In a sad and shocking turn of events, legendary singer Dionne Warwick has been forced to file for bankruptcy protection. Despite an illustrious singing career that spans five decades, Warwick is down to her last $1,000. This pales in comparison to her debts which surpass $10 million to the IRS alone in back taxes, interest and penalties. Despite being in her seventies and well past her career peak, Warwick still manages to earn over $20,000 per month in royalties and other income, yet mismanagement leaves her with a paltry $10 per month after expenses.
Unfortunately its not surprising to hear about young athletes and entertainers going broke, but a talented singer and businesswoman with a 50-year career being in dire straights is sobering. How did she get there and what can business owners learn from her example?
1. Don’t outsource all of your financial decision-making. Much of Warwick’s financial problems stem from shoddy accounting and poor internal controls during several decades of her career. This mismanagement (and likely misappropriation of funds) by untrustworthy people left her vulnerable. She may be a singer, but earning millions of dollars per month at her peak made her a business and she should have played an active role in overseeing her fortune.
2. Never play fast and loose with the IRS. If you owe money to the IRS, this won’t go away. You have to address the problem head on. Letting a debt to the IRS linger will only add penalties and interest which can be worth more than the underlying debt if enough years pass. The IRS won’t let you off the hook simply because you fall on hard times. If you save 5 percent of your income and fail to pay income taxes one year, it could take 6 years of savings just to pay that off.
3. Don’t assume that your peak earnings represent your future expected earnings. It's best to be conservative and assume—for personal budgeting—that you will earn less, not more, over time which means you need to save for an uncertain future.Finance Watch articles.
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