Why Celebrities Run Into Money Trouble

The rich and famous often face financial challenges the rest of us can only dream about.


In Pictures: Celebrities With the Biggest Money Problems

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On the surface, celebrities appear to have little to worry about in the finance department: They command massive paychecks, after all, and can often tap into impressive endorsement deals on the side. So why do so many of them run into major money problems? Britney Spears, Aretha Franklin, and Nicolas Cage are just a few of the rich and famous who have made headlines with their financial disasters.

[In Pictures: Celebrities with the Biggest Money Problems.]

It turns out that celebrities often face extra hurdles, despite (and in some cases because of) their big paychecks. Not only do they have luxe lifestyles (and images) to maintain, but friends and family frequently rely on them for cash, their income is often unpredictable, and cash flow can quickly peter out when they're past their prime.

In fact, it can be the celebrity lifestyle itself that trips up superstars. Travis Henry, a former pro-football running back, has fathered 11 different children (by 10 different women), and pays an estimated $170,000 a year in child support. (He's also been convicted of cocaine trafficking and received a three-year prison sentence in 2009.)

Olympic swimming sensation Michael Phelps lost one of his biggest endorsement deals with Kellogg after photos of him with a bong emerged. Photographer Annie Leibovitz faced $24 million in debt from a mix of outstanding rental equipment fees, an uncompleted book deal, and renovation payments. Michael Jackson died with about $323 million in debt, largely related to his Neverland ranch. Even Thomas Jefferson suffered from the celebrity-debt connection. The third president of the United States died so deeply in debt that his family was forced to sell Monticello, his estate.

Here are five of the most common causes of celebrity financial troubles:

The tax man. Wesley Snipes, who is currently serving a three-year prison term for failing to pay as much as $17 million in taxes, penalties, and interest, might be the most famous celebrity to fail to pay Uncle Sam, but he's not the only one. Actress Marlee Matlin has also recently acknowledged owing back taxes, a situation she attributed in part to her income fluctuations.

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 decline in the future, setting money aside for drier times is essential. Cheng adds that this advice applies not just to celebrities but to anyone whose income dips and dives, including people who work in sales, freelance, or consulting.

Moochers. 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 are often asked by friends for money. "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."

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Salaman also urges his clients to develop prenuptial agreements before marriage, because divorce law can be so "murky." Says Salaman, "In all the states I know about, if you get divorced, then the property you bring into marriage is still your own separate property, but marital property, which is the earnings after the date of the marriage, can be split up to fifty-fifty."

Temptation. Celebrity lifestyles often come with private jets, designer clothes, and jewelry to match. Kim Kardashian, after all, just received a $2 million engagement ring. Nicolas Cage has owned as many as 15 homes at once, along with nine Rolls Royces. (See Kim Kardashian's Ring: A Good Investment?)

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.