Myth Of The Week: Millionaires Don't Have To Worry About Money

By Tara Struyk | June 26, 2009 AAA

Michael Jackson didn't come to be known as the "King of Pop" for nothing.
He often hit the stage resplendent in gold and rhinestones, his lifestyle was notoriously lavish and he ruled a kingdom of adoring disciples: pop music fans, who bought more than 750 million records worldwide and flocked in the millions to sold-out concerts. Such was Jackson's influence, that even though he hadn't performed since 1997 or released a record since 2001, he was able to command $85 million in ticket sales for a sold-out tour he would never perform.

But despite the fact that Jackson's talent and shrewd business sense allowed him to rake in millions over his lifetime, when he died of a heart attack Thursday, he was reportedly more than $500 million in debt.

Nine-Figure Fortune: A Financial Thriller
To those of more modest means, it seems impossible that someone who earned more than $500 million in royalties alone should run out of money. In fact, many people assume that the super-rich don't have to worry about money at all. Nine-figure fortunes are so far beyond most peoples' own incomes, that it's hard for them to even imagine the bottom of such a large pot of gold.

This misconception is apparent in lottery winners, one-third of whom spend their way to the poor-house in a matter of years, according to the Certified Financial Planners Board. This is a result of poor money management – and the misconception that budgeting and financial planning does not apply to millionaires. (For more on budgeting, see The Beauty of Budgeting.)

Michael Jackson's king-sized financial problems have dethroned this myth.

Moonwalking the Hedonic Treadmill
So how does a mega-millionaire rack up such massive debt? It occurs for the same reason as it does for those with more average earnings: expenses exceed income.

Although hundreds of millions of dollars may seem like bottomless wealth, poor money management can lead to the depletion of even the most stately sums. This is because people – whether famous or not - generally fall victim to what's known as the lifestyle creep; their desires rise right along with their incomes. So, their lifestyles rise to meet – or in Jackson's case, surpass – their incomes. (For more on this phenomenon, read More Money, More Debt.)

According to a forensic accountant who testified in Jackson's 2005 trial for molestation charges, Jackson was suffering an "ongoing cash crisis", and was spending $20 million to $30 million more than the estimated $19 million he earned through royalties each year. While Jackson's expenses may have been extravagant, his behavior is shockingly average: the U.S. Commerce Department reported in 2007 that Americans, on average, were spending more than they had earned. Although the recent credit crisis has recently reversed this trend somewhat, it is clear that in good times, people tend to jump on the hedonic treadmill and keep on running.

Bad Spending Habits
Take Michael Jackson's 2,600 acre Neverland Ranch estate. The property was Jackson's personal kingdom, boasting a fairground, a 50-seat cinema, a zoo and an assessed value of more than $17 million in 2006. It sounds extravagant, but at least in terms of paying the mortgage, it's actually to scale with a $19 million income.

But Jackson was also described as collector and shopper, who reportedly spent $4 million on a single Las Vegas shopping spree in 2003. Ten-foot glass urns may not be on everyone's shopping list, but for the super-rich, the scale of expenses expands along with income, and there is no shortage of extravagantly expensive luxury items to cater to people with ultra-thick pocketbooks and an exclusive limit-free credit card.

The truth is, money is a finite resource. By definition, this means that no matter how much you have, it can never be unlimited. And as long as there are millionaires, there will be no shortage of ever-grander (and ever more expensive) luxury products. Good money management applies to all income brackets. Michael Jackson carried an air of aristocracy even among the most elite celebrities, but although he lived like a king, he died in debt.

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