Michael Jackson's Finances Were THE Thriller

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:

1. Know how much you earn
2. Know how much you spend
3. Spend less than you earn
4. Don’t borrow money to finance your lifestyle

He Lives Vicariously Through Himself

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.

As I have thought about it and reflected on it, I really like it.

Too many in our society are living vicariously through someone else. They do it through Desperate Housewives, American Idol, NBA Basketball (my weakness), US Weekly, romance novels, Guitar Hero and blogs. The list goes on. I speculate that they do it because it is more interesting than their own life and it takes great focus and emotional energy to create a good life for yourself.

The most successful people I know and admire actually do live vicariously through themselves. They do it by spending their hours becoming their best selves. This could be in their career, with their spouse and children, competing physically, and by serving those around them in need.

The very act of watching other people live their "good life" robs us of the precious time we need to create our own. I have begun the process of observing those around me who are successful, interesting and happy to see what percentage of time they spend living vicariously through others and how much through themselves. So far, it is pretty obvious why some peoples lives are far more interesting, fulfilling and more enjoyable to watch.

"Dost thou love life? Then do not squander time, for that is the stuff life is made of." - Benjamin Franklin

Are You Paying or Collecting?

My brother had a very interesting observation the other day. We were having a conversation about building wealth and he said that one of the best gages is to understand your "Interest Collected vs. Interest Paid ratio" (ICIP Ratio...I just made that up). The more I thought about it the more I completely agree that it is one of the best ways of knowing how financially healthy you really are.

Let's compare two different people:

Mr. DooDad is a good earner, 125k year, but really enjoys his toys. As a matter of fact, he has yet to see a toy he does not like. Because of this "DooDad" addiction, his ICIP ratio looks like this:

House $1500/mo interest

Car 1 $250/mo interest

Car 2 $175/mo interest

Boat $475/mo interest

Credit Card $225/mo interest

Interest Paid $2625/mo interest

401k $125/mo

Money Market $12/mo

Interest Collected $137/mo

Mr. Doodad collects a measly $137 a month in interest and pays $2625 a month interest. So his ICIP ratio is 1:19.

Mrs. Wisdom is also a good earner, 100k year, but she has used her cash to buy assets that she can collect interest on. She has been wiser with her money, buying her cars in cash and never using a credit card. Her ICIP ratio looks like this:

House $1000/mo interest

Rental House1 $750/mo interest

Rental House2 $1100/mo interest

Interest Paid $2850/mo interest

Rental House1 $1400/mo interest

Rental House2 $1750/mo interest

401k $1500/mo interest

Roth IRA $750/mo interest

Indexed Fund $2500/mo interest

Money Market $150/mo interest

Interest Collected $8050/mo interest

Mrs. Wisdom collects a whopping $8050 a month in interest and only pays out $2850 a month so her ICIP ratio is 3:1. Over time, as her renters pay off her rental house mortgages, her ratio will climb to 8:1.

Spend 10 minutes and figure out your ICIP ratio. Are you closer to a Mr. Doodad or a Mrs. Wisdom? How long will it take you to retire by following Mr. Doodad's plan? The rhetorical question's answer is probably forever!

Get Compound Interest on Your Side

There is a reason that Albert Einstein declared, “The most powerful force in the universe is compound interest”.

Compound Interest can be your fiercest enemy or your most powerful ally.

Compound interest is the concept of adding accumulated interest back to the principal, so that interest is earned on interest from that moment on. The act of declaring interest to be principal is called compounding (i.e., interest is compounded). A loan, for example, may have its interest compounded every month: in this case, a loan with $100 principal and 1% interest per month would have a balance of $101 at the end of the first month.

Here are some examples of the power of compounding:

Credit Card Balance of $15,000 at 29% interest

-          $4350 a year in interest

-          If you never made a payment, would climb to $683,812 in 15 yrs

Latte for $3.50 for five days a week

-          If saved money instead and invested at 6%

-          In 10 years you would have $12,000

-          In 15 years you would have $21,189

Car payment of $300 month from age 22-52

-          If paid for car in cash and saved and invested money instead at 6%

-          In 30 years you would have $284,609

401k at work investing 10% of your $50,000 annual salary

-          If invested with a 6% return

-          Over a career of 30 years you would have $395,290

Keep your first house as a rental property

-          original purchase price of $200,000

-          4% home price (national average since 1942)

-          In 30 years the value would be $648,679

-          …and the mortgage would be paid off now

Rental Income on your first house

-          $1200 when you first rent it out at age 30

-          Assuming a 3% annual increase in rental rates

-          At age 60, rents would now be $2912

-          …and the mortgage would be paid off now

Compound interest is a double edged sword. Great to have on your side and miserable to have working against you.

Where can you swing the momentum of compound interest on your side to create a better future for yourself and your family?

Where Does the Time Go? I Know

Ever lay your head down at night and ask yourself, "Where does the time go?" I have the answer.

A recent report by the Council of Research Excellence revealed an alarming statistic: Adults are exposed to screens - TV's, computers, cellphones, etc. - for about 8.5 hours on any given day. It goes on to say that TV is the dominant medium.

Ball State did a study that found the average American adult was exposed to five hours and nine minutes of live TV each day. 

Do the math.  That is 1879 hours a year or over 46 (forty hour) work weeks per year!

Imagine the impact in a lifetime if you would invest that time into your relationship with your spouse, spending quality time with your kids, reviewing and planning your finances, investing time and energy into your career, working out.

How much more could you get out of life if you made a better investment choice of your time?

You may be thinking, I don't watch 5 hours a of TV a day! I challenge you to track it for a week. Add up the hours, multiply it out over a year and determine if there is a priority change that could lead you down a more prosperous path.

Put Your Money Where Your Mouth Is

Determined to reach my goals in multiple areas of my life, I decided account-ability would provide me the kick I needed. I talked to a good friend and my brother to hold me accountable in different areas.

In the business part of life I committed to being in the office by 7am everyday, planning my night the day before so I have clear, prioritized direction, and lastly I committed to workout everyday this week. I chose a consequence that would be painful enough to get the action I needed. My love language is the Benjamin Franklin. I owe a $100 bill for everyday I do not meet the three commitments I made. 

As you might guess, I am 3 for 3 since our meeting!

My brother and I are meeting in Vegas in 45 days with our families for some sun and pool time. We committed last night to a "fitness duel-off". We will determine the winner by a combination of things like measurements, percentage improvement, and who looks best with their shirt off by the pool. This means I have to lay off of my straight Coca-Cola diet and drink more water and choose healthy meal choices. It means that I will need to really hit it hard in the gym and not just assume that by being around others who are fit and sweaty that it will rub off on me.

At times it seems pathetic that I need to play these games to get where I want to go in life, but I have learned through experience that I am not able to push myself hard enough on my own.

Stephen Covey said it best when he said, "Accountability breeds responsibility".

Is there somewhere in your life that you could work with to push eachother to be your best self?

Abe Lincoln's Formula for Prosperity

So much wisdom in this piece. These are great principles to live by when building a company, a family, or a community.

• thrift is the precursor to prosperity
• we all need to work together to be successful
• cannot spend more than you earn
• initiative and independence build character and courage
• teach a man to fish and he will fish for a life time

As I prepare for the birth of my first child in September, these are the lessons that must be taught to provide them any chance of success. Imagine a child raised on these five principles, how different would our world be if we reverted back to good old fashioned common sense.

 

Lessons From the Men's Urinal

I recently ran across an experiment conducted in the men’s room at Schiphol Airport in Amsterdam. Authorities had etched the image of a black housefly into each urinal. As women can attest to and most men would sheepishly admit, men don’t pay much attention to where they aim, which can create a mess. However, if they have a target, something to aim for, their attention and therefore accuracy are dramatically increased. According to the man who came up with the idea, it works wonders. “It improves the aim,” says Aad Kieboom. “If a man sees a fly, he aims at it.” Kieboom, an economist, directs Schiphol’s building expansion. His staff conducted the fly-in-urinal trials and found that etchings reduce spillage by 80 percent.

The results are shocking when we have something to aim at. Prior to the target, the men didn’t even pay attention. With a target, attention increased and results improved by 80 percent. Doesn’t this same lesson apply in all areas of our life?

What if in our careers, we had an income target? Not the one the boss sets for you, but one that matches your prerogative and ambition? Wouldn’t your attention increase? You would have a better filter in which to run your actions through, quickly realizing that much of what we do in a day will not increase income. This income target, etched in your mind would surely increase your aim, focus and results.

What if in our finances, we had a short-term, mid-term and long-term target to aim at? Wouldn’t you pay more attention to what you were spending your money on? If there was a way to keep those targets in mind every time you went to make a purchase, don’t you think you would increase your results by 80 percent? 8 out of every 10 times you would be able to make a more grounded decision on need versus want.

What are you aiming for?

“Most people aim for nothing and hit it with amazing accuracy.” – Joe Niego

It Is Not the Critic That Counts

"It is not the critic who counts: not the man who points out how the strong man stumbles or where the doer of deeds could have done better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood, who strives valiantly, who errs and comes up short again and again, because there is no effort without error or shortcoming, but who knows the great enthusiasms, the great devotions, who spends himself for a worthy cause; who, at the best, knows, in the end, the triumph of high achievement, and who, at the worst, if he fails, at least he fails while daring greatly, so that his place shall never be with those cold and timid souls who knew neither victory nor defeat." - Theodore Roosevelt, Paris - April 23, 1910

I have this quote hanging on the wall of my office and hope you find it as inspiring as I do.

How Are You Dealing With Change?

This recession underscores the harsh consequences of the failure to understand and respect the fundamental truths of the marketplace.

Two of these truths are:

1. real estate and stock markets are cyclical (they go up and down)
2. the marketplace is constantly changing due to technology, demographics, economics and politics

As I look around at different people, those who are the most afraid are those who are most lacking knowledge. They don’t understand the drift of the marketplace. They are completely dependent upon their employer for their ability to eat. They have abdicated the thinking and planning of their future to their boss. They have taken competitive learning out of their life since college and are “hopeful” that everything will work out or return to how it was.

"Success depends upon previous preparation, and without such preparation there is sure to be failure." Confucius

Now is the time to prepare for the future. Life is not going to get easier, we need to learn to make it easier. We need to take the responsibility upon ourselves to learn and think and strategize and act powerfully. We cannot rely on someone else to figure it out and then “hope” that we fit into the plan.

The world will never be the same and as far as I am concerned that is great news. It is the change that creates new opportunity and the person who is prepared will reap the rewards.

“Luck favors the mind that is prepared.” - Louis Pasteur

Here are some sources for learning:

The Aji Network – I have been in courses with them for 3 years and it has completely changed the way I think - http://www.theajinetwork.com/index.php

TED.com – source for tons of educational videos, all free - http://www.ted.com/

MIT OpenCourseWare – MIT has made available all of their curriculum for free - http://ocw.mit.edu/OcwWeb/web/home/home/index.htm

Insightful Magazines – most are fee now online – Fast Company, Inc, The Economist, Business Week,

Read Books – ask those around you that are successful what they are reading – libraries are still free!

Money Can’t Buy You Happiness…or Can It?

“Money can’t buy you happiness…but it can buy you a Waverunner,” said the comedian to start his routine.

I couldn’t say it better myself. Last night, my wife and I had a conversation on this very topic. Fortunately, we both agree that money cannot buy you happiness. I spent 2 years in Brazil on a mission for my Church and experienced poverty beyond comprehension for this day and age. What shocked me was the observation of the families who lived in it, often times were happier than the wealthy American families that I knew back home. To prove I was not in some spiritual fantasy land, I certainly experienced families in the depths of poverty that were absolutely miserable and unhappy.

The lesson I learned is that the two are disconnected. Happiness and pleasure have been used interchangeably in the English language and I think they are very different. Pleasure is short term, and I know first hand that money can buy you pleasure. What I have yet to see is the case where money bought long term happiness.

What money can do is enhance an already happy existence. Yesterday I talked to one family who went camping over spring break. Now, I happen to know camping was the recreation of choice because it is virtually free. By the way it was 45 degrees and raining! I know of another family that went to Mexico for the week and stayed in a beach front villa. All things being equal, I’ll take the Mexican trip to paradise please.

That leaves us all with some thinking and planning to do. First and most important, what is happiness? How do I achieve it today, tomorrow and twenty years from now? Secondly, what is my ideal life and how much does that cost? How will I fund it?

Just Doesn't Make Sense

Our current bailout strategy doesn't make sense to me, but I didn’t think I was intelligent enough to be the one pointing it out. Well I found someone who is smart enough and eloquent enough to explain why this fundamentally cannot work.

Legendary global investor and chairman of Singapore- based Rogers Holdings, Jim Rogers said the US risks sending the world into a depression as its bailouts of failed companies rob healthy businesses of capital.

Speaking to Bloomberg TV today , Jim Rogers said: “The U.S. is taking assets from competent people and giving them to incompetent people,” said Rogers. “That’s bad economics,” he added.

Rogers argued that American International Group should have been allowed to descend into bankruptcy, and he feels the same about similarly situated businesses. It just doesn't make sense to divert money from healthy, prudently-managed companies and plow it into debt-burdened companies that are being run badly at best and criminally at worst.

Rogers has spent a career being one step ahead of mainstream investment thinking.  Amongst his many accomplishments, Rogers was co-founder with George Soros of Quantum Fund. During his ten years with the fund, the portfolio gained more than 4,000%, while the S&P rose less than 50%

Thank Your Lucky Stars It Ain't 1950

I ran across a great post by Todd Ballenger of Borrow Smart Retire Rich. His post on Lifestyle Inflation today is very insightful. It breaks down how much we have to work at the average wage to buy typical household goods and compared today’s hours versus 1950’s. Pretty fascinating, check out the chart on the blog. Here is a little of what he said:

“Isn't it amazing, that we feel like we are working so hard for less.  Yet, we've said before that the richest man in the world couldn't afford air conditioning.  Who was that?  It was Getty, and air conditioning wasn't invented in his life time.  We take it for granted now don't we?  It would take us almost 8 months of work to afford the same material goods in 1950, versus less than 2 months today.  You would think we would be awash in 'free time', but our lifestyle inflates to absorb the new efficiencies.”

When things are not going the way we like, it is easy to get caught up in the trap of focusing on what isn’t going well instead of looking for what is going well. We really live at an amazing time in the world’s history and have so much to be grateful for.

“Happiness cannot be traveled to, owned, earned, worn or consumed. Happiness is the spiritual experience of living every minute with love, grace and gratitude.” – Dennis Waitley

“The hardest arithmetic to master is that which enables us to count our blessings.” – Eric Hoffer

Just Give Me the Friggin' Magic Bullet

Over the last few weeks I have been listening to the 4-Hour Workweek by Tim Ferris during my workouts. (In a business course I am in they call that a full move, workout and learn, instead of compartmentalizing the two). I have really enjoyed his perspective on work, not as a “consume your life” activity, but as a “fuel for your life” activity.

While reading the book he pitches a product that he sells called Brain Quicken. It is a speed reading course that he raves about. Disregarding the conflict of interest, it is something I have been intrigued by for some time.

I have a stack of books on my nightstand that I cannot get through quick enough. Feels like too much to learn and too little time…so that led me to the investigation of speed reading. I researched some books and sites, one of the better appears to be mother of speed reading, Evelyn Wood. Lastly, I fortunatlely consulted with a friend who is an avid reader and relentless learner. He is the CEO of DotNetNuke and possibly the best thinker I have ever associated with.

He also was intrigued by the concept, did some research of his own, sent me the link to StraightDope that explains " you get the text's general drift while remaining largely innocent of the details, sometimes embarrassingly so." 

More importantly, he made an observation that I should have made myself, “We need good research and a very respectable reference before we expend time (forget money) on this.” 

We both realized that we have never met someone who is a great thinker and wildly successful in business, let alone life, that is a speed reader.

Mike Ditka, the head coach of the Super Bowl champion Bears said it best, “If things came easy, then everybody would be great at what they did, let's face it.”

Being a life long learner is not easy and it is that very fact that separates those who are willing to pay the price from the rest of the field. Knowledge wins in this new economy and to gain it takes time, energy, sacrifice and persistence.