It’s essential to plan for your personal finances no matter how much money you make. An ill-considered financial decision can lead to serious challenges even for people with a very large income.
When celebrities have money troubles, it tends to end up in the headlines. Here are five examples, and five takeaways, from the financial snafus of people who need no introduction.
Famous social rights activist and performer Aretha Franklin was a prolific singer. With 73 chart-topping songs, Franklin amassed a large fortune over the course of her career. By the time of her death, she was purportedly worth about $80 million.1 But when Franklin passed away in 2018, it was initially reported that she died without a will.2 Because Aretha primarily resided (and died) in Michigan, her estate would have been distributed equally amongst her four children.
When an individual passes without a will, their estate can go through unnecessary legal and financial hoops. This can be expensive, reducing the overall value of an estate. And without specific instructions, the family of the deceased could disagree on the distribution of assets, resulting in more complications.
A will provides clarity and planning for survivors and, properly written, can ensure the last wishes of the deceased are respected.
Interestingly, three handwritten wills dated between 2010 and 2014 were eventually found in Franklin’s home after her passing. A draft of a fourth will emerged from a law firm Franklin was working with (although Franklin never signed it). The confusion caused by the conflicting wills left Franklin’s heirs struggling to agree on a course of action regarding her estate. The case has not yet been decided.
Have your will professionally drafted by an estate planning attorney licensed to practice in your state.
To avoid being perceived as inauthentic, some artists avoid focusing on their money. Billy Joel—long one of Ken’s favorite artists—reportedly took the approach that he did not want to know how much money he had or was spending, instead choosing to trust his manager. As a result, Joel’s manager spent and invested Joel’s money in multiple ways without approval, ultimately leading to Joel suing his manager for $90 million.3
When you get professional help with your finances, make sure you are delegating to an expert that you can trust. And don’t abdicate your own responsibility for your finances—ask what’s going on with your wealth. Your trusted advisor should be able to explain your finances to you in straightforward terms that you can understand.
For many people, money can be a stressful topic. But understanding one’s finances is integral to healthy money management. Compiling a list of expenses and clarifying where your money is allocated is a great first step.
Overspending is one of the most common causes of financial trouble for even the wealthiest individuals. Many celebrities are known for overspending, but one of the most eye-catching in recent history is Nicholas Cage. The well-known American actor spent $150 million of his accumulated wealth on various purchases reportedly ranging from castles in Europe to collector cars and a pet octopus.4
The purchases themselves aren’t necessarily the problem; it’s how quickly and how often they occur. It’s important for any individual to spend within their means.
Your financial advisor can help you determine how much is appropriate for you to spend each year and can work with you to prioritize your expenses so you get provide the greatest satisfaction while avoiding overspending.
Home buying, for most of us, is a big investment. Typically, we rely on a mortgage to complete the purchase, and if we have trouble keeping up with the monthly payments, the home can be forced into foreclosure.
Actress Kristen Bell’s $3.1 million home went into foreclosure in 2012.5 Fortunately, she was able to recoup her losses, though for many, a foreclosure has drastic consequences, ranging from credit damage to bankruptcy.
When deciding how much house you can afford, don’t just look at your current income and expenses. Consider how much you could afford if you had a few years with reduced income or unexpected high expenses. Remember, the loan the bank preapproves you for is not necessarily the amount you can afford: it’s the amount the bank is betting you will be able to repay.
We all know about the success of Facebook over its rival, Myspace. But did you know that Justin Timberlake was involved in the purchase of Myspace for about $35 million in hopes of reestablishing the social media platform?6 While the exact amount of his share of the investment isn’t clear, when he concluded Myspace wasn’t bridging the gap between artists and fans as he’d hoped, he sold his shares to a fan—for one dollar—so he could put Myspace behind him.7
As any financial professional will tell you, investing always comes with risks. Instead of investing in one goal, heed the fundamental principle of diversification. Any individual company is at risk of failing from an unforeseen event: it would be almost infinitely more difficult for every company to collapse. This is why we consistently recommend broadly diversified investments, such as index mutual funds.
Still, for Timberlake, it may not have been all that bad. While we don’t know the details of his finances, reports of his robust net worth suggest that he followed the number one rule of investing in individual companies, to invest only what he could afford to lose.
(And having experienced a capital loss (speculated by one source to be about $15,000,000), he can use it to offset future capital gains on his tax return. In the (highly) unlikely even he had no future capital gains, then under the current tax code, he can write off his loss on his federal return—at a rate of $3,000 per year, over roughly 5,000 years.)
Despite these issues, everyone on this list has accumulated great wealth. Still, those with vast sums at their disposal can experience the same financial troubles as anyone else, just sometimes on a grander scale. These cautionary tales help us to see the importance of an effective financial plan, no matter the amount of your net worth.
Worried you might be making financial mistakes? Give us a call, and we’ll help you get everything under control.
This content is developed from sources believed to be providing accurate information and provided at least in part by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.