Yahoo Finance 4 Biggest Ways Rich People Can Lose Financial Security
Few things are less inspiring than riches-to-rags stories about people who built a fortune that’s the envy of average earners only to lose it all.
But it happens.
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Acquiring wealth is only half the battle — preserving it often proves to be the hard part. If you’re progressing on your journey to financial security, the mistakes you avoid will be as important as the successes you achieve. Here are the wealth-wrecking missteps to avoid when you finally do get rich.
Financial Mismanagement Can Ruin the Rich, Same as Everyone Else
The rules of money management and healthy financial hygiene don’t change whether you earn $30,000 a year or $3 million. The traps of overspending, reckless investing and failure to keep track of your finances can foil the average and affluent alike.
“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.”
That last one is crucial because the more you earn, the more people you’ll have bombarding you with can’t-lose “investment opportunities.”
But the biggest danger is complacency, which can creep in when you build what feels like inexhaustible wealth.
“Easy come easy go,” said Jason Moll, CPA. “Oftentimes, wealthy people don’t maintain the same discipline that they had when they built their wealth. Wealthy people should try to preserve their assets and live off of their earnings. You should be mindful that if you’re not moving forward, you might be drifting backward.”
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Their Wealth-Generating Businesses Can Fail
Most wealth comes from success in business, said John Jennings, president and chief strategist of the St. Louis Trust & Family Office.
He said virtually all the truly high-net-worth individuals he works with — those with tens of millions of dollars — earned it by pouring all their energies and their entire savings into all-or-nothing entrepreneurial endeavors.
When it works, they get rich. When it fails, they go bankrupt — but it can fail even after it works.
“Rich people who run businesses can face big problems,” said Baruch Silvermann, financial expert and CEO of The Smart Investor. “Even if they have a lot of money, they can still lose it because businesses might fail or investments might go wrong. This can happen because the economy gets worse, what people want to buy changes, more companies compete, or the business is not managed well. If a business fails, they not only lose the money they put in, but also the money they could have earned in the future if the business did well. It’s also possible that if their business fails, they might owe money personally because of the business, and this could put their personal belongings in danger.”
Divorce Is Expensive — Especially for the Rich
According to Duke University research, wealthier couples have lower instances of divorce. But they’re hardly immune — and the results can evaporate personal wealth.
“When rich couples decide to split up, they sometimes have to share their stuff,” Silvermann said. “This includes things like companies they own, houses and money they invested — and this sharing can make them lose a lot of money.”
In 2006, Ohio State University released research that’s still widely cited, showing that personal wealth drops by 77% after divorce.
In 2020, research from the Journal of Marriage and Family showed that if anything had changed 14 years later, it changed for the worse. It revealed “82% and 76% reductions in personal wealth of men and women, respectively.”
And the rich are no exception.
“For instance, MacKenzie Scott, who is Jeff Bezos’s ex-wife, received 25% of the stake in Amazon — worth about $144 billion at the time — which was worth about $36 billion,” said Silvermann, who also cited Bill and Melinda Gates as an example.
While it’s hard to feel bad for two guys worth a combined $270 billion, the situations and net worths of Gates and Bezos are extreme outliers. In more typical cases, divorce can do to the rich the same thing it does to everyone else — cast their lives into financial disarray.
They Can Lose It for Posterity by Failing To Plan
Some wealthy people lose their money after they die. While they won’t miss it, their heirs certainly will.
“A lack of estate planning is a sure way to lose wealth,” said Renee Fry, CEO of the estate planning service Gentreo.
Like average earners, the wealthy sometimes avoid planning for the inevitable because they don’t want to confront the uncomfortable subject matter, don’t know where to start, are unsure how to divide their assets among their children or simply don’t get around to it.
No matter the reason, dying without a will — or better yet a trust — leaves their wealth and their wishes at the mercy of the courts or, even worse, squabbling heirs.
“Wealth can be lost due to a lack of estate planning when assets are not properly allocated or protected, leading to unnecessary taxes and legal expenses,” Fry said. “Without a clear plan, family disputes and inefficient distribution of assets can further erode the wealth accumulated over lifetimes.”
Even those who plan for their estates can forfeit a fortune if they don’t revise those plans as their circumstances evolve.
“I had a client who failed to update his will,” Morrison said. “When he passed unexpectedly, the legal fees and disputes almost halved his estate’s worth.”
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