If I had one hour with Gabby Douglas…

 

Gabby Douglas Olympics

Imagine experiencing a substantial windfall of money – talk about everyone’s fantasy! Well, Gabby Douglas is one of these lucky people. CONGRATULATIONS GABBY!! As a CPA, I do worry about her sudden success. Can she manage and maintain this financial windfall? She’s a talented young woman with a good head on her shoulders, but it’s a big responsibility and a complex task to take on at such a young age. So, instead of yelling my advice to her through the TV, I thought I would blog about it.

Everyone will tell her to assemble a good financial team around her – but really, what does that mean? What comprises a good financial team and what will they (hopefully) tell her?

Gabby, here are my 3 pieces of advice…

1) When selecting your financial team, be sure to get a CPA who understands international tax law in addition to US tax law for entertainers and athletes. As a US citizen you are taxed on your entire worldwide income. The country you’re in may tax you too. There are treaties that use a combination of foreign tax credits, exemptions, etc. to mitigate double taxation. Hire someone who understands this and has robust research capabilities since these laws are always changing.

  • Most people make many false assumptions about taxes – like they have to live in a state or country to be taxed in that state or country. Not true!
  • And did you know entertainers and athletes are also subject to special tax rules? Being in a city for 1 day can subject you to taxes in that city and state.
  • Don’t let the rumors in the locker rooms tell you otherwise: the only legal way to not pay taxes is to earn no money. The key is to minimize the amount of taxes you pay, from a global perspective.

2) Form a company focused on the sole purpose of evaluating your business opportunities. You’ll be approached by family, friends and strangers with great business ideas they want you to invest in. Enjoy these opportunities; however, manage them properly.

  • Form a company to evaluate these investment and business opportunities. You have ultimate approval and veto power, but every opportunity must go through this business. Print and keep business cards for this investment company on you at all times.
  • Every time you’re approached, offer this card and tell the prospective entrepreneurs you would be happy to hear more about the proposal and ask them to please send the business plan and proposal to the address on the card. It will be very difficult to turn down friends and family; this is exactly why you need advisors. Let them be the bad guys! Although this should never be true, the phrase “My CPA won’t let me” is a great tool. You do not need to have employees in this business, just a loose alliance of an attorney, a CPA and a banker that specialize in startup businesses. They should help you determine your priorities and your minimum criteria for making an investment.
  • Of course your company would invest in businesses that you hope would be successful, but when they are not, you want the best tax treatment. This is generally achieved when it is a business loss rather than a personal loss. This is another reason that you want to have a business that evaluates opportunities as opposed to doing it personally.

3) Treat your endorsements and financial deals as an inheritance, not a salary. Please remember, you will likely earn your lifetime of income in the next few years, so plan that way. Make the assumption that after age 18 you will never receive income again.

  • This means you must invest in such a way that your windfall not only grows to keep up with inflation, but also generates an annual living income.
  • Find a financial advisor who will help you create an annual, cushioned budget (that includes fun money!) that you think you can live on.
  • Housing – Make prudent decisions regarding housing; this is where most people make their biggest financial mistake. If you will only make $2M over your lifetime, you wouldn’t buy a $1M house. Keep this in mind as you consider buying a house for you and your family. You’re probably not buying a home for your lifetime. What you and your family want now may be very different from your needs in 10 years. So think of resale issues: Look for a moderate house in the neighborhood you select – not the biggest but also not the smallest. Interest rates are at historic lows, so get a fixed-rate mortgage. With proper advisors to keep discipline in your financial management you should be able to consistently earn more than your mortgage costs. Leverage can be good!
  • Family – Of course you want to do as much as you can for your parents and family given how much support and sacrifice they’ve offered you over the years. Just do this in a prudent way. Chose a financial team that both your parents and you approve of. When discussing financial support for your family, consider that your parents are at a different life phase than you, so goals will be different. These are your lifetime earnings, so consider purchasing a home for the family and have them work out a generous allowance, approved by both you and your financial advisor. See above for their investment ideas.
  • When either you or your parents seek items outside of your respective budgets, get approval from the advisor. Keys to making this work are: Having enough cushion in the budget that as adults your parents won’t feel they ‘need permission’ to a make decision and as the earner of the money, you don’t feel like you need permission to spend it. Putting controls in place such that your advisor has your tacit approval to deny access to your funds, but can’t actually block you from your money.

Finally, once you’re comfortable that your funds are being managed well and there are controls in place such that advisors don’t have unfettered access, HAVE FUN! You’ve certainly earned it. To remind you of this as you begin your post-Olympic life, include in your annual budget a budgeted line item called “Just Because I Feel Like It.”

Comments

  1. Gabby is truly inspirational!

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