Do Billionaires Need An Emergency Fund?

By in Automatic Saving, Debt, Insurance, Saving | 29 comments

How Billionaires and the Uber-Wealthy Went Under

If you think billionaires don’t go broke, think again. Lottery winners, professional athletes, actors, and others with tremendous wealth have lost it all.

The interesting thing about money, not matter how much you have, if you spend more than you make or swindle others, at some point you’ll wind up broke. 

Do billionaires need an emergency fund?

Bernie Madoff – From $17.179 Billion to Zero

How wealthy do you think the Madoff family is today? 

According to a Time.com article by Sam Frizell last year, “Where are Bernie Madoff and His Inner Circle Now?” The once wealthy Madoff family isn’t doing too well. Bernie Madoff, the head of an elaborate Ponzi scheme which swindled the rich and famous lost not only their wealth, but the lives of family members as well.

Convicted of securities fraud, investment fraud and a litany of other charges, Bernie Madoff is currently serving 150 years in federal prison and forteited $17.179 billion. 

Bernie’s wife, Ruth lost $80 million in assets and is living in her son Anderw’s house. Mark, his eldest son took his own life. Andrew, another son, died last year of lymphoma. Bernie’s brother, Peter is serving 10 years in federal prison and gave up everything.

Bjorgolfur Gudmundsson: Iceland’s #2 Richest – From Billionaire to Negative $1.4 Billion

Iceland’s second richest man, a brewer by trade, went from billions to nothing. He invested in Icelang’s banking system, and lost, according to FNResearch.com’s “11 Billionaires Went Broke: How Safe is Your Retirement?” At one point, Gudmundsson was $1.4 billion in debt. After bankruptcy, his net worth was zero. 

Versailles Mansion – David Siegel Builds the Biggest House in America

David Siegel and his wife Victoria gained notoriety when they began construction on what was arguably the largest home in America. Siegel, the owner of the largest time share company in the US, Westgate Resorts, ran into financial difficulties during the economic downturn of 2009-2011.

How could David Siegel, billionaire owner of the largest time share company in the world not have back up savings when trouble hit? Bloomberg BusinessWeek  chronicled his downfall and rebound in “Versailles, the Would be Biggest House in America“.

According to the inquisitr.com, in 2008 Siegel was worth over $1 billion, in July 2014, he was reputed to be worth $100 million. Although his fortune didn’t completely vanish, $100 million isn’t a billion. Also, he’s been plagued by other troubles, with the unfortunate recent death of his daughter Victoria.

Allen Stanford Dug His Own Hole

Stanford was born a billionaire, and he managed to lose it all. Another criminal, Stanford created fake certificates of deposit (CDs) and conned more than 20,000 investors to buy. Then he took the proceeds and transferred them to his own offshore account. Stanford is now paying for his fraud with a 110-year prison term for stealing over $7 billion from investors. 

Why Even Billionaires Need an Emergency Fund

For David Siegel, business was continuing as usual with his time-share expansion funded by a profitable business model. Meanwhile, after the timeshares were sold, the property developer bundled the mortgages’ together, securitized them and sold 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. Siegel’s funding dried up in the midst of the sub-prime lending crisis and mortgage meltdown, a massive economic event.

Siegel’s business fell prey to economic changes and faulty business practices. Other billionaire losses were also attributed to miscalculations, poor decisions or inability to accurately predict the future.

Yet, no one is perfect at decision-making or predicting the future. Economies collapse, recessions happen, the winds of business change. You do your research and a decision doesn’t turn out the way you planned. In other words, life is imperfect and no one can predict the future.

Certainly in the case of criminals, there’s a different situation. The ponzi scheme operator and the fraudster is simply acting on borrowed time. Sooner or later they will likely get caught.

Billionaires are different than simple millionaires or the common Joe or Jane. On the up side, they have greater access to capital, can take on bigger projects. The scale of their resources may lead to grander wins. And when a billionaire falls, they must have done something really wrong to blow through that much money.

Even billionaires need to keep an ’emergency fund’. And the billionaire emergency fund should be grand, at least several million.

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 net worth? 

No Matter What Your Income Level is – You Need to Save

Have you had those periods where unplanned expenses crop up? We had a costly ‘unexpected’ fender bender this year. We also had several other surprise large expenses this year. Our emergency fund kept us from borrowing to meet these expenses. We’re now in the process of building it back up. 

Everyone needs extra cash to fall back on when hard times hit. 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. Whether you have a billion dollar net worth or are working towards the $10,000 mark, the lesson is the same.

Live within your means. No matter what your net worth or income, don’t risk more than you can afford to lose. That means if you’re an investor with a $100,000 net worth, don’t bet it all on a ‘can’t miss’ investment opportunity. If you earn $80,000 per year, save and invest at least $800 per month. 

Emergency Fund Action Steps-For Billionaires and the Rest of Us

  1. Build an emergency fund now. Don’t worry about the amount, just funnel a percent of each paycheck into a separate savings account designated for emergencies. This money is not your ‘retirement‘ money which goes into an IRA or 401k.
  2. Put the money in a bank savings or money market account.
  3. Strive to build up 3-9 months of household expenses in your emergency fund. With job insecurity today, having a cash cushion reduces stress.
  4. Vow not to touch this money unless there is a financial emergency. After you spend some of the money, replace it as soon as possible. 
  5. 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.
  6. Do it now!
 


What Others are Saying

Starting an Emergency Fund with the Right Amount of Money at Yes I am Cheap 

21 Strategies for Creating an Emergency Fund at Zen Habits

What tips do you have for building an emergency fund? Have you dipped into yours recently?

A version of this article was previously published.

    29 Comments

  1. Hasn’t Donald Trump had this same issue a time or two? I would guess that it isn’t that they don’t have the money, but they have it all tied up. You would think they would leave some liquid, but I guess they can’t resist the temptation of trying to make more money.

    Melissa@PersonalFinanceJourney

    March 24, 2012

  2. One problem with businesses, such as Siegel’s, is they try to maximize the use of capital and increase ROI for investors. That often means a lot of leverage and liabilities. If investors paid more attention to the balance sheets, corporations would maintain larger reserves.

    Everyone wants to hit a home run and they don’t seem concerned enough with striking out.

    Bret @ Hope to Prosper

    March 25, 2012

  3. Great post highlighting why everyone needs to have an emergency fund. I would think billionaires actually need larger emergency funds since they typically have larger potential liabilities.

  4. @Melissa, You are absolutely correct, Trump faced bankruptcy over one of his casinos.
    @Robert-I agree, it’s one thing to take some risks, but its important to cover yourself when things don’t go as planned.
    @Bret-You highlighted my personal style; I’m a fan of striving to be a consistent singles hitter. Home run hitters are too high risk high reward strategies for my taste.

    Barb

    March 25, 2012

  5. I would have an automatic direct debit take a percentage out of your main current account as soon as your paycheque comes in. That way you are automatically strict with yourself.

    MultiMillionaireRoad

    March 25, 2012

  6. @Multi-Sounds so simple, yet so smart. That’s exactly what us “normal” folks do. Take some money out of our income stream and divert it for future needs, wants, and emergencies.

    Barb

    March 25, 2012

  7. I really loved this post! I’ll be pinning it on pinterest!

    George

    March 25, 2012

  8. Rich people usually have better access to capital than the rest of us until something goes bad. I guess that is why it is called an emergency fund.

    krantcents

    March 25, 2012

  9. YES! your right. you never know how long they will be a billionaires. so that they need to save it right.
    thanks that you shared this interesting article.
    great job.

    Cley

    March 26, 2012

  10. Hi Barb…I have no idea if billionaires need an emegency fund or not..Anyway, I enjoyed reading your post here…

    Rossalie

    March 26, 2012

  11. If Apple thinks it needs to hoard $500 billion in emergency savings before it can pay out dividends, I think everyone needs an emergency stash!

    Moneycone

    March 26, 2012

  12. Here’s my problem with the typical psychology of the rich or high income earner. The failure to recognize that it could all come to an end very quickly…I suffered from this for awhile, but got wise a few years ago. Leverage is extremely powerful…it’s like the saying absolute power corrupts absolutely. A person who has been succesful using leverage becomes addicted to it. Before long, they know of no other way.

    BusyExecutiveMoneyBlog

    March 26, 2012

  13. Good reminder for Monday morning. Paying for cash is the only sure fire way to ‘own’ something. Having an emergency fund before you make major purchases (houses) ensure you can keep them.

    Brent Pittman

    March 26, 2012

  14. Good to know that the bum who washes his windshield probably has more money to throw around.

    I’m also happy to see that financial freedom has nothing to do with money. How ashamed was he to be put on an allowance as an adult?

  15. @Moneycone-Nice example. BTW, APPL is considering a offering a div:)
    @Busy-Well put.. Enjoy the fruits of your labor, don’t take it for granted, and save for a rainy day. The rain hits everyone.
    @Brent-Yea, what ever happened to cash? It’s a sure fire way to stay out of debt!
    @John-So true, he Siegel hated being put on an allowance. I certainly wouldn’t like it. Hey, Last time I had an allowance I was a kid!

    Barb

    March 27, 2012

  16. As what I have read and what I have known, emergency fund is an ensure way of establishing for the future, that’s why most of us need it in case if unexpected things…

    Johnson15

    March 28, 2012

  17. Unfortunately, there’s a paradox: its tough (perhaps impossible) to become a self-made billionaire without using leverage, and yet, leverage creates risk. In this case, that risk was realized. It’s easy to say in hindsight that the billionaire should have turned his sights away from growth and towards de-risking, but I can’t fault someone for being unable to predict the biggest market crash since the Great Depression, which led to his financial demise.

    Paula @ Afford Anything

    March 29, 2012

    • Hi Paula, Leverage is very useful in creating wealth. In fact, most homeowners have leverage and benefit from it with their mortgages. And, as you said, the future is unpredictable. But I think Siegel was too cavalier with his risk level!

      Barb

      March 30, 2012

  18. I am totally agree that Leverage has a big rule for a kind of development… Great post and keep it up.

    Jenkins

    May 17, 2012

  19. Risk goes hand in hand with leverage so if you are not comfortable with the risk its better not to take on debt. Many real estate developers operate as LLCs or C Corporations which shields them from the debt of the company. When it is your own bank account that is at risk, most people are not so cavalier with their decisions!

    Paul @ The Frugal Toad

    November 11, 2013

    • @Paul, Life is risky and no one knows what the future holds. I wish we could protect against all forseeable risk, but that’s impossible. WRT to leverage, I think it’s best to maintain a carefully assessed amount of leverage, too much and there is just way too much risk.

      Barbara Friedberg

      November 11, 2013

  20. Barb, I think you hit the nail on the head with the automatic transfers to build an emergency fund. That’s what I did and I haven’t touched it since I started building it! I never missed it either, because I never knew that part of my salary existed, from a spending standpoint. Hopefully I never have to touch it, but it is there if I need it.

    Lance @ Money Life and More

    November 11, 2013

  21. I wonder how much Siegel should have had in his emergency fund, enough to cover all his construction loans? Or perhaps three to six months of operating expenses? As others have said, people like him are often leveraged to the hilt, and if they could borrow more, they would.

    Bryce @ Save and Conquer

    November 11, 2013

  22. I would think that if you made that much money, you should be prepared to lose a good chunk of it at any time. Having that wealth would mean that you are more open to lawsuits or extortion. And the upkeep of that money has to have a windfall too.

    Michelle @fitnpoor.com

    November 11, 2013

  23. @Lance, Once the automatic investing and saving starts, you really don’t miss the money, and you don’t need to worry so much about money!
    @Bryce- For people like Siegel, I’d suggest watching how much they borrow and look at worst case scenarios before over leveraging.And billionaires should probably have at leas a million in an emergency fund!
    @Michelle- Definitely true that when you’re dealing in finances on such a large scale, the risks are outsized as well!!

    Barbara Friedberg

    November 12, 2013

  24. What a wake up call! Even high net worth people can hit the skids. What a story. I’m going to redirect more funds into my emergency fund right now. Do you have a good guideline for what’s a good amount? Thanks!

    Buck Inspire

    November 13, 2013

  25. Hi Buck, I tend to be anxious by nature, so I compensate by keeping a large amount of available cash in our emergency fund. We have about one years living expenses in cash investments.

    Barbara Friedberg

    November 14, 2013

  26. Everyone could do with an emergency fund, moreso the billionaires since they suffer the same emergencies we do only maybe at a more massive scale!
    I try not to dip into my e-fund as much as possible and keep putting away small amounts from each paycheck to grow it. Consistency is what has helped.

    Simon @ Modest Money

    November 18, 2013

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