Multi-platinum recording artist celebrity Kanye West recently shocked the world when he revealed on Twitter that he currently has $53 million in personal debt. Although many hard-working Americans have very little sympathy for the often egotistical West, the reality is that debt is a huge problem for a large number of Americans who could learn some very helpful lessons about debt from West’s situation.
1. You can’t earn your way around bad spending habits.
If you think that your debt problems will go away once you finally get a raise, you may be sorely mistaken. There are certainly some people who are simply not making enough money to make ends meet, but many more Americans simply do not maintain a realistic budget or and live lifestyles beyond their means.
Kanye reportedly earned $30 million in 2014 and $22 million in 2015 and still found himself $53 million under water. If you don’t get your spending habits under control, you will likely always have debt issues no matter how much money you make.
2. Don’t invest more money than you can afford to lose.
Whether it be stocks, gold, oil, real estate or your nephew’s startup, never invest money that you absolutely couldn’t afford to lose. The vast majority of Kanye’s debt is reportedly money he has invested in business ventures, including $40 million invested in his Yeezy fashion line.
There’s still plenty of time for Kanye’s investments to turn around, but there’s no guarantee that they ever will. Let this be a lesson to all investors: there’s no such thing as a sure thing, and even the seemingly best and smartest investments can go south in a hurry.
3. Know how to separate personal finances from business finances.
According to Kanye’s original tweet, his $53 million debt is “personal debt.” Assuming this claim is true, Kanye seems to have made a crucial financial mistake: mixing personal and business finances.
If you intend to make a major investment or take on a business venture like Yeezy that requires large debt up-front, it’s almost always a good idea to establish a Limited Liability Company (LLC) or other legal business entity to protect your personal assets from liability in case of a default. One conversation with a business or asset protection attorney should clear up any confusion about the process and the benefits of setting up a legal business entity.
4. Prepare for the worst.
It’s likely Kanye earned enough income every year to more than cover a lavish lifestyle, but just because the financial times are good today doesn’t mean they will be tomorrow. It’s great to avoid debt on a month-to-month basis by only spending what you earn, but if you aren’t saving any money, you will not be prepared if/when an unexpected medical, accidental or other large expense comes along.
The economy is on strong footing today, but do you have enough money saved if you are one of the thousands of Americans that gets laid off during the next U.S. recession? I’m sure the U.S. shale oil rig operators didn’t have a financial care in the world a couple of years ago, but now a huge number of them are jobless with limited prospects in an extremely tough global oil environment.
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The Bottom Line
Not everyone needs to have sympathy for Kanye West to learn from his situation. It’s likely that Kanye will easily earn his way out of debt within a matter of months. However, not all of us can drop a hit record seemingly at will or reach out to the founder of Facebook for a loan. For the rest of us, debt is a potentially serious issue that needs to be carefully planned, minimized and managed responsibly.