DO BILLIONAIRES NEED AN EMERGENCY FUND?
Versailles Mansion – David Siegel Builds the Biggest House in America
“The Siegel’s had to stop construction on Versailles three years ago when financing for Westgate Resorts faltered, putting the company and their personal fortune at risk.” from Susan Berfield, BloombergBusinesssweek, March 15, 2012
How could David Siegel, billionaire owner of the largest time share company in the world, Westgate Resorts not have back up savings when trouble hit? Bloomberg BusinessWeek chronicled his downfall and rebound last year in “Versailles, the Would be Biggest House in America“.
Background; What is a Time Share?
As a struggling young married couple living in Southern California, El Carino and I visited many time share presentations. Wooed in by a set of luggage, free meal and a show, or other goodie in exchange for 90 minutes, it was both a source of entertainment and a free meal.
A timeshare is a form of vacation ownership where you buy a week or two vacation in a tony resort in exchange for $25,000.00 plus an annual maintenance fee of up to $700.00 per year. This investment (I use the term investment loosely as it is quite unlikely that you will financially profit from the time share purchase and rarely can you sell your ownership interest for a profit) provides a small apartment in a resort area. You usually buy the same two weeks with December and prime vacation times costing more than off peak weeks. Most owners’ average annual income is about $75,000.00 and they finance their timeshare purchase at up to 15% annual interest. Time share sales teams go after the relaxed vacationers for these impulse purchases. In sum, the sales tactics are powerful and the owner profit’s outstanding.
Why Even Billionaires Need an Emergency Fund
Business was continuing as usual with expansion funded by the profitable business model. Meanwhile, after the timeshares are sold, the property developer bundles the mortgages’ together, securitizes them and sells the new investment products to investment bankers to market to the public. Things were going along great-until they weren’t. In 2008, Siegel couldn’t sell a $300 million securitization and pay off the primary lenders, his credit dried up, and he was in the midst of a huge Las Vegas building project. His funding gravy train dried up in the midst of the sub-prime lending crisis and mortgage meltdown.
What’s a billionaire to do?
He could not pay back the lenders from the initial mortgages since he was depending upon the funds from the securitization for the capital. And there were no buyers for the securitized products. The initial lenders were not happy and Siegel was on the hook for $1.2 billion, with no savings.
His creditors took swift action requesting he sell a dude ranch, mobile home park, and a Ramada Hotel near Disney World. His creditors put he and his wife on an allowance leading to a drastic lifestyle adjustment.
Lessons from a Billionaire Without Savings
Not only are there wealthy folks without savings, there are high income earners plagued with debt and a negative net worth. Without getting into the psychological reasons for this, what does this mean for those of us without a $1,000,000,000.00 net worth?
Add Siegel’s losses to those of lottery winners who blow it all combined with millionaires in bankruptcy court and the examples of financial mismanagement are not hard to come by. What can you learn from their mistakes? Hint; the lesson is not to give up because if the wealthy can’t manage their money, what hope is there for you!
No Matter What Your Income Level is; You Need to Save
Everyone needs some cash to fall back on when hard times hit. And financial setbacks happen to everyone. Not only are the poor susceptible to financial problems, but high income earners who overspend and don’t save can run into financial problems as well. There is research that substantiates the importance of having emergency funds to fall back on.
Siegel sold some assets, scaled back on spending, and continues to pay his debt. He’s on a path to become financially stable again. Yet his story highlights the importance of living within your means and saving for the eventual financial surprise.
Versailles in Florida Update
After a four year respite, construction resumes on The Siegel’s biggest home in America according to abcnews.go.com. Why anyone would want or need a home this big is beyond me, but there is a lesson to the Versailles mansion story. Financial troubles can hit anyone at anytime. No one is immune. If a billionaire can hit the financial skids and face bankruptcy, so can you.
Live prudently and have a contingency plan for disaster. Build up that emergency fund so that a surprise financial set back won’t sink your ship.
- Building an emergency fund must be done now. Don’t worry about the amount, just funnel a percent of each paycheck into a separate savings account designated for emergencies. Vow not to touch this money unless there is a financial emergency. No, I don’t mean buying a new electronic gadget or pair of shoes!
- Each paycheck, transfer manually or by automatic deposit money into your Emergency Savings Account. No excuses. If you don’t see the cash, you won’t miss it.
- Do it now!
What Others are Saying
Starting an Emergency Fund with the Right Amount of Money at Yes I am Cheap
How and Why to Start an Emergency Fund at Get Rich Slowly
Figuring the Size of Your Emergency Fund at Wise Bread
21 Strategies for Creating an Emergency Fund at Zen Habits
$1000 emergency fund? 6 months expenses? 1 year salary? Throw them all out the window! at Wealth Informatics
What tips do you have for building an emergency fund? Have you dipped into yours recently?
A version of this article was published on March 24, 2012
image credit; google images- gobankingrates.com