6 money management problems of the suddenly rich; 4 ways to fix them
Posted by: Uma Shashikant on Jan 07, 2019, 06.30 AM IST
By Uma Shashikant
Last week I was introduced to a young film star who had grown rich very quickly. She was proud of her success. She also seemed very comfortable with the many people who kept intervening as we spoke, not to mention the several phone calls. Then she told me that she had lost count of the number of people who had made her good fortune theirs. She told me that strangers had taken over her wealth.
We have this quirky notion about easy money. We treat it callously. Assume that you win a lottery. Research shows that you are highly likely to spend the money easily, without the care you would take with your routine income.
When someone earns way too much, they are not able to take their money seriously. There is a lot more than needed and there is little time, energy or expertise to manage it well.
The opportunity is grabbed by others who begin to make demands for money and the wealthy earner is unable to refuse. Our star told me about her three reactions when asked for money: a sense of power that makes her say yes without thought; an overconfidence that giving small sums away won’t hurt; and a feeling of helplessness when it is tough to say no.
The money management problems of the suddenly rich are many. First, it is unclear how to allocate the money towards essentials and wasteful expenses. Expensive clothes, watches, jewellery, footwear, car and habits are par for the course. Someone in the glamour industry cannot help spending a huge amount of money on merely looking good. She does not know whether buying jewellery with the large signing amounts was a good thing. She now has too much but cannot stop buying.
Second, she is routinely bombarded with investment ideas. Property dealers swarm her office and she needs a secretary to just look at deals that are being brought to her. She is not sure if they are a good idea. Many of them have been bought in the names of her relatives to save tax apparently. She fears her money could be mismanaged in these assets.
Third, household expenses have skyrocketed, with a number of relatives visiting or living in. She trusted her parents to manage her money and now finds that extended families have moved in, and she has no idea what is being cooked in the large kitchen or who takes out the cars on long trips. Her parents tell her everything is fine, but she is not too sure.
Fourth, accounts are kept by her father and the secretary, who also negotiate with directors and producers on her behalf. They also decide which products she will promote and the fees she will charge. The income tax returns are also filed by them. She does not understand finance well enough to get involved nor does she have the time. She trusts them and signs documents they bring to her.
Fifth, there are business ventures that are always being discussed and despite her protests, money is invested in miscellaneous enterprises that conduct varied business activities. These ideas are driven by relatives who live with her, who siphon off money based on their interests and connections.
Sixth, there are men who profess they love her, have her interest in mind and offer to take charge of everything. But she is unable to trust them either, because they are either married, or they are not doing well professionally and likely to leech off her earnings.
I am appalled at the lack of control or accountability, while she tells me that such problems are common in the entertainment business. Only the scale of income and operations vary. How can we help her?
First, the high income in this line of business comes with high risk. One flop, and her market rates will change overnight. She also runs the risk of not getting work, or staying for long periods without income. There is no insurance that can protect this risk. She should, therefore, build assets. A corpus that is set aside and invested in financial assets that can be drawn on when needed is critical. She must buffer her income. The best way to do it is to create an alternative investment income that will kick in when her regular income runs low.
Second, she should ensure that assets, including property, are held in her name, even if that means paying higher tax. She should view everything other than the house she is living in as investments that she will roll over when required. Investing in that expensive farm house that needs constant maintenance; holding fancy houses that cannot be rented; and buying plots to gamble on development are risks she can do without. Flats that are easier to sell are a better choice.
Three, she must put a limit on the parasitical bleed her income suffers from the hordes of relatives that live off her. She should take back control of her income and hand over a fixed amount to her parents, within which all expenses need to be managed. How much she earns need not be in the public domain in the household, it should be discreetly managed by her secretary and accountant. She should hire and work with good quality staff for these positions, who will remain loyal and work on her instructions. Such a transition will initially anger her relatives, but they will back off if she is firm.
Fourth, she should place a premium on keeping her financial transactions above board. She will be able to cut out all the operators from her life, if she chooses to hold assets in her name, bill her fees to her bank accounts, and file income tax returns. She will have complete control and freedom to use her money without fear. Creating a small office of professionals who will set up and manage her affairs will help her immensely.
She has to ring fence her wealth. Who would have thought that there is a problem like having too much money?
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