Celebrity Financial Mistakes
Since the dawn of Hollywood, financial illiteracy has caused dramatic falls for some of America’s wealthiest and most famous names. But even as certain celebrities’ net worths tumble, their mistakes remain valuable – as lessons. Econ4U presents nine of the financial pitfalls that have caused many a celebrity to squander a massive fortune, and what you can do to avoid their money missteps.
Poor Financial Planning
Court papers during Britney Spears’s child-custody trial in 2007 revealed that the singer earns an average of $737,000 per month but doesn’t allocate a penny toward savings, investments, or education funds for her two sons. Gary Coleman was once one of the highest-earning child stars but was forced to declare bankruptcy after his handlers mismanaged his $8.3 million trust fund. Teen heartthrob Corey Haim starred in a dozen hit movies in the 1980s but had to file for bankruptcy in 1997 when faced with a $100,000 IRS bill and another $100,000 in debts; reportedly, his only assets at the time were a 10-year-old BMW, $100 in cash, and $7,500 in royalties.
Moral of the story: Start planning for the long term while you’re young – you never know how soon you might need the money. Learn more about saving for retirement here.
Bankruptcy
Boxing champion Mike Tyson made $400 million over twenty years but when he filed for bankruptcy in 2003, he was $23 million in debt. When soul icon and actor Isaac Hayes declared bankruptcy in 1975, he lost all of his songwriting royalties in the settlement, obliterating his most valuable investment. Oscar-winning actress Kim Basinger tried to walk away from the set of Boxing Helena, but the movie’s producers said she breached her contract; she lost everything in the ensuing legal battle and was forced to sell her $20 million Georgia property. And even after a series of hit albums in the 1970s, rock star Ted Nugent was forced to file due to “several failed business ventures and poor management,” according to his website.
Moral of the story: Declaring bankruptcy will trash your credit and jeopardize your ability to earn a good living in the future. Learn more about credit ratings here.
Money Hungry Relatives
Hotel magnate Barron Hilton was so embarrassed by granddaughter Paris’s partying ways that he donated 97 percent of his fortune to charity, rather than let her inherit it. Pro wrestler and actor Hulk Hogan is paying $40,000 per month in alimony to his estranged wife and Hogan Knows Best costar, Linda Bollea. In 1978, Motown star Marvin Gaye owed his ex-wife so much in alimony that the court ordered him to give her the profits of his next album, which he entitled Here, My Dear. After a red-hot career in the 1970s, Burt Reynolds bought himself a helicopter, multiple vacation homes, and a sprawling Florida ranch, but his divorce from actress Loni Anderson left him broke (though he got to keep the ranch).
Moral of the story: If you have substantial assets to protect, get a prenuptial agreement or update your will. And be wary of co-signing loans for family members if you can’t afford to make the payments by yourself if they default. Learn more about the costs of providing for a family here.
Bad Investments
Supermodels Naomi Campbell, Claudia Schiffer, Elle Macpherson, and Christy Turlington combined forces to invest in the ultra-glamorous Fashion Café, but without a solid business plan, it was belly up within two years. Figure skater and Olympic gold medalist Dorothy Hamill purchased the Ice Capades in 1993, but three years later the struggling company had drained her bank account; she declared bankruptcy in 1996. Larry King was swindled out of $15 million in life insurance policies after the talk show host’s investment plan went awry. Actress Debbie Reynolds took a gamble in the casino business, but the Debbie Reynolds Hotel & Casino was one of the most spectacular failures in celebrity-crossover history.
Moral of the story: Entrepreneurship is an essential part of the American dream but success is not automatic. Never risk more than you can stand to lose. Learn more about starting your own business here.
Tax Evasion
In 2008, action movie star Wesley Snipes was sentenced to three years in federal prison for failing to pay $15 million in taxes. Country singer Willie Nelson escaped jail time but was fined $32million for hiding assets in a bogus tax shelter; he later settled with the IRS for $16 million. Grammy-collecting recording artist Whitney Houston auctioned off her lingerie to pay reportedly tens of thousands of dollars in back taxes. Perhaps the most clueless example of tax evasion is Richard Hatch, who won the first season of reality show Survivor but claims he didn’t realize he had to pay taxes on his $1 million prize; he is currently serving a 51 month sentence in federal prison.
Moral of the story: Taxes are inevitable, so you have to pay what you owe. Learn more about your tax bill here.
Big Spending
Donald Trump is living large once again, but in his book Trump: The Art of the Comeback, the entrepreneur talks about his time on the brink of bankruptcy with $900 million in personal debt. In 1998, R&B crooner Toni Braxton owned Gucci silverware, a Fabergé caviar service, and a Porsche, but even surrounded by luxury goods she had to file for bankruptcy protection because she couldn’t afford the $2.8 million in back pay for her managers and lawyers. The title for most famous squandering of all goes to rapper M.C. Hammer, who had to declare bankruptcy in 1996 after lavishly spending $33 million on houses, cars, interior decorating, and a forty-member entourage.
Moral of the story: Be realistic about budgeting and don’t fall behind on debts. Learn more about short-term borrowing here.
Bankruptcy
Star Search host Ed McMahon made national headlines in 2008 when he fell $644,000 behind on a $4.8 million mortgage on his Beverly Hills home. Evander Holyfield’s lawyers told the mother of one of his 11 kids not to expect any more child support payments because the boxing champ’s $10 million Georgia mansion is in foreclosure. Former baseball MVP José Canseco walked away from a $2.5 million mortgage on his Los Angeles-area house. And musician Courtney Love lost her historic Washington home to foreclosure in 2005.
Moral of the story: Don’t buy more house than you can afford, and make sure you understand the terms of your mortgage.
Learn more about home loans here.
Loans and Credit Card Debt
Michael Jackson nearly lost one of his only remaining assets in 2008 – the famed Neverland ranch in Santa Barbara, Calif. – but the pop star managed to save it by refinancing the $300 million loan he has with Fortress Investments. Socialite and television personality Kim Kardashian rang up $120,000 in shopping charges – on another person’s credit card. And Tori Spelling, the sometimes-actress and daughter of late billionaire producer Aaron Spelling, admitted to once owing hundreds of thousands to credit card companies due to what she called “bad shopping habits.”
Moral of the story: It’s simple – live within your means. Learn more about credit card debt here.