That You Bankrupt Yourself

Whoever said money can’t buy happiness simply didn’t know where to go shopping.
–Bo Derek

Warren Sapp. Allen Iverson. Ron Artest. Lenny Dykstra. Michael Vick. Vince Young.

What do these people have in common? They were all professional athletes. They also all went broke. How is it that these people who made millions and sometimes tens of millions of dollars had to declare bankruptcy? Let’s look at the case of Allen Iverson, who made more than $154 million in his lifetime and yet couldn’t write an $860,000 check. In his case, he spent not only profligately on himself – even taking a hairstylist on the road with him – but he also supported up to 50 of his friends and family.

Such spending is admirable in a sense that he wanted to help his friends. However, what he didn’t do was help either them or himself. He lived, and consequently spent, in the moment with not the first glance to the future, to a time when he’d lose a step, his shot, and more importantly, a team to pay him for his eroding skills.

George Foreman faced a similar situation in his boxing career. Having blown more than $5 million, he found himself needing to fight to make money. The realization that he needed to fight to have money was a turning point for Foreman, who started looking at a time when he might not be able to fight and started saving money.

While less likely to happen to the Everyman, it is possible for us to find ourselves in the same situation, albeit probably in the same magnitude as Mike Tyson or Michael Jackson? Maybe there’s a propensity for famous Michaels to go bankrupt? Here are a couple of situations which may face us.

  • Sudden and unexpected inheritance
  • Buyout of a small business
  • A big pay raise

While the first two provide big and nearly immediate payouts, injecting us with money we didn’t have before and may not have expected (do you think that at the beginning of 2011, the founders of Instagram would have contemplated being bought for over $1 billion?), it is the third situation that may be more invidious.

For people who have higher earnings, the mentality can be similar to sports stars. They have high earnings and think that those earnings will continue indefinitely. Since the stream of income is expected to continue for the foreseeable future, they spend it up, only to find at some (nearer than expected) point in the future, that income is no longer there.

How can the newly rich, or even the slowly rich, avoid the fate that has befallen the stars of tabloid dramas?

  • Don’t spend it all. Save some.
  • Allow yourself some increase in your standard of living, but don’t let your wants expand to meet your paycheck.
  • Plan for the day when the well will dry. You won’t work forever. You won’t play sports forever. You won’t sing forever. Plan for the day when it happens.
  • Differentiate between wants and needs. You don’t need a Maserati, but you probably need transportation. Be reasonable.
  • If you want to help others, help them in ways which provide a lasting benefit. Consider trusts.

By

Jason Hull, CFP®, was the co-founder of Broadtree Partners, a firm that acquires $1-5MM EBITDA companies. He also was the co-founder of open source search consultancy OpenSource Connections, a premier Solr and ElasticSearch firm. He and his wife FIREd (financial independence retire early) at 46 and 45, respectively. He has a BS from the United States Military Academy at West Point and a MBA from the University of Virginia Darden Graduate School of Business.

You can read more about him in the About Page.

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