Tag Archives: over-spending

How the Rich Spend Their Money..and Go Bankrupt

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If you’ve ever wanted an insight into what rich people do with their money, here it is. It’s a research report from Personal Capital of over 50 NBA players. In some ways, they’re not so different from you and me. In other ways, you definitely don’t want to emulate what they do!

The average income is around $45,000. THAT is roughly what the average NBA player SPENDS in a month! But then, the rookie entry salary in the league is $4.7 million. But let’s see what they spend that half a million on every year:

11% goes to clothing and shoes – their biggest trackable expense category.

9% is automotive – even though most of them likely get a free vehicle from a dealership in return for some endorsements.

8% is travel – after all, it’s a long off season, and they like to travel in style, and to 5-star hotels and resorts, which isn’t cheap.

Restaurants eat up 7% of their spending. That’s around $35,000 a year, which will get you some great meals, even if you’re picking up the tab for others in your group.

Sadly and surprisingly, 7% is also what they donate to charities. That’s kind of a puny percentage for an income of more than five million bucks if you ask me.

5% goes to a category called service charges and fees. It’s kind of obvious here that over $25,000 of fees means they’re really not very financially literate, and certainly don’t shop around at all.

The one place they do seem to want to save money is shopping at Walmart. Yes, the average NBA player shops there, too – to the tune of over $45,900 a year!

But here’s where you want to be very different than an NBA player: Over 78% of them go bankrupt within two years of retiring from pro basketball. We spend what we make – that is: we spend to the amount of our pay. That’s not a good idea for us middle class earners or millionaire income athletes.

Yes, there are stories of pro athletes who are incredibly great savers and literally don’t spend a dime of their salary. But for every one of them, there are dozens who crash and burn. Vin Baker made over $100 million in his career and last month started a job at Starbucks to support his four kids. For millionaires and ourselves: Spend what you want, but only AFTER at least 10% comes right off your check, or out of your account, to pay yourself first.

Lifestyles of the Formerly Rich and Famous

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Getting ahead financially really isn’t complex, or hard to do. We just need to do one thing: Spend less than we make. Yes, it really is that simple to say, but often that hard to do. We just get addicted to our “stuff,” and our lifestyle. Yet, any drop in income has us in denial and clinging to our former spending habits, instead of making some basic adjustments. But with less income, that lifestyle now has to be financed with debt. And like blowing up a balloon, there will always be an end to that shell game.

The rich and famous are even more likely to go through this denial phase. But denial only goes for a short period of time. And that time-frame is often shorter for the rich, since they choose (yes, it’s a choice) to have monthly expense which are a whole lot more than for the rest of us.

In the entertainment field, Zsa Za Gabor, Marvin Gaye, Mick Fleetwood and Don Johnson of Miami Vice fame have all been through a bankruptcy. As has Sopranos actress Lorraine Bracco, M.A.S.H. star Gary Burghoff, filmmaker Francis Ford Coppola, and singers Natalie Cole, Elton John, and Toni Braxton. The most famous bankruptcy likely still to come will be Michael Jackson. Somehow an estimated $500 to $800 million net worth in the 1980s is all spent, and then some. Jackson is holding on by his fingernails, with hedge fund financing and multiple mortgages on his Neverland ranch and his Beatles music catalogue.

But this common, often self-imposed problem, does not just apply to the rich. With bankruptcies up 16% year over last year, and the current recession, more and more people are reaching the danger level.

The National Post last week had a story of a drywaller whose income shrunk drastically last summer. Yet, for more than six months, he stayed in denial by using credit cards to maintain his lifestyle, and to make payment on his “baby,” as he called his Honda Acura. That may work for a while, but by January he had filed for bankruptcy.

Optimism is a great mindset, but when it comes to our debt and finances, staying realistic is always a much better frame of mind. And don’t kid yourself. Filing for bankruptcy is neither easy nor fun. Along with a death in the family or perhaps a divorce, bankruptcy will always rate amongst the top five traumatic experiences of a lifetime.

Going Further Into Debt: Up, Up and Away

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The recent headline in the newspaper was pretty direct: “Canadians’ overspending is escalating.” As though we haven’t talked about that for a long time now.

This was a study by Mackenzie Investments that reinforced what you’ve have heard me say for some time: Try saving a little and stop impulse spending with money we don’t have. In this case, it’s pretty much a generational divide, breaking down the over and under 50 age group. In the over 50 age group, only five percent are chronic over-spenders, while those under age 34 are the biggest debtors at 29%.

The key findings are a lot of common sense. It’s just that common sense is so uncommon these days. Factors to overspending include an almost non-existent social stigma to being in debt and vast amounts of available credit. Just sign here, quick approvals, and introductory rates designed to make you feel like you’re saving today, just to get the rug pulled out from under you later.

The online survey actually had 53% of people under age 50 admitting they use their credit cards to buy stuff when they don’t have enough money. THAT is impulse purchases and not having a clear understanding between needs and wants.
What was even more eye opening was the admission by almost half the respondents that they have purchased something without any consideration of the long term implications of the debt, and costs to their personal finances.

And things will get worse – way worse. Remember that I’ve been saying for two years what happens in the U.S. will happen here in Canada. 90% of Canadians now have more debt than they did just five years ago, and last year we barely reached seven percent of our RRSP contribution room.

Singles are twice as likely to be over-spenders than married people, which stands to reason. But what was an interesting insight is that women are also twice as likely to be over-spenders, than men!

The best line of this article from Canwest News had to be the sub-title: “We don’t deny ourselves much – except for a dose of reality.”

Getting Financially Fit For 2008

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The good news: It’s a new year! The chance to start over, to resolve to do better, to do more, or in the case of your payments and all that interest – to do a lot less.

The bad news? It’s likely that you’re already broke! How is that? Well, we spend more than 120% of our disposable income, half of us have no savings and almost 70% of us don’t make RRSP contributions. Why? Because every dollar we earn goes to make a long list of lenders really really rich, and there’s simply nothing left at the end of the month.

So when it comes to making some commitments about our debt, credit and all those bills, perhaps we should think small to make sure we set ourselves up for a win, and not a sure-fire let-down. But small doesn’t mean pointless, small just means some little steps you can actually keep, that’ll pay off big for 2008.

If you need additional motivation, remember that every $100 you don’t pay out making lenders rich is really about $150 or more. Why? Because you earn gross income, then all the deductions and tax come off your pay, and it’s only the net income that you have left over to pay bills.

So here are some more points, continuing our list from last week:

6. Set yourself a credit limit. If you won’t leave your credit cards at home for at least 90 days – pick a dollar figure below which you’ll pay by debit card or cash. Maybe $20 or $30 bucks – that’s it. But anything below that, you’ll spend with real money, instead of running up debts. It’ll become a great habit and will cut down your credit card balance in huge ways. After all, look at your statement. Almost all the charges are for pretty mickey mouse amounts that add up in huge debts – twenty bucks at a time.

7. Destroy your line of credit cheques and unhook the account from your bank card. Your line of credit was set up for emergencies and not for monthly bills. It’s too tempting to use the account if there are cheques around. Because when you use a line of credit for a monthly bill – the next bill will be here in thirty days, while you’re paying the last one off with interest over a year or more!

8. Close your overdraft. I know – it’s like being hooked on drugs. It’s so convenient and always there and you can’t live without it any more. Well, that’s what the banks were counting on, and where they make a huge amount of their profit. But it’s killing you. Just a $1,000 overdraft will cost you between $200 and $300 in interest and fees. It’s a one-time pain to cancel the overdraft, but it’s worth it.

9. Change to a credit card that isn’t a credit card. We’re now averaging three credit cards each, and it’s rising, while card issuers keep upping our limit to make sure we have much less chances of paying them off every month. With no grace period and over-limit charges, it’s a recipe for spending a ton of money needlessly. Get yourself an American Express Green card. That’s not a credit card – it’s a charge card. At the end of the month, there are no payments to make – the balance has to be paid off in full. Oh sure, the first month that’ll be painful. But after that, you’ll watch what you’re charging pretty carefully, and you’ll never ever have a credit card balance again. What’s that kind of financial freedom worth?

10. Contact the credit bureau to get a free copy of your credit report. Almost all lenders now base your interest rate on your credit report and its credit score. So you have to know what’s in there and whether there are errors on your file. The how-to is in the It’s Your Money book and will take under five minutes. Less than 30% of us ever look at our file and that can easily cost us two or three percent on everything we borrow. After all, knowing is always better than hoping.

11. Keep your car for another year. If you believe a cool car is a status symbol and a must-have, you’re doomed to be in debt for decades to come. Not to mention that almost 50% of people trade their vehicle and STILL owe more than it’s worth – that’s financial suicide when you take your extra debt and just roll it over to the next new car with interest for another five or six years. It makes things worse – much worse. And your car will never increase in value. So the goal should be to drive a reliable vehicle that doesn’t have payments with it which are killing your chances to save or get ahead financially. Imagine a couple of years without car payments and the huge financial advantage you’ll create for yourself. And remember: Those $400 car payments are actually more than $600 in gross earnings. If you can’t get a $600 raise this month – here’s a way to get it – you’ll just be giving it to yourself!