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Fortune doesn't always favour the rich and famous; why celebrities also need to save

Nikhil Kamath     October 16, 2020

We hear of startup success stories, and the ones who made it. No one is more susceptible to the trappings of risking their fortunes than a successful actor, artist or even an entrepreneur. Having tasted victory, it reinstills the misnomer that you are different and the normal laws of capital preservation do not work for you.

Thomas Piketty famously proclaimed, "The return on capital almost always exceeds economic growth." It can be a humbling reminder to those who make vast fortunes and spend with the expectation that their income would grow at the same rate as it has.

While this may be true for a handful of celebrities, athletes and even entrepreneurs. It is wise to preserve capital and prepare for an eventuality where your income may not grow at the same rate as it has.

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Return on capital always exceeds economic growth  

The top ten highest-paid actors in Bollywood earned between $11million and $40million in 2019. Additionally, many celebrities who do have different sources of income have the added burden of managing them.

The most prudent thing to do is to invest in a professional wealth management service. Having professionals do what they do best and understand the limits/expectations they set for you is extremely important. We live in an era where living beyond our means is an extremely easy thing to do and when one is surrounded by people that spend lavishly and others applaud them for that, it is challenging for one to spend within pre-defined boundaries.

Looking back, most personal financial crises are created because of high-interest loans. They tend to make a significant dent on one's income and that money is gone before they even have it.

Most financial institutions are happy to give out loans when the times are good and everyone is making money. But, when the income is non-existent, EMIs start piling up and it can get overwhelming, very fast.

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The second most common cause for financial crises that celebrities face is the inability to pay their taxes. Due to the high income they enjoy, they generally tend to fall in the highest tax bracket.

If one does not account for the money, they need to pay the taxman when they receive their income. They tend to not have any money left when at the end of the year the taxman comes knocking on their door.

Financial Literacy is a universal need  

The mantra of creating a secure financial present and future for one, no matter what crisis comes about, is to not only save but invest in the good times.

Invest in assets that appreciate in value over time. These assets can be liquidated when one's career is over and they don't have access to the same high value of income anymore.

But, during their career, one should also invest in assets which have the ability to give you a stable, continuous cash flow.

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This may be in the form of dividends from stocks, rental income or coupons from bonds - these cashflows can freely be spent on that lavish mansion, fancy supercar or anything that one desires.

Lack of financial literacy is a deficiency that plagues the affluent and non-affluent alike. It is a basic life skill that one must understand and implement. Without it, no amount of money can ever truly be enough.

(The author is Co-Founder and CIO Zerodha and True Beacon)

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