From Rags to Riches - Why rich people go bankrupt?

Author
Paramita Das

Doesn’t the idea of having a lot of accumulated wealth in your bank account make you feel good?”

“At the same time, how do you feel about your financial health getting crashed with a huge amount of debts? Haunts you right?

People don’t realise the outcome of a circumstance until they go through the situation themselves. You might not know how it feels like to become bankrupt. But why wait until the blizzard of bankruptcy hits you?

Bankruptcy is an image of a person in impecuniosity i.e.when he/she does not have a single penny in his/her own name.

However, the bankruptcy of a famous or rich person is different from that of a bourgeoisie or poor. Being broke for a rich person does not only mean having empty bank accounts but also suffering from huge loss and debts. Being rich undoubtedly increases your capability of saving money. But this plan is never turned into action. You adapt to the tendency of spending more when you earn more.

In this article, I’ll take you through the events which can turn a rich person into a broke.

 

i) Unnecessary expenses - Extremely high level of spending is one of the most important reasons why riches turn into rags. Their optimistic impression of having unlimited access to money increases their needs and demands. This leads to overspending on clothes, house, car, vacation, parties, etc. and hence, they fail to sustain wealth.

ii) Poor investment decisions - Economic downturn for rich people is catastrophic. When a person is said to have money, he/she does not only have it in the form of cash or in his/her bank, but also in the form of things like real estate, stocks or any other investment schemes. When these investment decisions are not taken carefully, they end up in dire straits losing all the money that they had invested.

iii) Vulnerability to Scams - Rich people are more susceptible to being scammed. Scammers can use any possible means to pull them into fraudulent activities, extortion, poor investments, fake charities, etc. just to rob them of all their money.

iv) Improper financial planning - Middle class people are considered to be experts in planning their finances because they realise that they have to manage all their expenses with the limited money available to them, unlike rich people. The primary reasons why they fail to plan their finances are - spending more than what is actually needed, not planning their non-monthly or additional expenses like going for a vacation, considering savings to be the last option while allocating their income, etc.

v) Business Failures - Encountering business failure is a nightmare for all the businessmen. Failure of a business career is definitely not surprising but the consequences are worse. These consequences might include – not able to pay the debts, being unable to pay its employees, etc., thereby resulting in Bankruptcy.

vi) Lending, Donating or Gifting - Rich people often fall under the trap of fake charities, donations and unnecessary gifting. Poor people look to them for any kind of financial mishaps. As a result, they end up distributing a huge amount of money either on credit, donations or in the form of gifts. If these expenses are not administered properly, then a rich person will soon fall victim to financial losses.

vii) Family or Relatives - The richest person in a family always becomes a target when there is need of money. Be it someone falling sick, organising a family occasion, celebrating festivals or buying gifts, they are compelled to spend a lot of money. Most people do it out of love while others do it to maintain their status. This is also one of the reasons why their bank balance starts decreasing and they might gradually incur losses in the long term.

viii) Over Borrowing - It is another common reason why rich people go bankrupt. Rich people believe that leverage is essentially required to become wealthy. However, they fail to understand that borrowing more than what is normally required will engulf you into the sea of debts.

Accumulating wealth becomes insignificant if you can’t sustain it. The above mentioned situations pave a direct way to bankruptcy. Therefore, it is very important to anticipate the consequences and protect yourself before it is too late to recover from it.

 

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About the Author
Paramita Das
As a financial analyst at 7Prosper, Paramita Das addresses the needs of individuals by planning and implementing wealth management strategies. She believes in establishing meaningful and long term relationship with her clients to inspire them to work towards their financial goals.

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