While this isn’t exactly new news, a recent water cooler conversation about Johnny Depp’s financial distress led us down a bizarre intern rabbit hole – where multi-millionaires go broke. And when we surfaced for air, it occurred to us that celebrities are just like H.E.N.R.Y.s™. We’re all human and equally vulnerable to becoming victims of lifestyle creep.
WHAT IS LIFESTYLE CREEP?
As H.E.N.R.Y.s™, the good money has likely just begun to kick in. We are in the period of our life that financial people call our “accumulation years”. Incomes are going up, bonuses are getting larger, and titles are becoming fancier. As we develop more experience and skill in the work we do, we have compensated accordingly.
As we earn more, we can spend more. And we should. But we should also be saving more. If we continue to live PTP (paycheck-to-paycheck) we will inevitably become victims of lifestyle creep: when our lifestyle increases in lockstep with our income, thereby trapping us in the PTP cycle.
OTHER FAMOUS PEOPLE WHO WENT BROKE
According to a 2009 Sports Illustrated article, 78% of National Football League (NFL) players are either bankrupt or are under financial stress within two years of retirement and an estimated 60% of National Basketball Association players go bankrupt within five years after leaving their sport.
Ever wondered why Billy Joel still plays Madison Square Garden night after night? For the love of entertaining? He wishes! Our favorite piano man plays because a few poor money moves have him tickling those ivories for the cash. If only it was Easy Money.
Other famous people include MC Hammer, Toni Braxton – 2 times, 50 Cent, Meat Loaf, Francis Ford Coppola (the guy who created The Godfather) – 3 times, and the list goes on.
IT’S NOT ABOUT HOW MUCH YOU MAKE
By now it’s probably pretty clear that how much you make has little to do with your ability to save and/or go broke.
We’ve done the math… 5-figure earners, 6-figure earners, and even 7-figure earners all have a chances to sit on millions or go broke.
The Art Is Not In Making Money, But In Keeping It
WHAT ABOUT HIS TRUSTED ADVISORS?
If you book a session with a personal trainer and fail to show up, it’s likely your results will be lacklustre. Similarly, if you go to the gym and then go home and eat cookies every night, your progress will reflect it.
No one can know for sure if Johnny’s management team did everything they could to help him avoid this situation so we’d rather not get into the legal muck of it. But their side of it is that they made multiple attempts to discourage him from his lavish lifestyle.
Bottom line – choose an advisor you trust and one that you’ll listen to!
Most people convince themselves that, “when I’m making $10,000 more, $20,000 more, etc. then I’ll start to save, invest, travel [insert goal here], etc”. But from what we’ve seen, it’s likely you won’t.
So before you fall into the trap of living a life you can’t afford, set up some automation around your short-term and long-term goals. Read more about whether you’re living a life you can’t afford, here.
-Set up an auto deduction from your checking account on a monthly or bi-monthly basis into a savings account that DOES NOT sit at the same bank as your checking account. Keep it “out of sight, and out of mind”.
-If you aren’t working with a financial pro who has helped you decide how much you should be contributing to retirement, opt in for the automatic annual percentage increase. Most 401(k) plans offer this option and it’s a good way to systematically increase your savings in lockstep with your income bumps.
At Stash, we almost never say “no”. Our clients are rewarded for taking action and prioritizing their financial life early on. Do yourself a favor and start automating your financial life as soon as possible.