Kim and I are back on the road! After wintering in Savannah, Georgia, we packed the motorhome this week and began the six-month trek home to Portland. We’ll start by winding our way through the southern states.

Our first stop is beautiful Asheville in the mountains of western North Carolina. The views here are stunning, even in the rain and even with leafless trees. (Plus there’s lots of great beer!) Yesterday, we toured the Biltmore Estate, the largest home in the U.S. This 250-room chateau contains 179,000 square feet of floor space — including 35 bedrooms, 43 bathrooms, and 65 fireplaces — and originally sat on 195 square miles of land. (Today, the estate “only” contains 8000 acres.)

“This feels like Downton Abbey but in North Carolina,” I said as we walked the endless halls. Just as Downton Abbey documented the excesses of British upper class, so too the Biltmore sometimes feels like an example of how rich Americans indulged in decadence.

George Washington Vanderbilt II, the man who built Biltmore, was a member of one of the country’s wealthiest families. His grandfather, Cornelius Vanderbilt, was born poor in 1794, but by the time he died in 1877 he had become one of the richest men in the world. During his lifetime, he built a fortune first from steamships and then as a prominent railroad tycoon.

By family standards, grandson George didn’t have a lot of money. He inherited about $7 million, and drew income from a $5 million trust fund. He decided to use the bulk of his fortune to build a huge house high in the Appalachians. Work on the Biltmore Estate began in 1889, when George was 26 years old. Six years and $5 million later, he moved into his palace. (That $5 million would be roughly $90 million in today’s dollars.)

Strolling the grounds of the Biltmore Estate got me thinking about the stories we hear of wealthy people who squander their riches. How and why do they do this? Are there lessons from their stories that you and I can put to use?

We hear all the time about the “lifestyles of the rich and famous”. Today, on April 1st, let’s look at some lifestyles of the rich and foolish.

Lifestyles of the Rich and Foolish

There are so many stories of athletes and entertainers who have blown big fortunes that it’s tough to know where to start. Who should we pick on first? Since I’ve never been a fan of Nicolas Cage — and since he seems to be especially bad with money — let’s use him an example.

Over a period of fifteen years, Cage earned more than $150 million. He blew through that money buying things like:

  • Fifteen homes, including an $8 million English castle that he never stayed in once.
  • A private island.
  • Four luxury yachts.
  • A fleet of exotic cars, including a Lamborghini that used to belong to the Shah of Iran.
  • A dinosaur skull he won after a bidding contest with Leonardo DiCaprio.
  • A private jet.

It’s not fair to characterize Cage as “broke” — he’s still a bankable movie star — but his net worth is reportedly only about $18 million. (That’s like someone with an average income having a net worth of roughly $25,000.) He could be worth ten times as much but his foolish financial habits have caused him woe.

The IRS alleges that Cage owes millions of dollars in back taxes. He’s being sued by multiple companies for failing to repay loans. His business manager says that he’s tried to warn Cage that his lifestyle exceeds his means, but the actor won’t listen.

Cage is but one of many celebrities who have done dumb things with money. Other prominent examples include:

  • MC Hammer sold the rights to his songs to raise money after being bankrupted by his lavish lifestyle. Hammer earned more than $33 million in the early nineties, but spent the money on a $12 million mansion (with gold-plated gates), a fleet of seventeen vehicles, two helicopters, and extravagant parties. [sourcesource]
  • Actress Kim Basinger paid $20 million to buy the town of Braselton, Georgia in 1989. When Basinger filed for bankruptcy just four years later, she was forced to sell the town. [source]
  • On the night of 01 February 1976, Elvis Presley decided he wanted a Fool’s Gold Loaf, a special sandwich made of hollowed bread, a jar of peanut butter, a jar of jelly, and a pound of bacon. He and his entourage flew from Memphis to Denver. The group ate their sandwiches and then flew home. Price: $50,000 – $60,000. [source]
  • Even authors get in on the act. Writer Mark Twain made tons of money through his work, but he lost much of it to bad investments, mostly in new inventions: a bed clamp for infants, a new type of steam engine, and a machine designed to engrave printing plates. Twain was a sucker for get rich quick schemes. [sourcesource]

When it comes to frittering way fortunes, it’s hard to compete with sports superstars. In a 2009 Sports Illustrated article about how and why athletes go broke, Pablo S. Torre wrote that after two years of retirement, “78% of former NFL players have gone bankrupt or are under financial stress.” Within five years of retirement, roughly 60% of former NBA players are in similar positions.

Some examples:

  • Boxer Mike Tyson earned over $300 million in his professional career. He lost it all, spending the money on cars, jewels, pet tigers, and more. He eventually filed for bankruptcy. [source]
  • When Yoenis Cespedes signed a new $75 million contract with the New York Mets, he drove a new vehicle each day during the first week of training camp, including a Lamborghini Aventador ($397,000) and an Alfa Romeo 8C Competizione ($299,000). [source]
  • Basketballer Vin Baker earned $100 million during his career. He’s now worth $500,000. He manages a Starbucks store in a small town in Rhode Island. (To be fair, Baker sees to be turning his life around, which is awesome.) [source]
  • Hall-of-fame pitcher Curt Schilling earned $112 million during 20 years in the big leagues. It wasn’t enough to keep up with his spending. Plus he lost $50 million through the collapse of a company he owned. In 2013, he held a “fire sale” to avoid bankruptcy.

How NOT to Waste a Windfall

When you receive a windfall, whether it’s a tax refund, an inheritance, a gift, or from any other source, it’s like you’ve been given a second chance. Although you may have made money mistakes in the past, you now have a chance to fix those mistakes (or some of them, anyhow) and start down the path of smart money management.

It can be tempting to spend your windfall on toys, trips, and other things that you “deserve,” but doing so will leave you in the same place you were before you received the windfall. And if that place was chained to debt, you’ll be just as unhappy as you’ve always been.

If you receive a chunk of cash, I recommend that you:

  • Keep five percent to treat yourself and your family. Let’s be realistic. If you receive $1,000 or $10,000 or $100,000 unexpectedly, you’re going to want to spend some of it. No problem. But don’t spend all of it. I used to recommend spending one percent of a windfall on yourself, but from talking to people, that’s not enough. Now I suggest spending five percent on fun. That means $50 of a $1,000 windfall, $500 of a $10,000 windfall, or $5,000 of a $100,000 windfall.
  • Pay any taxes due. Depending on the source of your money, you might owe taxes on it at the end of the year. If you forget this fact and spend the money, you can end up in a bind when the taxes come due. Consult a tax professional. If needed, set aside enough to pay your taxes before you do anything else.
  • Pay off debt. Doing so will generally provide the greatest possible return on your investment (a 20 percent return if your credit cards charge you 20 percent). It’ll also free up cash flow; if you pay off a card with a $50 minimum monthly payment, that’s $50 extra you’ll have available each month. Most of all, repaying debt will relieve the psychological weight you’ve been carrying for so long.
  • Fix the things that are broken. After you’ve eliminated any existing debt, use your windfall to repair whatever is broken in your life. Start with your own health. If you’ve been putting off a trip to the dentist or a medical procedure, take care of it. Do the same for your family. Next, fix your car or the roof or the sidewalk. Use this opportunity to patch up the things you’ve been putting off.
  • Deposit the rest of the money in a safe account. It can be tempting to spend the rest of your windfall on a new motorcycle or new furniture or new house. Don’t. After attending to your immediate needs, deposit the remaining money in a new savings account separate from the rest of your bank accounts — and then leave this money alone.

Here are other superstars who act as money bosses:

  • During his 12-year career in the NBA, Junior Bridgeman never earned more than $350,000. Unlike most players, however, he planned ahead. He recognized his basketball income would eventually vanish. He bought a Wendy’s fast-food franchise and learned the business inside-out. He became a hands-on owner. He expanded from one store to three to six — and then to a small empire. Today, twenty-five years after retirement, Bridgeman owns more than 160 Wendy’s restaurants and 120 Chili’s franchises. His company employs 11,000 people and generates over half a billion in revenue every year. His personal net worth tops $400 million. [source]
  • Patriots tight end Rob Gronkowski is a shining example of how to handle sudden wealth correctly. To date, the 26-year-old has earned over $18 million for playing on the field — and hasn’t spent any of it. Here are his own words: “To this day, I still haven’t touched one dime of my signing bonus or NFL contract money. I live off my marketing money and haven’t blown it on any big-money expensive cars, expensive jewelry or tattoos and still wear my favorite pair of jeans from high school.” [source]
  • Seattle Seahawks running back Marshawn Lynch has a similar story. During his nine-year NFL career, Lynch collected roughly $50 million from his contract. Reportedly, he hasn’t spent a penny of that money. Instead, he’s been cautious to live only off his endorsement earnings. Whether this is true or not, Lynch is known to be a good example to his teammates, helping them with their 401(k)s and other financial issues. [source]

Sometimes superstars who have been poor with money have a flash of insight and they’re able to turn things around. Former NFL player Phillip Buchanon is a perfect example. After watching ESPN’s Broke, he realized he was headed for trouble. He mended his ways and started managing his money wisely. Now he’s written a book with advice for other folks who are fortunate enough to encounter a windfall. [source]

When people make a lot of money, they’re able to spend a lot of money. Sometimes the super-rich canafford to build a place like the Biltmore Estate. The problem isn’t a single extravagant purchase, but a lavish lifestyle in which they spend more than they earn. Real wealth isn’t about earning money — it’s about keeping money.

This is a rewrite of article by J.D.Roth. I enjoyed it so much that I just had to share on my blog!!