Updated: Oct 29, 2021
Rich and famous individuals go bankrupt more frequently than you would imagine. While it may be more difficult for the wealthy to lose all of their money, the fact is that financial rules apply whether you have $100 in your bank account or $100 million. It's worth considering why affluent individuals lose all their money because many of those reasons apply to average individuals as well. Avoiding several of these errors may help you keep more of your money and become wealthier in the long run.
1. Poor Budgeting
When we think of having $1 million, it appears to be an infinite sum of money, but it is not. Every sum of money has its limits and will eventually run out if it’s not cared for. After all, having a high net worth does not ensure lifelong financial security.
The ultra-rich and famous are just like average earning individuals in that they might be impulsive and lose sight of where their money goes. People are people, and they make decisions based on their emotions. If a millionaire or billionaire fails to budget correctly and begins to spend recklessly, they will eventually run out of money.
One example of poor budgeting amongst the rich and famous can be found within the NBA. The average salary of an NBA player for the 2020-2021 year was around $7.4 million. Despite this, according to Bleacher Report, 60% of NBA players file for bankruptcy five years after retirement. Analysts believe this is because many athletes lack the financial literacy to spend their millions properly or fail to understand and plan around the boundaries of their cash access.
Many wealthy people just overindulge, which consumes a large portion of their money. Consider the purchase of a yacht or mansion, for example. You might be able to afford to buy it, but ask yourself, can you afford all the added costs that come with it? When you buy a brand new boat or home, you have to pay for the expenses, repairs, staff, taxes, insurance, upkeep, heating and cooling, and so much more.
One real-life example of this overindulging behavior happened several years back with the wildly popular music artist 50 Cent. The rapper sold his $2.9 million Connecticut mansion that was reportedly costing him $70,000 per month just to maintain.
People of average wealth are also prone to overspending on items, leaving little space for maneuvering in their budget. To save for the future, keep an emergency fund, and pay all living expenses, it's preferable to buy only the things that you can truly afford after all the added costs have been considered.
3. Taking on Large Amounts of Debt
Many times when wealthy individuals lose everything, it's because they took out far more debt than they could afford to repay. Instead of taking out affordable loans, they stretch the boundaries of what is reasonable. Carrying debt will cause your net worth to decline rather than rise. This is true whether you've taken out a large mortgage on a mansion or merely accumulated some credit card debt. When a portion of your income or assets is needed to make debt payments, it's difficult to go forward in life and become financially healthier.
Consider, for example, the very famous Hollywood actor Gary Busey. The actor found himself in more debt than he was worth after a 45-year career in Hollywood in which he appeared in over 70 films. It was believed he owed between $500,000 and $1 million in debt in 2012 but only had $50,000 in his bank account. Busey apparently owed money to several organizations such as hospitals, banks, the L.A. Waterworks District, and even a storage company. In the same year, he filed for Chapter 7 bankruptcy.
4. Listening to Bad Investment Advice
A number of the rich-to-poor stories involve poor investment decisions or methods. Many successful individuals might have the right idea, investing in order to build their wealth over time. However, that individual may attempt to invest without conducting adequate research, having the proper knowledge, or advice. When this happens, they can lose a lot of money, just like the rest of us.
These poor investment choices don’t just happen in stocks and bonds, they can sometimes be made in companies such as restaurants. Burt Reynolds, for example, wasted millions investing in the PoFolks restaurant business, which had locations throughout the country. The restaurant’s failure, along with other poor investments, contributed to his bankruptcy, in which his debt was believed to be around $10 - $12 million.
Another major factor that can lead to the loss of wealthy individuals’ money in investments occurs when they become impatient or ignore associated taxes and fees.
5. No Financial Plan
Finally, no matter how rich and famous you are, going through life without a financial plan is one of the riskiest things you can do for your future. We should all have a good understanding of how much money we need to live on right now and how much we'll need in the future. We also need a strategy for how we will continue to grow and not lose our wealth. Unfortunately, this is one strategic point that many wealthy and average-earning individuals skip out on.
Schedule A Consultation with an Experienced Financial Advisor
Your financial situation may not look the same as the rich and famous on paper, but you’re likely to face many of the same complex financial decisions that they do. Here at Fourth Avenue Financial, our first priority is your overall financial success. We want to help you develop, implement, and monitor a strategy designed to address your individual situation to ensure all your decisions are setting you up for a path of financial success. If you are ready to start planning for your financial future, we are here to help. Contact us today at (304) 746 7977 to schedule a meeting with one of our experienced financial advisors or schedule online: https://calendly.com/fourthavenuefinancial/introductory-zoom.
Securities offered through J.W. Cole Financial, Inc. (JWC) Member FINRA / SIPC. Advisory Services offered through J.W. Cole Advisors, Inc. (JWCA). Fourth Avenue Financial and JWC/ JWCA are unaffiliated entities.