Poor budget choices and failure to follow basic financial principles can send even therichest peoplewith a highnet worthinto debt.
Millionaires have more money than most of us can imagine. To put into perspective $1 million equates to 588 months, or 49 years, of the average rent price in America.
For the 57% of Americans who have less than $1,000 in savings for an emergency, it’s inconceivable what it would be like to have so much money.
So, how does someone who has at least $1 million dollars just go broke?
Everyone Needs a Budget
$1 million may sound like an everlasting amount of money, but it is, in fact, finite. Even $1 billion does come to an end at some point. Having a large net worth does not guarantee security, a good credit score, or long-lasting happiness.
If millionaires wish to use their money wisely they need to create a budget. Of course, many of them may hire financial planners instead of using free spreadsheet software to work out where their money should go. However, the same principle applies: decide how to spend your money before you make purchases.
Just as non-millionaires can be impulsive and fail to track their expenses, millionaires are also capable of making this budgeting mistake. People are people, and they make emotional decisions. If a millionaire doesn’t budget properly and starts spending on personal chefs, expensive cars, and other luxury amenities, they may quickly run out of money. Sometimes millionaires, especially new millionaires, feel they have so much money that they lose perspective on what they can afford.
According to a CNBC report, 65% of NBA players file for bankruptcy five years after retirement. Analyzers theorize it is because it is common for athletes to come from middle-class or low-income families. Therefore, they don’t likely have the financial literacy to spend their millions responsibly or have a good perspective on the limitations of their funds.
While the NBA is working to instill financial literacy in their players, this can be a lesson for anyone. Budgeting is important. If unexpected money comes your way, take a moment to decide the wisest way to spend it instead of celebrating by buying everyone in the bar a drink.
They Lost Their Primary Stream of Income
If millionaires rely on one primary stream of income, and that stream fails them, then they are in a position to go broke. This happens to millionaires the same way it happens to us. If you only have one job or your household has only one breadwinner, then it can be devastating to lose that job. It’s the same for millionaires but on a much larger scale. If their financial planner didn’t anticipate the loss of income, they may not have enough money to pay off debts or maintain their lifestyle.
The truth is this: Those with the most money usually try to maintain multiple streams of income. In fact, according to research by CPA and finance author Thomas C. Corley, 65% of self-made millionaires had three income streams.
The wealthy who put all their eggs in one basket can find their earnings pulled out from under them if that business sours. For example, Patricia Kluge, a billionaire heiress who invested her cash reserves in her own Vineyard business. When the housing market crashed, the Vineyard dropped in value. Kluge auctioned off all her fine jewelry, but it wasn’t enough to save her from taking huge hits to her net worth and file for bankruptcy.
The average person can learn from this. While you might not need multiple jobs, it’s smart to diversify where your earnings originate in order to protect yourself in case something happens to one of those streams. People only have limited control over the success of their money sources. Additionally, keeping an eye on the job market and maintaining skills that can apply in multiple industries can make a difference for you in case you lose a job or your field loses relevancy. You probably don’t want to have only highly specialized skills that won’t make you appealing to anybody but your own company.
Bad Investments
Just as risky as it is to have only one stream of income, it’s equally risky to put a lot of money you own in one investment, or multiple risky investments, since you can lose a lot of money quickly.
The ability to make wise investment choices is good for anyone. When you invest in something, it’s important to ask yourself questions like:
- What are the risks of this investment?
- How safe is this investment?
- How does the investment work?
- Am I willing to maintain the investment?
- When will the investment pay off?
Millionaires Lose Money the Same Way We Do
While it may be harder for millionaires to accidentally lose all their money, the truth is, finances come down to the same principles whether you have $100 in your bank account or $100 million. You have to budget, spend responsibly, make sure you have reliable income, and be smart about investments. And of course, abide by the law.
Certainly! Let's break down the financial concepts and principles embedded in the article:
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Budgeting for Everyone: The article stresses the significance of budgeting, irrespective of wealth. It highlights the importance of planning expenses and being mindful of where money goes before making purchases. This aligns with fundamental financial management principles that emphasize the creation and adherence to a budget.
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Emotional Spending and Impulse Control: Both non-millionaires and millionaires are susceptible to emotional decision-making when it comes to spending. This behavior often leads to overspending and financial strain. It underscores the need for discipline and control over impulsive purchases.
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Diversification of Income Streams: The article discusses the vulnerability of relying solely on one primary source of income. Having multiple income streams is vital for financial stability, as highlighted by the statistic that most self-made millionaires have three income streams. Diversification minimizes the risk of financial ruin if one stream fails.
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Risk Management in Investments: It emphasizes the risk associated with investing heavily in a single or risky investment. It advocates for a prudent approach to investment, urging individuals to assess risks, understand the investment, and be willing to manage it actively.
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Financial Literacy and Awareness: The article mentions how financial literacy plays a critical role, citing examples such as NBA players who face bankruptcy due to a lack of financial education. It stresses the importance of understanding personal finances and making informed decisions.
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Long-Term Financial Planning: The article stresses the finite nature of wealth, highlighting the importance of long-term financial planning, budgeting, and being cautious about expenditures regardless of the amount of money one possesses.
In essence, the principles discussed in the article revolve around responsible financial behavior, including budgeting, avoiding emotional spending, diversifying income sources, risk management in investments, and maintaining financial literacy. These principles are universal and apply to individuals regardless of their wealth status.
