Five reasons why rich people go broke

We have all heard the saying that a fool and his money are soon parted.

Think of your social circle and business associates, as an example. 

I am sure there are a few people who continually throw money at bad investment schemes and are always going broke.

Throughout my career, I have seen people lose money for no “obvious” good reason.

And it’s not the market conditions – that’s  ] not the problem — they just can’t seem to hang on to their money, let alone make it grow.

All this  has very little to do with fate and everything to do with some bad habits and, very often, a bad mindset as well.

Some of these include:

 1. They have never had to manage a large sum of money before.

I am thinking largely of people who have earned an average salary for most of their life and then they come into a windfall.

Perhaps they win the Lotto or inherit a huge sum of money.

Either way, they are ill equipped to handle their new bank balance and it quickly dries up  — usually after they have bought the expensive car, the yacht, or a similar vanity purchase or depreciating asset.

2. They are too generous

There is nothing wrong with helping friends and family pay for things here and there if you can genuinely afford to, but often people who have suddenly come into lots of money don’t know where to draw a line.

Friends from their past will show up wanting them to invest in their new business venture and they may feel obliged to help.

Perhaps a cousin has a huge credit card debt that needs wiping.

Bad idea.

Business is business, and you need to look after your money rather than focusing on giving it away otherwise.

If you don’t, pretty soon, there will be nothing left to be generous with.

3. They get the wrong advice

Advice is a tricky area.

People either get the wrong advice by listening to so-called “professionals” who have vested interests in certain schemes or they don’t get any advice at all.

The latter group is made up of those who think they can invest in a new area, such as property, without consulting independent experts.

They may have read one too many get-rick-quick success stories and think investing is a cinch. Wrong!

4. They were never taught financial literacy as children

When growing up, we are taught how to drive, to read and write, and how to compose a stand-out resume. 

But how many of us were actually taught how to manage money?

Did your parents ever sit you down and explain the importance of understanding terms such as diversified risk, compound interest, budgeting and managing cash flow?

Did teachers ever explain the ins and outs of raising capital for business ventures, trading in the stock market, or selecting the right superannuation fund?

If you answered ‘yes’, then you are among the lucky ones.

Most young people enter the adult world with a poor understanding of managing finances and it is little wonder so many of them struggle to build their wealth or hang on to it.

5. They are afraid of being rich

Many of us aspire to be wealthy. 

For those who come from particularly poor backgrounds, being rich may seem like the preserve of an elite few.

It’s a club that you may wish to enter but you don’t feel like you deserve to.

In these instance, the person can subconsciously sabotage their finances because, deep down, they don’t believe they deserve to be wealthy.

On the surface they may be talking about their desire to be financially free, but they are acting in ways that cause them to squander any money they earn.

If this sounds familiar, the only option is to examine your deeply held insecurities about money and change them so they no longer hold you back.