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
Rich people who don't create a financial plan often set themselves up for failure. They not only fail to properly track and manage their income and expenses — they also fail to prepare for unexpected events that can drain their money in a hurry.
What creates 90% of millionaires? ›
Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined.
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.
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 millionaires leave their money? ›
Cash equivalents are financial instruments that are almost as liquid as cash and are popular investments for millionaires. Examples of cash equivalents are money market mutual funds, certificates of deposit, commercial paper and Treasury bills. Some millionaires keep their cash in Treasury bills.
What do most millionaires invest in? ›
No matter how much their annual salary may be, most millionaires put their money where it can grow, usually in stocks, bonds and other types of stable investments. Millionaires put their money into places where it can grow, such as mutual funds, stocks and retirement accounts.
What wealth puts you in the top 1%? ›
In the U.S., it may take you $5.81 million to be in the top 1%, but it takes a minimum net worth of $30 million to be considered among the ultra-high net worth crowd. As of the end of 2023, this ultra-high net worth population is on the rise, reaching 626,000 globally, up from just over 600,000 a year earlier.
How do millionaires multiply their money? ›
Investing in Stocks, Bonds, and Real Estate. Another way that millionaires make money is by investing in stocks, bonds, and real estate. Typically, you'll find that one of the significant advantages of millionaires, especially in stocks, is they benefit from compounding returns, meaning compound interest.
What is a silent millionaire? ›
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.
Millionaires don't always look like millionaires. That's because they spend their money modestly instead of pretentiously.
Millionaires Don't Keep Much in Their Traditional Savings Accounts. “My millionaire clients keep very little of their net worth in a traditional savings account. $10,000 or less,” said Herman (Tommy) Thompson, Jr., CFP, ChSNC, ChFC, a certified financial planner with Innovative Financial Group.
How do rich people pay their bills? ›
Billionaires (usually) don't sell valuable stock. So how do they afford the daily expenses of life, whether it's a new pleasure boat or a social media company? They borrow against their stock. This revolving door of credit allows them to buy what they want without incurring a capital gains tax.
What do millionaires focus on? ›
They focus on building wealth through investments in stocks, bonds and real estate. Live Below Their Means: Millionaires often spend less than they earn, leaving room for savings and investment.
Do 90% of millionaires make over $100000 a year? ›
Ninety-three percent of millionaires said they got their wealth because they worked hard, not because they had big salaries. 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.
How do the majority of millionaires make money? ›
Instead, 79% of millionaires in the U.S. today identify as self-made, according to the Ramsey Solutions National Study of Millionaires. The study showed that five careers produced the most millionaires: engineers, accountants, management, attorneys and teachers.
Do millionaires keep millions in the bank? ›
Millionaires Don't Keep Much in Their Traditional Savings Accounts. “My millionaire clients keep very little of their net worth in a traditional savings account. $10,000 or less,” said Herman (Tommy) Thompson, Jr., CFP, ChSNC, ChFC, a certified financial planner with Innovative Financial Group.
How much money does the average millionaire have? ›
To enter this high-end club, you must have a minimum net worth of around $11.1 million. Millionaires comprise about 8.8% of the American population. The average net worth of a millionaire in the U.S. is $2.2 million, according to Charles Schwab's 2022 Modern Wealth Survey.
