While wealth certainly has its rewards, it’s not a magic elixir that prevents you from ever having to worry about money again. Rich people often find themselves poor after making bad financial decisions. According to a blog by renowned penny stock investor Timothy Sykes, the average millionaire goes bankrupt at least 3.5 times.
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The reasons rich people go broke are not all that different than the reasons anyone goes broke. It almost always comes down to a combination of bad judgment, bad luck and bad timing.
In the case of rich people, however, there is also an element of overconfidence in their financial IQs. One of the surest ways to watch your money disappear is to believe you can’t make a mistake with it.
Here’s a look at six financial pitfalls of rich people who become poor.
The fastest way to grow your wealth is by investing in a stock or business that suddenly shoots up in value. But that also works in the other direction – you can lose money in a hurry by betting on the wrong investment. One common mistake rich people make is failing to do their due diligence when it comes to investments. Another mistake is investing in businesses owned by friends or family without properly vetting them, Motley Fool reported.
You’ve probably heard variations on the Benjamin Franklin quote, “When you fail to plan you plan to fail.” It’s as true in the financial world as anywhere else. Rich people who don’t create a financial plan often set themselves up for failure. They not only fail to properly track and manage their income and expenses — they also fail to prepare for unexpected events that can drain their money in a hurry.
3. Overspending
Just because you’re rich doesn’t mean you should go out and spend like you’re rich. Most financial advisors recommend spending less than you can afford to bolster your savings and ensure your financial security. But many rich people go in the opposite direction by buying bigger homes than they need, or more expensive cars, or yachts and country club memberships they rarely use. Not only do they overextend themselves when purchasing the items, they then have to spend a lot of money to maintain the assets.
4. Scams
Rich people tend to be more susceptible to scams than others, according to Paramita Das, a financial analyst at 7Prosper. These scams can range from business fraud and fake charities to outright extortion. Research cited by The Conversation found that overconfidence is an “important factor” in fraud vulnerability because many overachievers – including rich people — overestimate their abilities. This explains why financier Bernie Madoff was able to dupe so many wealthy and well-educated people with his Ponzi scheme.
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5. Lack of Financial Savvy
It might sound counterintuitive: rich people who lack financial savvy. But it happens more often than you might think — especially when it comes to celebrities who earned their wealth quickly such as entertainers or professional athletes. You could fill a small library with books on all the celebrities who went from rich to poor because they didn’t have the proper training in money management, or failed to recognize when they were being duped.
According to Entrepreneur, not having a budget is a common way that millionaires end up broke. These soon-not-to-be millionaires don't go over their bank statements or monthly bills to make sure that there aren't any unauthorized transactions or that they weren't overcharged.
Rich people who don't create a financial plan often set themselves up for failure. They not only fail to properly track and manage their income and expenses — they also fail to prepare for unexpected events that can drain their money in a hurry.
Real estate investment is not a get-rich-quick scheme. Instead, it's a long-term strategy that can steadily build wealth over time. As you continue to own and manage properties, their value appreciates, and your equity grows. Diversifying your investment portfolio is a crucial wealth-building strategy.
Late fees. No one likes to pay pesky late fees when they miss a bill or payment, especially rich people. That's why they're diligent about setting up auto-pay on all their accounts, from mortgages and car payments to credit cards and insurance, according to David Bach, author of Smart Women Finish Rich.
Indeed, some wealthy individuals are even said to suffer from “affluenza,” a social condition among those who are excessively focused on material possessions and consumerism, to the point where their personal values and behaviors are negatively impacted.
In fact, the majority of millionaires didn't even grow up around a lot of money. According to the survey, 8 out of 10 millionaires come from families at or below middle-income level. Only 2% of millionaires surveyed said they came from an upper-income family.
As of today, no billionaire is within striking distance of becoming a trillionaire. Elon Musk is, at present, the world's richest person, with a net worth of $206 billion, while Jeff Bezos is in the number two position with $179 billion, according to Bloomberg.
Key Takeaways. Sudden Wealth Syndrome (SDS) refers to a psychological condition or an identity crisis in individuals who have become suddenly wealthy. Sudden Wealth Syndrome is characterized by isolation from former friends, guilt over their change in circ*mstances, and extreme fear of losing their money.
A study published in the Journal of Child and Family Studies found that the children of the very rich often struggle with identity formation. The study found that the children had a difficult time developing a sense of self and often felt disconnected from their parents and their communities.
One thing that most rich people have in common is that they are risk-averse. At the same time, they always think big. Becoming wealthy means taking as little risk as possible to achieve as great a reward as possible.
“The biggest way rich people can lose their wealth is from a lack of financial management,” said Alexa Cruz, personal finance expert with Finder.com. “This means not keeping tabs on what they're earning versus spending, skipping out on budgeting and making high-cost investments with no research.”
And one crucial detail to note: Millionaire status doesn't equal a sky-high salary. “Only 31% averaged $100,000 a year over the course of their career,” the study found, “and one-third never made six figures in any single working year of their career.”
Studies indicate that millionaires may have, on average, as much as 25% of their money in cash. This is to offset any market downturns and to have cash available as insurance for their portfolio. Cash equivalents, financial instruments that are almost as liquid as cash. are popular investments for millionaires.
Many self-made millionaires have money coming in from several places, including their salaries, dividends from investments, income from rental properties and investments they have made in other business enterprises, to name a few examples. If one income stream slows down, there's another that can take its place.
Introduction: My name is Kerri Lueilwitz, I am a courageous, gentle, quaint, thankful, outstanding, brave, vast person who loves writing and wants to share my knowledge and understanding with you.
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