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From rich to broke?

Tuesday, February 26, 2013

Added (1 Feb 2017):

Over the best part of two decades, 
Johnny Depp has been spending US$2m 
a month, according to TMG, which is suing 
the star for an unpaid loan.
The actor is alleged to have forked out 
US$75 million on 14 homes, including 
a 45-acre (18-hectare) French castle, 
a chain of Bahaman islands, 
several Hollywood homes, 
penthouse lofts in downtown LA 
and a horse farm in Kentucky.
Since 2000, the actor has spent 
US$18 million on a yacht, bought 
45 luxury cars and shelled out 
almost US$700,000 a month on wine, 
private planes and a staff of 40 people, 
according to the lawsuit.
TMG says Depp has accrued more than 
200 artworks by Warhol, Klimt and 
other masters, 70 collectible guitars 
and a Hollywood memorabilia collection 
so extensive it is stored in 12 locations.
"... when Depp's bank demanded 
repayment of a multimillion-dollar loan 
and Depp didn't have the money, 
the company loaned it to him so that 
he would avoid a humiliating financial crisis."
TMG attorney said in a statement.
Source: CNA

---------------------------------------------------
I have shared this story many times before but I might not have blogged about it and that is how someone I know who was making >$15k a month at work became broke.

This person is quite a few years younger than me but he was very successful in his career and by the time I got to know him a few years ago, I know he was definitely making >$15k a month. It could have been >$20k a month but he wouldn't say.


Home was a 3 bedroom condominium in D10 which he bought a few months before getting married. 

He had a Mercedes Benz S something. He was always well dressed and each of his watches (yes, he had more than one watch) would probably have cost me a few months' salary. 

He and his wife would go on annual holidays to Italy, France, Switzerland etc. Although he was making a very nice salary, to have been able to have all that he had, he must have been heavy on credit.

When the Global Financial Crisis happened, he lost his job and everything unravelled. 

Of course, at that time, it was hard to sell any piece of real estate for a good price. The car would definitely be sold at a hefty loss. Pre-owned big name watches would be worth very much less as well.

For him, it was a swift descend from heaven to hell. Everyone who knew about it was shocked because he always appeared so confident and so wealthy.

What can we take away from this?

1. Everyone needs to learn financial management skills. The younger we learn the importance of financial prudence, the better. At its simplest, everyone should learn how to save and grow our hard earned money.

2. Everyone wants a higher standard of living. So, often, people end up buying expensive cars, expensive homes and expensive everything. However, what this also means is that we have higher costs of living. Can we not have a higher standard of living without a much higher cost of living?


3. Everyone needs to think of all the bad things that could happen to them. I know it can be depressing but it is necessary. How long can we continue in our current lifestyle if we were to lose our jobs? What if we or our dependents were to need long term medical care?


Stress test our finances. If we cannot pass these tests, we better do something to set our houses in order.

Of course, a very good question to ask would be: "Was he ever rich?"

All of us might have friends or family members who are living beyond their means. 

Of course, sometimes, people need to suffer a fall before they are aware of their financial mortality but I feel that it is our responsibility to at least talk some sense into them, if we could. It is as much for their own good as it is for ours.
-------------------------------------------
Johnny Depp's story makes my friend's story sounds like a walk in the park? Sorry. To me, there is no difference. To me, broke is broke.
Related posts:
1. A common piece of advice on savings.
2. Wage slaves should be fearful.
3. "How to tell if you are rich" by Alexander Green.

30 comments:

EC said...

Hi AK,

Thanks for sharing. Indeed one is better off being over-conservative when dealing with money matters. You may sacrifice some 'pleasures' but a peace of mind is priceless.

Then again, to each his own.

Best wishes,
Eugene

rustydoodle said...

It is a pity for your acquaintance. With his income, he could have created an outstanding passive income stream.

It reminds me of articles that I have read on how some non financially savvy people won the lottery and yet still became poor after a few years as they didn't change their way of handling money.

AK71 said...

Hi Eugene,

All of us make our own choices and will have to live with the consequences of those choices. :)

AK71 said...

Hi rusty,

Actually, this reminds me of reports of high flying financial executives selling their Ferraris and Patek Philippes during the GFC.

As for winning in the lotteries, a friend told me about an employee of his who won first prize in the Singapore Sweep years ago. This person resigned to enjoy his new found wealth. Within a year, he was back asking my friend for a job!

Don_Jerome said...

Sometimes, school of hard knocks is the best teacher...

AK71 said...

Hi Jeremy,

Unfortunately, this is so for some. :(

EY said...

Hi AK,

'Everyone needs to think of all the bad things that could happen to them. I know it can be depressing but it is necessary.'

You talking to yourself or talking to me huh? :P

Please don't think of 'all' the bad things, just focus on the critical things will do.

It is also possible to have higher standard of living without higher cost. Delay gratification and buy things at the right timing. Being a laggard can save a great deal of money.

By the way, most of my fashion purchases are past season designer items that I dig from eBay USA. As a rule of thumb, I won't pay more than 30% its original retail price. To me, I'm paying for the quality, not the brand. So 20%-30% of the original price is about right. Well, the argument here could then be - Do I even need to buy in the first place? No, I don't need. Just want to and therefore, I can only justify my wants if I'm getting them at a steal. Okay...sure...I certainly can be more prudent than this. Hmmm...I'll try!

Endrene

Yihhtan said...

"Can we not have a higher standard of living without a much higher cost of living?"

I like!!!

How ah??? Share leh!!!

Cheers,
YH Tan

AK71 said...

Hi Endrene,

Focus on the critical things. This is good advice indeed. What are the critical things, in your opinion? A guest blog post in the making, perhaps? ;)

For sure, delaying gratification in all its forms would help to grow our wealth. We could get many things for "free" over time.

Although I have suggested many times that we should not satisfy our wants, this is but an ideal.

I have wants too and my not so recent purchase of an antique Rolex is an example. ;)

However, we have to recognise that unless we are rich, we have to make more sacrifices in our wealth building efforts.

Your willingness to buy out of season designer items at 70% off their full retail prices could be seen as a sacrifice. Could it not? ;p

AK71 said...

Hi YH Tan,

Hahaha... Ask Endrene, she is the expert at digging out bargains! ;p

OK, let me share a personal example.

I had a SONY Vaio AIO a few years ago. I paid >$2,000 for it. Now, I am using a Lenovo AIO which I got for under $1,000. Both computers contributed to a higher standard of living but using a Lenovo AIO is a less costly option.

Another example. Having a car contributes to a higher standard of living but why a BMW or a MB?

To me, a higher standard of living could be achieved with lower cost alternatives. :)

la papillion said...

Hi AK,

I learnt this from somewhere. When things are going well for you, ask what are the things that can trip you and set you tumbling down? It is not a depressing exercise like you've mentioned, rather, it's an exercise to see what the 'critical' things are, or where the keystones that hold everything in place are.

In the example of your friend, he just need a little imagination to know that everything rests on him getting his pay from his job. Knowing that his pay from his job is the keystone to keep his personal ponzi scheme afloat, he should have done something to spread the risk.

In my own job as a tutor, my own personal ponzi scheme is kept afloat by good health and perhaps age. I realise that I'm at a low risk of being retrenched as it takes quite a lot of parents to drop me as a tutor, so I'm safe because my income is diversified. However, health is a depreciating asset, so is age. Before any of them could trip me up, I want to do something that can continue to earn income with or without my presence. In that way, age and health will no longer be critical to me i.e. I've grown larger than my potential problems.

I'll rather tackle my potential problems head on than wait for it to sneak up on me.

Care to share why you blog about this person again?

AK71 said...

Hi LP,

I always enjoy how you bring your personal experience to bear although I am somewhat lost with the phrase "personal ponzi scheme". Care to elaborate? ;)

The main message here could be encapsulated in 4 Chinese words: 居安思危. :)

la papillion said...

Hi AK,

By 'personal ponzi scheme', I meant a lifestyle that will continue to be supported as long as the suckers keep coming in. In my lifestyle, that sucker is good health. In your friend's, that's his paycheck. Once the suckers stop coming in, the whole ponzi scheme will start collapsing like a pyramid of cards.

Sorry about the phrase...I think I'm lost in my own thoughts :)

AK71 said...

Hi LP,

Thanks for enlightening me. That is an inventive use of the phrase "ponzi scheme". ;p

EY said...

The cat is back and has come to my rescue! Meow...meow...meow... Thankiew very much, LP!

I like LP's suggested approach in unearthing the 'critical' things. Very inventive to link the 'ponzi scheme' to our life and it's quite appropriate, I must say, to describe people with an unsustainable lifestyle.

AK, I fully subscribe to your 'lower cost alternative' idea! Economics 101 - examine opportunity cost and understand substitutes. Also, we need to lay down the fixed and variable costs as the first step to cutting expenses. For wants, seek the most value-for-money alternative available. For instance, I visit a salon at an HDB shop at Upper Cross Street where I get comparable service to the big brand names and pay only 50% the price. Same goes to my facial treatment which is done by a beautician who operates at home.

For clothes and accessories, I am a sucker for quality. Out of season or not doesn't bother me. I'm neither a celebrity nor a socialite. I don't have a front to keep up with. While I have my materialistic impulses, it doesn't make any sense to dent my bank account just to be trendy. I dictate my style not the magazines or the designers.

Lo and behold, to build more wealth, it begins with being rational and only then, we can start planning. :)

Easier said than done. I like to say that I'm rationally irrational! LOL~

Endrene

SnOOpy168 said...

enlightening reminder.

20/80 rule often subconciously applies. 20% of the $ can be used to satisfy 80% of needs. My $23 casio dual display watch will tell me the time as accurate as your rolex. of course, for face's sake & "needs", end up burning 80% of the budget for the 20% of "features. one could hardly use & perhaps to quantify.

of course, i really don't like to replace the broken down Casio every 3 years. but at $23, i m not complainting

AK71 said...

Hi Endrene,

Some heavy duty word play going on here. ;)

As we seek lower cost alternatives, the trick is in still getting the same quality of service or goods. If paying a lower price means getting lower quality, of course, the higher standard of living we are looking for would elude us.

So, I believe that you are doing all the right things in being rationally irrational. ;)

AK71 said...

Hi SnOOpy168,

I sincerely believe that your $23 Casio does a better job than the antique Rolex I bought. LOL. No kidding.

Sigh. A moment of weakness but, then, they do say that a thing of beauty is a joy forever. So, please indulge me. ;)

Yihhtan said...

AK, Endrene, LP,

Tks for sharing your personal experiences.

One personal experience is not to follow the latest technology. Latest technology smart phone, camera, PC, tablet almost every quarter. I first DSLR camera bought 7 years ago is still giving me good quality holiday pictures. My current iphone 3 is a pass down from my 17 years old niece. And I will be getting her iphone 4 very soon as she will be getting a galaxy note II!!! Mmmmm maybe by end of the year her galaxy note II will be mine… 

Chasing the latest technology is a never ending story…

BTW, you gal & guys are a rare breed.

Cheers,
YH

AK71 said...

Hi YH,

I am very much human and have all the weaknesses that come with being human. I am still trying to do better.

For example, I have yet to buy a pre-owned car. All my cars were bought new. Lost quite a bit of money to depreciation, didn't I?

You might want to educate your niece on the importance of financial prudence. You would only be doing your duty as an elder. ;)

Jay said...

The MAS should make mandatory the publication of this story in any of the 'get rich quickly' seminars on property/FX/whatever investment...

AK71 said...

Hi Jay,

Yikes! I wonder if anyone working in MAS is reading my blog now. ;p

Yihhtan said...

AK,

I believe it is her parent who needs to be educated. Whenever I have a chance I do talk to her. It is very interesting to get to know what goes into a teenager mind. I think she is much more rational and financial prudence than her parent. Period. And I hope she don’t stray into her parent path.

YH

AK71 said...

Hi YH,

Indeed, parents play the most important role in a child's development. Unfortunately, not everyone can be a good parent. :(

Then, perhaps, you could talk to her parents instead. ;p

SnOOpy168 said...

seriously, the bottom lines are affordabilty & quality. I'll pay a bit more for US or Aussie oats & musli than the china-made @ 1/2 price. Likely health & food safety Risk are not worth it.

Ray said...

Again...delayed gratification. Something that is prudent and right but hard to fathom for people who live in the now. People are getting impatient, fast food, instant noodle, fibre optic broadband (do we still remember the 7K modems? OMG) We no longer want to wait for rewards to come, we want instant rewards...

AK71 said...

Hi Ray,

Financial prudence is a rather boring topic, isn't it? I am running out of ways to share the same message! Time to seriously consider a sabbatical. ;p

Oh, yes, I remember the dial ups. I kind of miss the whining and the screeching sounds when making a connection. LOL. :)

Yihhtan said...

AK,

Not going to work. I let the wife do the talking. It is her elder sis so better let them talk...

AK71 said...

Hi YH,

Ah, in-laws? I see. Better let sleeping dogs lie then. ;p

AK71 said...

I have had conversations like this many times before and, recently, it happened again.

Friend:
This friend of mine must be very rich. Drives a new Mercedes Benz wor. He must have lots of money. 10 years my junior. Impressed.

AK:
I think you want to make a distinction between people who have lots of money and people who are willing to spend lots of money. Could be a case of "same same but different".

Many of us are easily impressed by appearances and that is why many people spend a lot of money on their appearances so that they look attractive to others.

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