Earlier this year, court documents revealed that Britney Spears doesn't save any of her $737,000 monthly income. Last month, the New York Post reported that photographer Annie Leibovitz racked up some $715,000 in debt, despite her $2 million annual contract with Vanity Fair. Wrestler/celeb Hulk Hogan spends almost twice as much as the $57,000 he earns each month. Dustin Diamond, best known as Screech on the early 1990s series Saved by the Bell, faced foreclosure in 2006, despite royalties from reruns. And more recently, Evander Holyfield, Ed McMahon, Jose Canséco, and Aretha Franklin ran into housing-related money problems of their own, despite being former heavyweight champion, Tonight Show personality, ex-slugger, and Queen of Soul, respectively.
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. U.S. News 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.
• 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."