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.
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