7 Ways to Avoid Debt

Toni Braxton becomes the latest celebrity to illustrate what not to do.

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What is it about being rich that turns some people into spendaholics? In the latest example of celebrity excess, TMZ.com reports that singer Toni Braxton has filed for bankruptcy and owes between $10 to $50 million. Her list of debtors includes AT&T, the Four Seasons, and Tiffany.

[In Pictures: 8 Painless Ways to Save Money]

Also guilty:

  • Alicia Keys's new husband, Kasseem Dean (also known as Swizz Beatz), who owes $2.4 million in taxes.
  • Annie Leibovitz, who has struggled publicly with her own debts.
  • Thomas Jefferson, author of the Declaration of Independence and third president of the United States, who died so deeply in debt that his family had to sell his estate, Monticello.
  • So why do celebrities fall on hard times financially, given their extreme money-making power? Despite the assumption that fortune follows fame, wealthy celebrities often run into trouble because their income is unpredictable, they maintain expensive lifestyles, and they face enormous pressure from family, friends, and charities who want their money. We asked financial experts to weigh in with tips for struggling celebrities, and advice about what the rest of us can learn from their spendthrift ways.

    Rein in spending.

    "The most common mistake that celebrities, and especially professional athletes, make is ridiculously high spending in their newfound financial success," says Tim Maurer, director of financial planning for Financial Consulate, a Baltimore advisory firm. Celebrities often expect their high earnings to continue, but in reality they often have short careers, marked by bursts of high income. That means they need to spend much more modestly than their last paycheck would allow in order to make that money last, says Maurer.

    Make a plan.

    Optimism has no place in plans for the future, at least when it comes to finances, says Maurer, because people—famous or not—need to be prepared for the worst-case scenario, such as disability or sudden loss of income. He says celebrities should estimate the expected duration of their career and life and then predict income levels during working and nonworking periods. Next, they should calculate the average income during the entire span and live off that amount. The rest should be saved.

    [For more money-saving tips, visit the U.S. News Alpha Consumer blog.]

    Learn to manage an unpredictable income.

    Rita Cheng, a financial adviser with Ameriprise, tells her clients to be guided by the three "f's": fun, feds (as in taxes), and the future. While it's OK to splurge a little when a big chunk of income comes in, it's important to remember that you could be spending more than 40 percent of it on income taxes. And because income might go down in the future, setting money aside for drier times is essential. Cheng adds that this advice applies not just to celebrities but to anyone who sees their income dip and dive, including people who work in sales, freelance, or consulting fields.

    Pay off debt as soon as you can.

    Celebrities should avoid mortgages, says Jennifer Streaks, a financial services attorney in Washington. She says they should buy homes that they can afford to pay for with cash, since they often don't know when their next paycheck is coming.

    Surround yourself with people you trust.

    Celebrities and noncelebrities alike need to make sure they trust the people who work for them, including personal finance advisers, Streaks says. "The worst thing that a celebrity can do is leave their finances and bank accounts in the hands of some accountant who is not only charging them exorbitant fees but also has complete access to the money in those accounts," she says. Each person should read his or her own monthly statements and regularly check up on savings and retirement accounts, Steaks adds.

    Save for retirement.

    During flush periods, people should put at least 8 percent of their income toward retirement accounts, says Streaks. That's in addition to maintaining an emergency fund of six to nine months' worth of expenses.

    Just say no.

    Alby Salaman, chair of Holland & Knight's private wealth services group for the mid-Atlantic region and lawyer to several NBA and NFL players, says his clients often get asked for money from friends. "They call in their chips. There are all sorts of distant relatives who have really sad luck stories," he says. Having a financial adviser can help because the celebrity can say, "I'd like to give you the money, but I've been with this adviser for a really long time, and he'd kill me if I did that."

    Like noncelebs who pull themselves back into solvency after bankruptcy, many stars manage to make financial comebacks. Through a spokeswoman for Vanity Fair, Leibovitz says her debts have been paid off. And since her divorce proceedings, Spears's father has taken control of much of her affairs and likely clamped down on her spending. Even the famous, after all, deserve second chances.

    Kimberly Palmer is the author of the new book Generation Earn: The Young Professional’s Guide to Spending, Investing, and Giving Back.