Life Musings

Why do celebrities go broke? Often, it's because they don't know how to manage their money. They come from poor or modest backgrounds, and when they come into money, they squander it, not realizing that it could all disappear someday.

Here's what one fella said about that. I read this on a message board, and I have to agree.

It's easy. People don't know crap about money. Most rich people got rich by working real jobs and taking very good care of their money. People who luck into money either by winning a lottery or by having a hit t.v. show usually don't know crap about money and investing.

I read study a while ago that tracked people who won a lump sum of money greater than one million over 5 years. Something like 85% of the people who won a cool million or more were back at their normal jobs after 5 years.

If you have 1 million and make 10% in investments you get 100,000 per year. Take out taxes and you are down to about 80,000 (maybe less, I am not sure of the top tax rate on investments) . Now, assuming you have an investment adviser, they'll take a bunch of that. So you can quickly get down to 50,000 a year net, which ain't bad at all to live on assuming that you don't go out and buy a new house, car, boat, plane, etc. The problem is that they get some money and then take their new Ferrari out of their new 20 car garage to drive to their new yacht so they can impress their friends with how rich they are*. Of course the new house, Ferrari and yacht came out of the principal, not the returns on the investments, so the next year instead of earning 100,000 off of one million they had they earn 50,000 off of 500,000 they have left. Do that a couple more times and you are broke.

Now some of these folks, both actors and lottery winners, get smart and either learn about investing or pay someone to do it. The problem with paying someone to do it is that you have to watch rather carefully so that the investment adviser doesn't rob you blind and man, they will try.