SIBRENA STOWE DE FERNANDEZ was sitting on top of her financial world in 2001. She owned a 5-year-old communications firm called Stowe Communications that boasted such clients as Universal Music Group and Epic/Untertainment Records. With the profits from her business, money left to her when her mother died, and her stock market investments, she amassed more than $1 million by the time she was 30. "I became very wealthy at a young age," the 44-year-old from Bayonne. New Jersey, recalls. "But I wasn't disciplined financially and I didn't think that I would ever run out of money."
But run out of money she did.
She didn't pay herself a regular salary, but rather took money out of her business for personal expenses whenever she needed it. She also didn't understand the importance at the time of not commingling business and personal funds. "I would pay my bills with my business checking account," she says. "It was very much in disarray."
She also spent her personal funds freely. For example, she paid approximately $50,000 in cash to remodel her home. When the job wasn't completed as fast as she'd expected, she couldn't hold the rest of the payments or change contractors because she'd already paid the money upfront. "I didn't know that I was supposed to pay for my home remodeling in phases. I spent whatever because I thought the money would always be there."
While a failure to budget caused some of Stowe de Fernandez's financial difficulties, bad advice compounded them. She had entrusted her taxes to an accountant who advised her to file an extension whenever she didn't have the cash on hand to pay her tax bill. As a result, in 2002 she found herself owing $25,000 to the Internal Revenue Service, and $9,000 in taxes to the state of New York. Making matters worse, part of her investment strategy had been buying stocks on margin--borrowing money from her brokerage to purchase more shares than she'd be able to afford on her own. By this time her margin debt had risen to $250,000, and the brokerage was demanding money.
With her tax and debt situations spiraling out of control, Stowe de Fernandez found one glimmer of hope: She owned her home outright, and she had equity. She sold her home in 2002 for $400,000 and with the proceeds strategically paid off all her debts. She settled some accounts for less than she owed by calling the creditors and agreeing to pay a lesser amount upfront. The $1 million dwindled down to $25,000 in cash as she paid off all...