There was a recent news report about a well-known television personality Aditya Narayan being on the verge of bankruptcy due to the COVID-19- induced lockdown impact on his professional career.
Whilst he has clarified that he was quoted out of context on the same and that there is no truth in this matter, it is not uncommon for celebrities in multiple areas - Bollywood or Hollywood, and even sports professionals, to go through this kind of a challenge during their career.
This very often happens due to a concept called the "Sudden Wealth Syndrome" wherein someone who has worked very hard, and had meagre earnings from his/her professional life thus far, comes into a significant amount of wealth suddenly.
In fact, you do not need to be a celebrity to have this happen to you - it could happen due to a windfall gain from your stock options, sale of your business, a large inheritance, or even winning a game show or lottery.
There are multiple steps that one can take to deal with a situation of this kind including:
- Rent before you buy- It is very common for wealth to be used for conspicuous consumption reasons, that is, to demonstrate a high social standing. Whilst all of us are probably guilty of this at some point in time, it is critical to ensure that it is done within one's means. The most common mistake that we see happening is to spend most of this wealth to buy a large house or fancy cars. Since this wealth may or may not always be available, it may be a good idea to rent that fancy car or house address for a while, so that the desire to demonstrate wealth is temporarily satisfied. The rest of the money should be kept aside for a while, at least six months, to carefully think through what should be done with it.
- Build complementary skills- Many celebrity careers tend to be short-lived, and thus the need to plan for an alternative career post the working years is critical. Whilst it could be something that complements your current career, it is important that it is done under the right advice. Setting up a business is very common. Bootstrapping businesses until they demonstrate sustainability and some success is critical to ensure that they only take in the capital when they demonstrate that they deserve it. Hire professional managers in case one finds that one is too busy in a current role to handle this.
- Choose the right advisor - Whilst tax-related advice is a critical element of optimising and managing your wealth, it is only one aspect of a complete financial plan. A robust financial plan should include planning for short-term goals like vacations and control of living expenses, to long term goals like retirement and overseas education for children, as well as a savings and investment strategy, both domestic and international, aligned to these goals.
In addition, having a robust risk management plan by having the right types of insurance for life and health, covering against critical illness and liability insurance is crucial, along with a solid succession/estate plan through the right vehicles like wills and trusts.
A tax advisor may not be best suited to this comprehensive role, and thus one may need to seek the services of an experienced certified financial planner, who can give comprehensive advice around all these aspects. Tax matters could, of course, continue to be handled by a professional tax advisor.
Whilst the sound of the audience clapping on your virtuoso performance in your last film or your last match is wonderful, being sound with your financial matters is equally important.
(Vishal Dhawan is a certified financial planner and founder of Plan Ahead Wealth Advisors, a SEBI Registered Investment Advisory firm.)