What Losing A Million Dollars Taught Entrepreneurs About Finance
A million dollars sounds, to most people, like absolute security because being a millionaire seems like it would put you in a solid financial position for life. If your car were to break down or lose your job, a million dollars could quickly solve those problems. But, what happens if you find yourself losing a million dollars?
Unfortunately, there are no guarantees in personal finance. Even a million dollars can go away quickly through bad luck or poor decisions. Learn the lesson from these ex-millionaires to keep a tight grip on what you have.
A Million Dollars can not sustain a millionaire’s lifestyle
When most people think of a million dollars, they usually don’t think of the money in their accounts. They think about big houses, flashy watches, and fast cars. Those things are part of the lifestyle, and they’re part of what makes the dream of a million dollars so desirable. The problem is, a million dollars disappear pretty quickly when it’s being used on those things while trying to grow a business.
Take the example of Joshua Lee, an internet entrepreneur from Texas, who had accumulated that coveted seventh figure at the young age of 28. Like most 28-year-olds with extra cash, he bought cars and watches, treated his friends to expensive nights out, and did all the other things millionaires are “supposed” to do. His first million didn’t last him long at all.
Thanks to hard work and good fortune, Lee recovered, but he offered valuable advice on the topic. Once you’ve decided on a goal, whether having a million dollars in your account or getting debt-free, think about the parts of that goal that make it desirable. Once you’re 80% of the way there, take some time to re-evaluate. Figure out if the properties of that goal are sustainable. A million dollars looks and feels a great deal different from $800,000 than it does from $20.
Keep an eye on those keeping an eye on your money
Most people who get a million dollars do so by doing something other than working with finances. Like successful investment managers, even those who do probably have someone else looking out for their money. Top earners in most industries have IRAs and other long-term investment accounts watched over by a third party. A professional can be indispensable in tax planning and long-term return maximization when there’s that much money.
A millionaire can be too trusting, though. Millionaire retiree Jay Cee, a California resident, found out the hard way that not everyone who claims to be looking out for your best interests is. He transferred his 401(k) from a previous employer and worked with a financial professional to make the move. She encouraged him to put his money in a specific set of investment vehicles as part of an IRA rollover. The deal looked incredible since there was no line on the contract for a commission. When he asked about her compensation, she told him that the company took good care of them.
That part was indeed genuine. The investment company charged nearly 3.5% in management fees while earning a return of less than 4%. Jay’s retirement nest egg was growing at less than half a percent. He would have been better off putting his money into a basic savings account. Over the year that the company held his IRA, they made $12,000 from his account after just one 30-minute meeting. Talk about expensive advice!
Remember, the golden rule of economics
If you’re not paying for a service, you’re not the customer; you’re the product. Ensure you know how everyone who gives you financial advice is compensated and insist on seeing a detailed breakdown of fees before you sign any investment agreement.
Of course, the proper lesson isn’t one of exclusive self-reliance. Most people aren’t financial professionals. They don’t have the education or experience necessary to make expert, long-term financial plans. People who make a great deal of money tend to see themselves as invincible (see #1). That’s how someone like former Major League Baseball pitcher Curt Schilling went broke shortly after leaving baseball. Schilling invested his money without a proper understanding of risk, then lost everything when the one company he’d backed went bankrupt. Getting advice is indispensable; make sure it’s advice you’re paying for upfront.
Keep an eye on risk
There’s a certain glamour in having nothing to lose. When starting a small business, you can throw caution to the wind — to a certain extent. After all, if your new business goes belly-up, you haven’t lost more than you’ve put into it. It’s OK to swing for the fences when you’ve got a fledgling start-up. That changes a little bit once you’ve experienced some success. You need to take steps to protect what you’ve got.
Protecting what you have means you realize it can be lost. If you’re a successful entrepreneur, you must realize that success took hard work to build, and without that hard work, it’ll go away. Risks to your business are always present, and you must work hard to minimize those risks.
That’s one of the lessons to be learned from the bankruptcy of rapper Curtis Jackson, III, known by his stage name, 50 Cent. Jackson was one of the most successful figures in the music industry, yet his stage name became equivalent to his net worth in 2015 as he filed for bankruptcy. One of the reasons behind the loss was his repeated entanglements in lawsuits. Jackson never stopped acting as though he had nothing to lose, picking fights with other performers and business owners, who would then take him to court. Even if he won most of the legal battles, he’d still suffer the slow loss of money in legal fees and settlements.
Once you’ve “made it,” you need to change your strategy. You can’t afford to take those same wild risks. Finding safe investments and knowing when to back away from a challenge would be best. Slow growth is better than losing it all.
What do you think? If you found yourself losing a million dollars, what would you do? Do you think there are tips that we may have missed? Let us know. And, if you like this post, make sure you check out our other posts on MoneySmart Tips.
