Financial irresponsibility, inevitability and reality
Yesterday’s New York Times had an article* about the irresponsible handling of Johnny Depp’s finances and the dire state of his wealth. I do not know Mr. Depp or his financial advisors but the article suggested a somewhat joint responsibility for the bad current situation. I thought about this and since I’ve previously advised an irresponsible client I thought about a letter I sent to that client to stress the criticalness of his situation. Here is an abbreviated version which suggests how a client could be made aware of their detrimental behavior. When this was sent, the client’s major income producing days were behind him. A moral of the story is to spend less than your income regardless of your situation or who you are (or were).
To my client,
This memo addresses some concerns I have regarding your financial situation and repeats many of the conversations we have had. I wanted to take this time to try to put it in urgent perspective for you.
Inevitability and reality
I feel you are on a course that will lead to an inevitable disastrous conclusion, and that the clear reality of the situation is not being recognized or dealt with. The inevitable conclusion is that you will run out of funds to support you and your family.
The reality is that your assets are finite, not growing, and that the income and cash flow being generated is declining. Even allowing for an unexpected windfall, or big hit, the situation is as it is, with dire conclusions if nothing is done to reverse the course you and your family are on.
I am an accountant, and am looking at this as a numbers situation, and am not considering any personal elements or feelings or relationships. That provides me a luxury that you cannot have – it allows me to view your situation more objectively. Additionally, my professional background has permitted me to have an experience in matters such as you are in now, so that I can reasonably project a conclusion. Unfortunately, in your case, it is a bleak forecast if no changes are forthcoming.
Current situation
Your annual expenses are in excess of $1,000,000. This includes you, your wife and the support you provide to your children and their families. Your projected annual cash flow is just over $600,000. The present deficit of about $400,000 and is being provided by reductions in your assets.
Inevitable conclusion
You will deplete your cash in less than two years, and your assets in less than ten years assuming some sort of orderly liquidation of the assets. You will have no substantial income source after the assets are depleted. These projections consider a reduction in cash flow as some of the assets are liquidated as well as a reduction of certain costs needed to maintain non income producing properties. These are the amounts you provided to us, and while we did not audit or otherwise confirm them we concur with the substance of the conclusion.
Suggested remedy
Since your efforts to earn income has declined, additional revenue sources cannot be a remedy.
I suggest that the only thing you can do is to drastically, substantially and immediately reduce your cash outflow so that it is not in excess of your income. This requires all four of you (you, your wife, son and daughter) to recognize the reality** of the situation and to stop draining the assets with expenses that will have to be eliminated anyway if nothing is done. And it has to be done as triage. I believe it is that critical!
Not responding is a decision to continue as is. I feel that will be the height of irresponsibility for you, your wife and children.
Conclusion
This short memo repeats numerous conversations that were started after we met a little over two years ago. Nothing in here is new and your situation has declined as we have discussed. You have the numbers! You know how to interpret them! And you know the consequences of making no changes! Only you can do something. And I believe you must! And it must be now!
* The Depp Riddle: Who Should Watch the Money?
** Face reality as it is, not as it was or you wish it to be! (First said by Jack Welch)
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