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.
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.
1. Bad Investments
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.
2. Poor Financial Planning
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.
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.
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.
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.
6. Being Too Generous
Another cliché is that a rich person never lacks for friends — just ask anyone who has ever won a lottery. When you become wealthy, you suddenly hear from old friends, family members, associates and casual acquaintances you haven’t heard from in years or decades, looking for loans or handouts. You are also likely to be inundated with donation requests from charities. One common financial pitfall is lending or giving away too much money on the theory that the money will either never run out or be easily replenished.
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