Famous Financial Faux Pas
As Chris Rock once said, “Rich is some (bleep) you could lose with a crazy summer and a drug habit.” Just because one may be good at making money doesn’t mean he or she necessarily has the savvy to save, invest and grow that money. The financial failures of some celebrities amplify what can go wrong when you mismanage your dollars and cents.
Here are five famous faces, their financial faux pas and the lessons they learned.
Correction: A previous version incorrectly labeled the story as featuring six celebrities, but it has been fixed to reflect the accurate amount of five celebrities. Our apologies.
After a year of marriage, the top-earning pop singer divorced comedian actor Russell Brand. She stood to lose half her fortune as a result, since she had no prenuptial agreement. According to Forbes, Perry raked in $44 million while married to Brand and without a contract overwriting California’s 50/50 divorce laws, her ex stood to inherit half of that sum or some $20 million. Very fortunately for Perry, Brand decided not to pursue his share and the couple settled “amicably.” But was failing to sign a prenup really worth the risk?
A prenuptial or postnuptial agreement is not romantic, but it can save you agony and time in the event of a divorce, especially if you disagree with your state’s divorce procedures. For example, in California, a “community property” state, sans prenup the divorce laws require couples to equally divide assets including savings, property and even debt acquired during the marriage. (There are nine community property states in all.)
Most states proceed with an "equitable distribution" where a judge considers various criteria — including each spouse’s income and whether one spouse was a stay-at-home parent — to rule who receives what and how much. In 2011, 73% of divorce attorneys cited an increase in pre-nups over a five-year period. And as women earn more, they are asking for them in record numbers.
The ‘House of Lies’ actress may not be able to qualify for credit anytime soon. Kristen Bell’s Los Angeles 2.5-acre property fell into foreclosure in early 2012 and was auctioned off for a reported $500,000 less than what she paid for it. While the busy actress doesn’t appear to be struggling for cash these days, a foreclosure isn’t an easy stain to wipe off your credit files and could prevent her from obtaining a loan in the near future. In fact, according to FICO, a foreclosure will remain on your credit report for seven years.
The lesson: Don’t buy more house than you can afford (try to keep monthly payments to no more than 28% of your income). And be even more conservative if you have fluctuating income as a freelancer, entrepreneur or, in this case, Hollywood actress.
Spending money that isn’t technically yours, an appetite for extravagance and some bad luck is what largely led the Grammy Award winning R&B singer to bankruptcy court — twice. While Toni Braxton seems to be making a financial comeback, she has had cataclysmic problems with overspending and debt.
In 1998, she filed for bankruptcy due to what she says was lavishly living off of the millions of dollars given to her as an advance from her music label. The catch was that she had to refund the record label all related expenses from clothing to travel to music videos and was left with very little in the end. Braxton told ABC News, “What happens is they give you advancement on the next record and then the next record…So you kind of stay in debt, in a sense." While her worldwide sales totaled $170 million, Braxton said she took home a mere $1,972 from her first recording contract.
Her financial problems didn’t go away. In 2010 Braxton claimed she was $50 million in the red, prompting her to file bankruptcy again. This time she cited a life-threatening medical diagnosis that left her unable to perform and follow through with her self-financed concert series. (One reason to get disability insurance.) In the end, however, she was able to settle her case by paying just $150,000.
Moral of the story? A life built on credit is vulnerable to collapse. And a disability related to medical problems can sometimes be enough to obliterate your financial life if you don’t have sufficient coverage.
No matter how wealthy you become, you’re never above the law. And certainly not when it comes to paying your taxes. Yet, hotel empress and businesswoman Leona Helmsley managed to avoid paying Uncle Sam for years until she was finally charged and sent to prison. According to the New York Times, a judge sentenced Helmsley to four years in prison, of which she served 18 months. She was also required to pay a $7 million penalty, in addition to $1.7 million in back taxes.
Tax evasion is not uncommon in the celebrity world. Actors Wesley Snipes and Nicholas Cage, along with domestic doyenne Martha Stewart, among others, have reportedly had to pay penalties for failing to pay sufficient taxes.
Lending money to family and friends can turn into an ugly scenario, especially if it’s money you, as the lender, can’t afford to lose. Once upon a time “Days of Our Lives” soap actress Deidre Hall lent her wardrobe consultant and her family some $800,000 to help them get through rough times. Hall claimed she tapped her pension plan to come up with some of the money and when her friend failed to pay her back in full she took them to court. The two parties reached a compromise in the mid ‘90s.
Let this be a reminder that loans to loved ones don’t usually get paid back in full. Best to think of the loan as a “gift” you may never get back. If you do decide to go down the path of lending to a friend or family member, implement a simple written contract to lay out the terms of the agreement, including both your names, the amount borrowed and details of when and how the loan must be repaid. At RocketLawyer and SimpleForms you can find free templates for promissory notes. And for $30, LendingKarma and LoanBack will help you create a contract and nudge borrowers via email to make payments.
Farnoosh Torabi is a personal finance expert, author, TV personality, and sought-after speaker whose mission is to help people take control of their finances so they can live their richest, happiest lives. Her latest book is entitled “When She Makes More: 10 Rules for Breadwinning Women.” Sign up for her free newsletter and receive Farnoosh’s latest money advice and the first chapter of her book, “Psych Yourself Rich for free.”