It’s all over the news: they say Johnny Depp is broke. $650 million gone. How in the world could that happen, and how can you avoid making a similar mistake? It looks to me like a cash flow issue.
When we meet with new clients, we work with them to figure out how much they need to support their lifestyle, and how to plan to appropriately support that lifestyle through investments.
We create a financial plan for our clients, and then we continue to monitor and update it as time goes by. We call this a financial plan, but it's actually a cash flow analysis. It works like this: We add together all their sources of income, pensions, Social Security, etc. We look at all their potential expenses: Do they want to travel, give to charities, take care of grandchildren? Then we add up their income and subtract their expenses. Usually there is a deficit, meaning their expenses are higher than their income, and they’ll need their investments to make up the difference. Then we figure out how much those investments need to make. For example, let’s say a couple’s deficit is $40,000 year and they have $1 million in investments: $40,000 divided by a million equals 4 percent. That’s the amount their investments need to make in order to support the lifestyle they want.
Now let’s look at Johnny Depp’s cash flow. It’s reported that he spends $30,000 a month on wine. He bought his ex-wife a $400,000 diamond cuff. He bought islands in the Bahamas, an $18 million luxury yacht, and a $75 million French chateau. He paid $5 million to shoot the ashes of his friend, Hunter Thompson, out of a cannon in Aspen. If he was going to spend that kind of money, Johnny needed to look at what percentage of his net worth his spending represented. Just looking at his reported expenses, I’d suspect it was a lot more than 4 percent and that he couldn’t invest fast enough to keep up. No wonder he’s running out of money.
I believe the job of a financial advisor is to keep clients’ financial plans current, to help ensure that any expenses stay within a range where investments can support them by earning 4 to 5 percent (Depp’s advisers say they tried, but he wouldn’t listen). My job is to help my clients' money last longer than they do. As we like to say here at Money Matters, we're not here to make you rich quick; we're here to keep you from becoming poor.