This story is all too common among many lottery winners: after coming into a large sum of money with little experience to manage it, most of it is squandered on extravagantly over-the-top homes, cars, yachts, and other “toys” as well as lost to poor financial investment decisions.
But such financial falls from affluence aren’t only among the lottery winners. In an interesting piece in the New York Times, Geraldine Fabrikant tells a story of a family that came into $14 million after a company they had a family stake in was sold in 1998. What followed was a house, car, and horse-buying spree coupled with a string of poor financial investments that were closely tied to the housing market.
First, the Martins bought a house in Somerset, England, near the home of Mrs. Martin’s parents, and he decided to write a novel. At about the same time, they spent $250,000 on the 3.5-acre camp with four structures on Tupper Lake, deep in the Adirondacks, as a summer home. They began extensive renovations at the lake, adding a stunning three-story boathouse and two other buildings…In 2002, fed up with England, the Martins chose a new base, Vermont, and plunked down about $650,000 for a home there, as renovations continued on the Tupper Lake property.
They managed their expenses for a while, but the costs mounted and mounted some more as they worked at refurbishing the Adirondack property — eventually totaling a staggering $5.3 million, Mr. Martin said. He poured another $600,000 into the Vermont property, he said.
On the face of it, this doesn’t sound all terribly bad for a very high net worth family. But you have to keep in mind that the family’s windfall was for $14 million and their houses alone took up more than half of their initial wealth! Add to that the yearly property taxes and maintenance fees, and you can see how someone with even substantial wealth could quickly be in over their head.
But this wasn’t the end of the family’s poor investment decisions. Guided by “investment experts“, the family made a string of poor financial investments that were tied to the housing bubble. In addition, they borrowed heavily while using their brokerage accounts as collateral against that debt.
In the end, the “family ultimately put the Adirondacks property on the market for $4.9 million, then quickly slashed the price by half. Last month, the Martins got an offer for just half of the latest $2.5 million asking price.
They have stopped making payments on their $1.1 million mortgage and their $53,000 in annual property taxes in the Adirondacks as well as the mortgage and taxes on their Vermont home.”
After selling the homes and a lot of other valuables, the father is now teaching English for $14,000 per year and is living in a modest, sparsely-decorated tract house. The rest of the family is due to join him soon.
This story could have had a much better ending. More appropriate than the $5.3 million summer property for a family of 4, could have been a home more fitting for their income level. Rather than listening to the investment “gurus” and putting their money into highly volatile and speculative investments, they could have relied more on no-load, low-fee index funds, bonds, or both. Rather than buying things on credit while using their investments accounts as collateral, they could have bought only things their income allowed for.