Since the death of Michael Jackson last week, I have been interested in the many articles that describe the tangled web that was his financial life. The more I read, the more I realize that the age old financial principles apply to everyone, rich or poor.
Michael Jackson was one of the most prolific earners in the history of entertainment. He sold 61 million albums in the U.S. and had a decade-long attraction open at Walt Disney theme parks. The New York Times reports that he earned about $700 million as a performer and songwriter from the 1980’s on.
As if that is not a lot of money already, his most valuable asset was Beatles' music -- in 1985 he paid $47.5 million for ATV Music, which owned the copyright to 259 songs written by John Lennon and Paul McCartney. According to some estimates, he brought in an additional $300 million in record royalty fees from that deal.
Earning however, is only half of the equation. As Notorious B.I.G. declared, “Mo money, mo problems.”
In 1988, he paid $14.6 million for Neverland Ranch, a 2,500-acre property in Santa Barbara, CA. This “ranch” was complete with a theme park, a steam railway, lakes, a cinema and a zoo with giraffes, lions and tigers. At its peak, it was valued at over $100 million and he had as many as 150 employees running it, costing millions of dollars each year to maintain it.
A couple of years ago he nearly defaulted on the $24.5 million dollar loan tied to Neverland. Thomas Barrack, chairman and CEO of Los Angeles-based real estate investment firm Colony Capital LLC, agreed to bail out Jackson and set up a joint venture with him to take ownership of Neverland, yielding a $23 million loan.
“Michael never thought his personal finances were out of control,” said Alvin Malnik, a former advisor to Michael Jackson and godfather of Prince Michael II, the youngest of his three children. “He never kept track of what he was spending. He would indiscriminately charter jets. He would buy paintings for $1.5 million. You couldn’t do that every other week and expect your books to balance.”
As his income peaked out, his spending did not, forcing him to borrow money to finance his spending habits. In 2001, he used his half of the ATV Music assets as collateral to secure $200 million in loans from Bank of America.
The problem was that his appetite for spending exceeded his cash inflows -- to the tune of $20 million to $30 million each year. Right up to his death, he continued to lead a relatively lavish lifestyle, renting a property for a reported $100,000 a month in Los Angeles.
Whether you make hundreds of millions or tens of thousands, the lessons remain the same:
- Know how much you earn
- Know how much you spend
- Spend less than you earn
- Don’t borrow money to finance your lifestyle
In watching some NBA playoffs the last couple of weeks, a line in a commercial caught my eye. In this commercial for Dos Equis, they are trying to portray an old(er) man as the most "Interesting Man in the World". He is so cool that "he once had an awkward experience, just to know what it felt like." That is not the line that grabbed my attention but helps you understand the image they were creating. They go on to tell you as he is jousting with someone that "he lives vicariously through himself." Sounds ridiculous at first.
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