Few things are more inspiring than the rags-to-poverty stories of people who built fortunes the envy of those of average income, only to lose it all.
But it happens.
Check it out: 5 ways to improve your everyday finances
See also: What to do if you owe taxes to the IRS
Acquiring wealth is only half the battle; maintaining it often proves to be the difficult part. If you're on the road to financial stability, the mistakes you avoid are just as important as the success you achieve. Here are the wealth-ruining mistakes to avoid when you're finally rich.
Financial mismanagement can ruin the wealthy just as much as it can ruin anyone else.
The rules of money management and sound financial management remain the same whether you make $30,000 a year or $3 million. The traps of overspending, reckless investing, and poor financial management can lead to failure for average and wealthy people alike.
“The No. 1 reason wealthy people lose their money is a lack of financial control,” says Alexa Cruz, personal finance expert at Finder.com. “That means not tracking their income and expenses, not creating a budget, and making expensive investments without doing their research.”
That last point is very important because the more income you have, the more people will push no-lose “investment opportunities” on you.
But the greatest danger is complacency, which can creep in when you feel you have amassed unlimited wealth.
“What comes easily is also easily lost,” says CPA Jason Mohr. “Often, wealthy people don't maintain the same discipline they did when they created their wealth. Wealthy people should strive to preserve their assets and live on their income. Know that if you're not moving forward, you may be moving backward.”
Suze ohman: the first bill I have to pay each month
Wealth-creating businesses can fail
Most of your wealth comes from business success. St. Louis Trust & Family Office.
He said that the truly wealthy people he works with — people worth tens of millions of dollars — almost all built their wealth by pouring all their energy and all their savings into “all-or-nothing” entrepreneurship.
If it works, they get rich. If it doesn't, they go bankrupt. But it's possible to fail even after it works.
“Wealthy people who run businesses can get into big trouble,” says Baruch Silverman, financial expert and CEO of The Smart Investor. “Even if they have a lot of money, they can lose their money if their business fails or their investments go wrong. This can happen if the economy worsens, what people want to buy changes, more companies compete, or the business is poorly managed. If the business fails, not only do you lose the money you invested, but you also lose money that you could have made in the future if the business had been successful. Also, if the business fails, you could be personally in debt because of the business, and your personal possessions could be at risk.”
Divorce is expensive – especially for the rich
A Duke University study found that wealthy couples are less likely to divorce, but divorce is rarely an option and can wipe out a person's wealth.
“When wealthy couples decide to separate, they sometimes have to share possessions,” Silverman says. “This can include businesses they own, homes they own, money they've invested, etc., and this sharing can result in significant losses.”
In 2006, Ohio State University published a still-widely cited study that found that an individual's wealth drops by 77% after divorce.
If anything has changed 14 years later, it's for the worse: “Men's and women's personal wealth fell 82% and 76%, respectively,” according to a 2020 study in the Journal of Marriage and Family.
The rich are no exception.
“For example, MacKenzie Scott, Jeff Bezos' ex-wife, acquired 25% of Amazon, which was worth about $36 billion at the time, compared to about $144 billion at the time,” Silverman said, citing Bill and Melinda Gates as another example.
While it's hard to feel sorry for two men with a combined net worth of $270 billion, Gates and Bezos' situation and net worth are highly unusual — and more commonly, divorce causes financial turmoil in the lives of the wealthy, just like everyone else.
Failure to plan can result in lasting losses
Some wealthy people lose their fortunes after they die. They may not be able to spare it themselves, but their heirs will certainly miss it.
“Lack of estate planning can certainly lead to the loss of wealth,” said Renee Fry, CEO of estate planning services firm Gentleo.
Like people with average incomes, wealthy people sometimes avoid planning for the inevitable because they don't want to face unpleasant problems, they don't know where to start, they don't know how to distribute their assets to their children, or they simply don't have the time.
Whatever the reason, when someone dies without a will or leaving a trust, their assets and wishes are left to the courts, or even worse, to be fought over by their heirs.
“If assets are not properly distributed or protected, a lack of estate planning can result in the loss of assets and unnecessary tax and legal costs,” Frye said. “Without a clear plan, family disputes and inefficient asset distribution can further erode the wealth accumulated over a lifetime.”
Even those who have an estate plan in place can lose significant amounts of their wealth if they don’t revise the plan as circumstances change.
“I had a client who didn't update his will,” Morrison says, “and when he died unexpectedly, legal costs and disputes nearly halved the value of his estate.”
More from GOBankingRates
This article originally appeared on GOBankingRates.com: 4 Big Reasons Why the Wealthy Lose Financial Security
