Okay, I’m going to show my age here. I’d never heard of Drake Bell until this story broke.
Go ahead. Skip to the comments and call me old.
What I do know is that–if the reports are correct–this guy did a poor job planning for the future, and we can all learn from his mistakes.
According to ExtraTV.com (where I find all of my hardcore news), 26-year-old Nickelodeon star Drake Bell declared bankruptcy. It seems he’s currently making $2,820 per month and has monthly expenses of $18,771.
He has a home valued at $1.575 million, but reportedly owes $1.597 million. In 2012 he reportedly earned $408,000 but only made $14,099 in 2013.
Don’t ask me how these numbers add up. Let’s just glean some lessons.
1) Betting your future income against loans is dangerous.
Let’s do a little simple math on Bell’s debt payments (either stick with me through it or feel free to skip to the last paragraph to grab my “so what”):
If the reports of Bell’s $408,000 income are true, that means he had $34,000 per month of income.
…but that doesn’t include taxes. Let’s see how bad that bites his butt.
Living in California, he had to pay 11.3% state income tax and had a roughly 28% rate.
That means that he may owe around 39% of his income to taxes or $159,120.
…so he doesn’t have $408k of income, does he? After taxes, he only has $248,880 of net income or $20,740 per month.
What does that mean for his budget?
It’s not bad on the surface. While racking up expenses of $18,771 seems to be within a $20,740 monthly income stream, you have to carefully evaluate whether that stream will continue.
Luke Landes discusses the debt snowball vs. debt avalanche in one of our most popular podcasts ever.
But Then There’s His Mortgage:
His monthly mortgage payment (assuming a 30-year note and 6 percent interest rate) would be $8,374 per month. After taxes and insurance, he’d easily pay over $9,500 per month.
Wow!
He was devoting nearly half of his income stream to his mortgage payment…an incredibly dangerous amount of debt. If he was using his pre-tax income stream (which many people mistakenly do) he may have thought he was only spending a third (within some expert’s definition of an “acceptable” amount of debt).
Betting that much of your future income against a mortgage is risky. How old can you be before Nickelodeon thinks you’re too old to be a child star?
2) Home equity is irrelevant until it’s either claimed or your house is paid off.
I always roll my eyes when people pay every extra dime toward their mortgage. If you have one dollar left on your mortgage and can’t pay the loan, how much of your house will the bank take?
Correct. All of it. Keep money liquid so when trouble happens you can delay foreclosure.
It doesn’t appear that Bell had any equity, but even if he had, it wouldn’t have mattered.
3) Carefully evaluate your career, employer, and industry when making financial decisions.
I worked with some highly paid television personalities. My job was to help them realize that fame is fleeting, and this huge stream of cash is going to need to fund “whatever’s next” AND hopefully, help them live a comfortable life if they can’t find work.
You may not be a celebrity, but you should ask yourself similar questions: What is the real chance you could be injured in your job? Laid off? How likely is it that your business is thriving, but the overall market dries up?
….three important lessons.
I don’t know enough about Drake Bell to have an opinion about how he’ll do in the future, but I do know that if you can learn from his apparent mistake, you can avoid one of your own.
Want more lessons from celebrities? Here’s Top Ten Lessons We Learned from David Letterman
Photo: Wikimedia
If you’re old, then so am I – I’ve absolutely never heard of this guy before. =)
That’s actually great to hear! Ha! I read about this and thought, “Man, I’m living in a cave….” I still probably AM living in a cave….but it’s good to know there are others there with me. 🙂
I have never heard of this guy before but that is so sad =( Sounds like he was getting bad advice or no advice.
The fact that his mortgage is an acceptable number before taxes leads me to believe it was bad advice…but that’s a big time guess on my part.
Drake shouldn’t have stretched so much and rented instead without several years’ worth of consistent earnings and adequate savings to rely on during the periods in which actors cannot find work. However, the tax rates you mention are too simplified and are not correct, because those rates are on his marginal income in the highest bracket, not on his entire income. They also don’t take into account the tax deductions for his mortgage and many of the special deductions that entertainers have. Most actors rely on Business Management Firms to handle their finances (including tax prep) and provide financial advice.
Ah! Ye of little faith….
He’s in the 39.6% tax bracket. I actually did the math on $408k, which gives him the 28% rate mentioned in the piece.
Now, about the California tax rate….you could be right. I don’t live in California. In Texas there isn’t an income tax. When I was in Michigan it was a flat tax rate.
As for deductions…he pays AMT, so his deductions are minimized but accounted for (at least estimated based on his general amount of income).
I took out how I calculated 28% because, after reading it to Cheryl, it was WAY too mathy and finance is all about fun. Yee-haw! Geeky, nerd, watching-a-star-go-bankrupt hilarity.
I thought everyone got their hard news from ExtraTV, although in LA, this kind of stuff is the top story on the regularly nightly news. 🙂 I don’t recognize him but I’d guess my daughters would since he was on Nickelodeon. It sounds like he fell prey to a common problem among celebrities, athletes, etc … they never believe they money will stop coming in. Everyone faces that possibility but when you’re earning gobs of money and really young, you do feel invincible. Important lessons for the famous and not-so-famous.
I guess I’m old, too! Never heard of this fellow, but he obviously made some grave miscalculations on his future earnings and debt to income ration. Ouch! However, being a “child” star, I wonder how much education he ended up really getting. Perhaps his math skills are weak!
I’ve heard of this guy! My youngest brother used to watch his show. This is just one more checkmark in the column of never letting my kids become child stars. Are there any success stories?
Ron Howard!! 🙂
Speaking as someone who watched his guy on “Drake and Josh,” I can safely say that Josh Peck turned out much better. He’s doing well for himself, as he has a couple of steady roles in the “Ice Age” and “Teenage Mutant Ninja Turtles” series. I also heard that Drake Bell was looking to make another “Drake and Josh” movie but a simple movie isn’t going to turn the man’s luck around.
I don’t know who this guy is either! But you are still old 😉 Great thoughts Joe.
Never heard of him either. “Let’s see how bad that bites his butt” ha ha! BTW I totally watch Extra and Access Hollywood. 🙂 Oh wait I just scrolled down and I HAVE heard of Josh and Drake. OK whew! “How likely is it that your business is thriving but the overall market dries up?” I ask myself that every f’n day! Really. Even though last year was good, I can’t predict what this year will be like because freelancing is a roller coaster. Some seem to have mastered it better than me (Holly and Michelle), but mine goes up and down…and sometimes way down all the time. I’d rather keep that money around just in case the shit hits the fan. I guess Drake didn’t get the memo.
I’ve heard of this dude before, because I have kids.. But his story is anything but surprising.. These kid stars come and go quickly!
Taking on a mortgage like that when you don’t have a long term plan for income is just downright foolish..
Wow, I guess I’m young. I’ve heard of him, but mostly just enjoy his music:
https://www.google.com/search?q=drake+bell+album&rlz=1C1CHFX_enUS575US575&oq=drake+bell+album&aqs=chrome..69i57j0l5.3431j0j7&sourceid=chrome&espv=210&es_sm=93&ie=UTF-8#q=drake+bell+up+periscope&stick=H4sIAAAAAAAAAGOovnz8BQMDgyEHsxCXfq6-gXG6WXp6iRKYnVJSVlxcpSWanWyln1tanJmsn5iTVJprVZyfl178Ve9EpGF69iInqbCfj2zO_SqdfbAEAD8Do5dOAAAA
(sorry for the long link)
Sounds like he thought his fame would keep up. Apparently not, LoL.
LOL, I’d never heard of this guy until I read this post, so we certainly are joining ya’ll in that cave. 🙂 Sad stuff, though. Fame so often convinces people that they are invincible. 🙁
It’s true! Or fame makes them believe that their next project is going to be as popular as the last one.
I guess I get to be old with you Joe, because I’ve never heard of this character before. Though, I didn’t know you got your hard hitting news from Extra TV too! 😉 Seriously though, it doesn’t surprise me one bit and is sad to see. It sort of reminds me of all the sports stars that end up in the same situation – like Vince Young recently.
It’s so sad that those of us who are often blessed with the tools to create lots of income for ourselves never gain the tools to hold onto that cash.
There are times that I think being an advisor to the stars would be a great job….but then I started working with some highly paid local personalities in Detroit…and that’s a full time job sometimes just dealing with the egos….
You’re not old. I’m 25 and I’ve never – not once – heard of Drake Bell. Really solid advice here: “If you have one dollar left on your mortgage and can’t pay the loan, how much of your house will the bank take?
Correct. All of it. Keep money liquid so when trouble happens you can delay foreclosure.” I’m not into paying off more of my mortgage. I’d rather build up my emergency fund or invest anything extra.