I was reading this weekend of another superstar declaring bankruptcy. I couldn’t understand it. In fact, I have always been puzzled how some top sports stars such as footballers and basketball players or artists, such as musicians and film stars, who, during the summit of their careers, earned fabulous amounts of money, end up broke or, worse still, bankrupt later in life.
For example, the most notorious heavyweight boxer of all time earned over $200m in the ten years during which he dominated the sport. Today, he cuts a sad figure – forced into performing at pubs and playing bit parts in films to service his debts. How on earth did that happen?
I believe that the root of the problem lies in the stars’ inability keep their finger on the pulse of their finances and to slash costs when there is an obvious ‘downturn in business’. Not paying taxes on time is another culprit.
Stars who earn astronomical incomes should treat their finances like large companies do – although I am not saying that large companies always get it right. A large corporation however, would, in a time of crisis, announce a profits warning to its shareholders immediately – taking the pressure off the continuous quest for results and investment. This would be followed, if necessary, by dramatic cost-cutting, which could include rationalising staff by way of redundancies, streamlining budgets and sometimes liquidating assets. If profits and greater fortunes returned, the budget would slowly return to normal again in direct proportion to the profits.
Not so the superstar. During such a downturn in business, the superstar tries to retain his or her self-esteem by continuing to fund a lavish lifestyle. Instead of announcing a ‘profits warning’ to creditors and hangers-on, the star, with all reason clouded by self-importance and vanity, would attempt to style it out by creating the impression that things had never been better. Bills such as what is owed to the bank or taxman would be deferred – in the crazy hope that they would eventually go away, or be repaid when better times returned. Interest and late payment charges would mount up. Bankrupt!
Scale this down to the real world and there are some powerful lessons to be learned.
- Your financial well-being depends upon your ability to keep a close eye on your financial pulse.
- Cut your costs when there is a ‘downturn in business’.
- Build up reserves, or where that is not possible, buy insurance to protect yourself if the worst were to happen.
- Don’t let your emotions take control of your finances.
- Don’t feel under pressure to style it out when times are tough.
- If you are broke, swallow your pride and announce a ‘profits warning’ to your friends to take the pressure off.
- Learn to live within your means.