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.
FAQs
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.
How do most millionaires go broke? ›
When you understand how much money you have coming in as well as going out, you're in a better position to cut out unnecessary spending activities. According to Entrepreneur, not having a budget is a common way that millionaires end up broke.
How do 90% of millionaires make their money? ›
90% of millionaires made their money in Real Estate. I became a millionaire without owning a single property. But I own 6 small businesses that make me $725k/year. Here's why I prefer buying businesses over Real Estate: -- 1) Cash Flow The average rental property in the U.S. cash flows ~$300-$500 (some even less).
What are the 3 things millionaires do not do? ›
Millionaires prioritize avoiding consumer debt, making wise financial decisions, and aligning spending with long-term goals.
Why do some millionaires go 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.
What are the top 5 millionaires jobs? ›
By those standards, the five jobs with the most millionaires are engineer, accountant, teacher, people in management, and lawyer. Doctor is sixth. They make a lot of money, but also spend a lot. The poll found doctors aren't great in general at managing their money.
What do 90% of all millionaires become so through owning? ›
' - Andrew Carnegie? - Quora. How true is the quote "Ninety percent of all millionaires become so through owning real estate." - Andrew Carnegie? Probably as true as the statement “83.7% of all statistics are made up!”.
What kind of car do millionaires drive? ›
While some wealthy Americans drive luxury vehicles, an Experian Automotive study found that a whopping 61% of wealthy people with household incomes of more than $250,000 don't drive luxury brands. Instead, they drive less showy cars, such as Hondas, Toyotas and Fords, Ramsey said in an article.
Do millionaires keep their money in cash? ›
Millionaires also bank differently than the rest of us. Any bank accounts they have are handled by a private banker who probably also manages their wealth. There is no standing in line at the teller's window. Studies indicate that millionaires may have, on average, as much as 25% of their money in cash.
What are the top 3 careers reported among millionaires? ›
Dave Ramsey on X: "Top 5 Careers of Millionaires: 1. Engineer 2. Accountant (CPA) 3. Teacher 4.
The people who have all the money often go by unnoticed, dressing well, but without flash, driving used cars and living in the first house they bought in a modest neighbourhood. The authors called them the quiet millionaires. They often work in, or own, unglamourous businesses that spin off steady streams of cash.
What is the millionaires secret? ›
Millionaire's secret #1: Spend modestly.
That's because they spend their money modestly instead of pretentiously.
Where do millionaires hide their money? ›
Real estate
And in a 1 percenter world, penthouses and waterfront mansions can help protect or launder your fortune. A recent Times investigation into one Manhattan property found that more than 200 shell companies had purchased units in the building, including corporate fronts for 17 billionaires—and Tom Brady.
Why are so many millionaires unhappy? ›
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.
How do rich people run out of money? ›
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.
How do wealthy people lose their money? ›
“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.”
How do millionaires lose their money? ›
“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.”
Where do the majority of millionaires get their money? ›
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.
Do 90% of millionaires make over $100000 a year? ›
Only 31% averaged $100,000 a year over the course of their career, and one-third never made six figures in any single working year of their career.
Do most millionaires come from poverty? ›
Additionally, according to data analysis by Zippia, 80% of surveyed millionaires grew up in families at or below middle-income levels. Two percent inherited their wealth from their families.
