95% of Americans who have huge lottery wins are broke again within 5 years. Many young adults who inherit a huge amount of money from parents and grandparents often end up with very little several years later.
I always wondered how does this happen?! Perhaps we can learn a few things by looking at the recent history of rap star 50-Cent as a case study.
Here is a man who, at one point, was estimated to have a net worth of $155 million and who filed for Chapter 11 bankruptcy in July of this year. Maybe his story will provide some insight into some money lessons that all of us should learn no matter what the amount of our assets.
Image via World on Da Streets
50-Cent has recently lost two lawsuits – as a defendant in a headphone company complaint and as a defendant in a personal suit over his use of a sex video with the female’s consent. In both cases, he was ordered to pay millions of dollars. Even with those judgments, however, 50 Cent should have had plenty of assets left over. And yet, in bankruptcy court, he listed his current assets at $10 million and his current debt at $50 million. Quite a big fall from $155 million in assets at the beginning of 2015!
Chapter 11 Bankruptcy is not the “clean slate” bankruptcy that is Chapter 7, when all debt is virtually forgiven. The reason for Chapter 11 in 50 Cent’s case is that he has many assets he wants to keep. So the bankruptcy court will set up a reduced payment amount for his debt based upon his current assets without forcing him to surrender those assets. He and his lawyers call this a “re-organization of his finances.”
No matter what lawsuits 50 Cent has lost, the huge loss of money has actually come from some other key mistakes that he has made, and these types of mistakes are the same ones that others with rapid wealth accumulation make as well. They simply have not developed the personal finance skills to manage that amount of money carefully and have not adhered to some basic money management principles. And he has good company – Hollywood and the music industry is filled with those who made the same mistakes.
Whether your “windfall” is $500,000 or $5 million, you must put some of that money in safe investments – investments that will give you income if you should lose your other assets. 50 Cent made the mistake of not doing this.
He spent a lot of money on those things he grew up without – homes, cars, jewelry, and a large group of assistants, bodyguards, and other staff. It was important to him that people see him as a man of wealth and marvel at that wealth and at him. Unfortunately, this is a common mistake made by those who come into wealth quickly. Rather than looking into protecting some of that money by putting it into savings, they spend – and spend and spend.
On the other hand, people who accumulate wealth gradually are far more prone to develop plans that involve saving over the long-term. They have 401K’s at work; they pay into social security over a lifetime of work; and they tend to invest in relatively safe mutual funds.
It is so easy to get into a mindset that your new wealth allows you certain “privileges” that you have “heard” the wealthy have. You can now be rude if you wish, you can belittle others, you can demand respect, and you can take license to do as you wish.
50 Cent found out the hard way that these behaviors end up with lawsuits – lawsuits that he consistently lost. A bit of humility and some good legal advice would have prevented many of his legal troubles. But he seemed to enjoy the petty fights and he knew that he had the money for the best lawyers to be found.
People who do not obtain large rapid wealth tend to be more “grounded.” With that grounding tends to come a bit more humility where finances are concerned and, as well, in their daily living. They do not have opportunity to open themselves up to legal problems that can end up costing their life savings.
When you speak of your money “publicly,” you open yourself up to a lot - people who want you to invest in their businesses and schemes; people who need loans; people who want to give you the best “tips” for investments. Because a lot of people who come into money quickly have not had the time to educate themselves, and because they want to look magnanimous and like a hero, they tend to take poor risks. They tend to loan money out with no plan to get it back.
The smarter you become, the more you know that you really should just stop talking about money, especially your own. A popular book, titled the Millionaire Next Door, speaks to this well, and every newly rich person should read it. There are millionaires all over this country whose neighbors do not even know. They know that life is better when they stay quiet about their wealth and, because they have accumulated it over time, they do not find a need to “show” it with extravagance in front of others.
Your best friend is not your financial adviser; nor is your spouse or sibling or college pal, no matter what their professions may be. You need an objective financial adviser whom you pay well. 50 Cent got a lot of advice from friends; he counted on and listened to friends and others with no financial background, and he made poor decisions.
People who are grounded in earning what they do over longer periods of time, when they receive a promotion or a large raise, and even when they inherit, they just seem to have a stronger sense of needing help with financial planning. Even then, there are certainly bad planners out there. Finding a reputable one may take some time, but they are willing to do the research and go with a reputable individual or firm.
The key concept in financial planning is the word “plan.” Financial plans are long-term and are based upon gradual accumulation of wealth. Even when a large windfall comes, those who have been responsible about money during their earlier years, deal with it more responsibly.
Many newly rich turn to gambling – either at casinos or by pouring money into get-rich schemes. Unfortunately, 50 Cent did this often and there were never any “getting richer” results. The attitude was that the money just would never run out. But it does, and usually far quicker than could be imagined. According to court documents, 50 Cent’s mansion is worth $8 million; he own 7 cars, including a Rolls Royce. His monthly expenses are $108,000. It’s easy to see that when someone can afford to spend this kind of money, he can adopt an attitude that it will just go on forever. Unfortunately, bad spending decisions and extravagance, along with lawsuits, did eat away at his millions.
People who accumulate wealth slowly understand this concept. Not only do they set money aside for emergencies, they also put money where it can earn money. They know that spending the principle means that money will run out. And so the goal is to not use the principle at all, but only the money that it earns. When these people realize a huge windfall, they may spend a chunk of it, but the rest will go to work for them. In this way, they have permanent income no matter what else may happen.
Even when a newly rich individual has a reputable financial adviser, there is a tendency to act impulsively. Part of this is just the thrill of being able to “throw money out there;” part of it is also because somehow the money does not seem “real.” It is not money that was earned over a long period of time through a long-term plan of saving and investment; and part of it is because there is not a history of managing large amounts of money. 50 Cent had no history of such management, and he was easily enticed into impulsive actions with his money – putting it into glamorous but very shaky places. His one smart investment was in a line of bottled water, which was then purchased by Coca-Cola. He made about $1 million on that deal, but it was really “chump change” by that point. At about the same time, he began to build a lavish home in Africa.
People who must watch their money carefully tend to make more considered and thoughtful investment decisions, because they cannot afford to lose the money they invest. And those types of people are found among the 5% of big lottery winners who have not gone broke. The patterns of money management behavior have been established over years, and they don’t change much.
What Happens Now?
50 Cent appears to be pretty philosophical about his current financial situation. In a recent interview, he stated that he will come through just fine, that he has good lawyers. Meanwhile, he is finishing the home he has built in Africa and looking forward to a new album release soon. He will pay off his creditors, make more money from his music and clothing line, and move on, hopefully a wiser person.
We should all go bankrupt this way.