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The Elephant on The Red Carpet

by J. Money on Friday, August 6, 2010

elephant in rear view mirror
(Guest article today)

Celebrities are willing to dish on their diets, workout regimes, health issues, partying lifestyles, relationship woes and child-rearing preferences. But the one thing celebrities don’t seem too willing to talk about is their money … or lack thereof.

Behind the glitz and glamour, some celebs are racking up enormous debt as they struggle to maintain their extravagant lifestyles. Noteworthy examples include:

  • Lindsay Lohan – Pre-slammer, the former child star was charged with $600,000 in credit card debt in April.
  • Teresa Giudice – This Real Housewife of New Jersey seemed pretty desperate in $9M of debt when she filed for bankruptcy in June.
  • Mariah Carey – The diva owes her veterinarian $30k. Not such a sweet fantasy.
  • Mike Tyson – Iron Mike was a formidable opponent in the ring, but debt KO’d him in 2003, when he filed bankruptcy at $27M in the hole.
  • Nicolas Cage – The star can’t work sorcery on his bank account. His Bel Air Mansion went to auction in April after the IRS demanded more than $13M in back taxes.

Unfortunately, as celebrities go into debt with over-the-top spending, Americans are following suit as they try to keep up with them. It turns out that we Americans begin to identify with the characters we see on TV, and we use those lifestyles as unrealistic reference points. Soon “Keeping up with the Joneses” becomes “Keeping up with New Jersey Housewives.” In a study of Americans’ spending habits, Juliet Schor, author of The Overspent American, concluded that each hour of weekly television viewing correlated to an increase in spending of $200 annually.

Scott Crawford, founder and CEO of DebtGoal, says the boring, unglamorous fact we all must face is that financial health means spending less than we earn, whether our salaries are blue collar or red carpet. Here are some of Scott’s tips for managing your debt before it reaches celebrity proportions.

1. Quit spending on your credit cards

It might seem obvious, but it’s hard to make any progress on your debts if you continue to spend on your credit card. Putting away the plastic wouldn’t have freed Lindsay of her debt to society, but at least she wouldn’t owe her credit card company too. If you’re using a credit card for the rewards, stop now! It’s not worth what you pay in interest, and there are debit cards out there from companies that let you can earn up to $600 in cash back annually without going into debt.

2. Negotiate Your Rate

While you’re paying those credit cards down, make sure you are doing it at the best interest rate possible. Most credit card companies are willing to negotiate to lower rates, but you need to make the call and ask. NegotiateMyRate.com provides a free script to help first-timers negotiate better rates.

3. Organize your debts and create a plan for paying them off

Most people in debt know they have a problem, but don’t have a good idea how much debt they really have, what it costs them per month and whether they’re making progress each month or not. The first step in getting out of debt is creating a pay down plan that works for you. Pay the minimums on every account but your highest-interest account and apply the remainder to this account. Doing the math and setting up a pay down system can be daunting, but online tools can help automate this process.

4. Tell others about your goal

Duchess of York Sarah Ferguson is managing her reported £2M in debt with some help from a friend—Queen Elizabeth II. Not all of us have these kinds of connections, but telling a friend gives them a chance to support you and creates positive peer pressure that can keep you on track. Studies show people who tell others about their goals are 10-20% more likely to hit their goals, so don’t be shy.

5. Find additional cash by lowering major expenses

You may not spend lavishly on your dog like Mariah (or maybe you do), but re-evaluate the recurring expenses in your life like your cable bill, cell phone, health club, etc. Netflix has a ten dollar per month on-demand subscription, which costs less than what many cable companies charge. And Hulu.com can bring you most of your favorite shows for free. By moving to a cell phone family plan, arranging to have longer chats with friends during free evening and weekend time slots and just sending fewer texts per month you can significantly reduce your cell bill. Your health club may be willing to reduce your monthly fee if you ask, and if not, a little fresh air never hurt anyone. Consider moving to housing with a lower rent or trading down a car to a different one with lower payments. Such moves can free up hundreds of dollars per month that you can use to get out of debt.

6. Start saving to avoid future debt

Once you’ve got your debt paid down it’s time to start saving. Without an emergency fund and a clear plan to save for the things you really want, you’ll just wind up in debt again. Many online savings accounts helps people save for specific financial goals too.

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[AWESOME photo by exfordy]


{ 10 comments… read them below or add one }

1 Techbud August 6, 2010 at 9:05 am

I think #4 is a key. Telling other about your goal or your debt issue. If family and friends are aware, they are less likely to ask you to spend $ on things you cant afford.

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2 SAFTM August 6, 2010 at 9:45 am

Number 4 is definitely the key, but be careful not to listen to too much negativity. People are crazy. They think their way of doing things is the only way or that credit card debt is “normal” or that “such a low interest rate can’t be beat, you’re crazy to pay it off.” WRONG! I told a bunch of people (technically the world) about my plan to pay off my student loans that are at 2.5% and they told me I was nuts. One of my buddies tole me he would borrow money at 2.5% “all day long” if he could (http://www.stepawayfromthemall.com/2010/07/i-must-be-on-to-something.html).

So telling people is a great idea, I believe, to hold yourself accountable and to get support from those who care about you and appreciate that you made a decision to get out of debt. But don’t let people talk you out of doing something that’s right for you.

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3 Evan August 6, 2010 at 11:44 am

I think a lot has to do with being flush with cash after an event or movie. Just because Tyson made lord knows how many hundreds of millions from 88 to 95ish…didn’t stop hime realizing he can’t spend the same way when made NOTHING in 2001ish

Great post!

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4 Mark Lawrence August 6, 2010 at 4:26 pm

Seriously great stuff here. I think this can all be summed up by “stop living above your means!” Stop living the live of an illusion in an effort to prove something that will end up slowly ruining you. Life is awesome. Rock it out. Just not with unnecessary spending. Don’t be TI!

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5 Debt Vigilante August 7, 2010 at 11:05 am

I cannot believe celebrities like that are going broke. They are the biggest losers in world. You don’t really see that happening to wealthy business owners because they have to slowly build their businesses from the ground up. Drs and lawyers as well, they have to slave through medical and law school, so when they start to get the large paycheck, it means more to them. most celebrities hit it big when they are too young to realize what kind of assets they have. They squander all their money on lavish possessions and vacations and a lot of them are bankrupt before they are 40. I read an article the other day that said 80% of ex-nba players file bankruptcy by the time they are 50. I don’t know if those numbers are right, but I am sure its a higher percentage than it should be.

Pathetic.

Great topic!

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6 Molly On Money August 7, 2010 at 6:09 pm

I agree that #4 can be very effective.
Last night I went out with a bunch of girlfriends. One friend kept introducing me as ‘the woman that has this blog were she writes about all the wacky ideas how not to spend money’. Even if I wanted too I was pressured into being the cheap girl for the night! Hey, a few people bought me drinks- I’ll take being the cheap girl!

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7 myfinancialobjectives August 8, 2010 at 8:13 pm

Great post. I particularly liked the beginning where you listed the stats of celebs who have no idea how to manage their money. I was kinda shocked about Nicholas cage to be honest – he seems like a relatively wise guy…

I guess I am “telling others about my goal” through my blog! I will without a doubt admit however, that since starting my blog, not only have I continued to learn a lot about personal finance, but I feel that I began managing my money better as well!

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8 John@Financial Elite August 9, 2010 at 12:43 am

I agree with all the suggestions. I have quit using my credit cards and pay cash for everything now. No dinero, no buy. I have also put many of my cards on balance liquidation programs and have had my rates reduced to zero percent. Several of my accounts will be paid off within 3 years. The rest within five, if not sooner. I share my debt on my blog and many of my readers hold me accountable. I have reduced all of my utility bills either by a balanced payment plan or eliminating some of the bells and whistles. I have my emergency fund in place and will continue to increase it after my debt is paid off.

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9 Greg McFarlane August 9, 2010 at 2:09 am

Can you back up your claim that the Duchess of York is getting “help” from the Queen? I couldn’t find it anywhere, and it seems odd that the Queen would cut checks to her ex-daughter-in-law.

Juliet Schor, author of The Overspent American, concluded that each hour of weekly television viewing correlated to an increase in spending of $200 annually.

What do you mean by “weekly” viewing contrasted with “annual” spending? Do you mean that if I watch 1 hour of TV a week, I’ll spend $200 annually that I wouldn’t have otherwise? If that’s the case, using identical time periods would have made it less confusing – e.g., watching 1 hour a week means spending an extra $4 a week. Which means watching 1 hour means spending an extra $4, regardless of time period.

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10 J. Money August 9, 2010 at 3:05 pm

It truly is WHAT you do with all your money, over HOW MUCH money you make every year. There are plenty of people bringing home $200k+ but live a lifestyle that still forces them to live paycheck to paycheck. It’s crazy… now if you’re TRULY happy, that’s one thing, but most people I know who are honestly that happy has a good chunk stored away in savings.

Money may not buy happiness, but it sure does give you options ;)

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