So, can you name a way that a rich person might lose his or her money?
You know, I think that we often spend so much time focusing ways we can make and save more money, that we don’t really consider the myriad ways that we can lose money. That’s often the case with me, as I often think about ways to grow net worth before I’ll think about losing.
Upside is more fun than downside, right?
Well, consider what I wrote about Buffet’s Rule #1 when the temptation arises to ignore the risk of losses. If you have $100 and lose 20%, you’re down to $80. But to get back to $100, you have to gain 25%. It’s painful to lose money!
So it’s worth considering that there are plenty of ways that people can lose money. This includes people who have accumulated a fair amount of wealth. Here are some examples that come to mind for me:
There’s a saying that “pigs get fat, hogs get slaughtered”. I take that as meaning that if you get too greedy, you can lose out. Think of how many people pursue high risk investments and end up losing quite a bit of money. Chasing returns can be enticing, but there is often risk associated with potential reward.
This is a way to quickly lose money. Not only could you lose half of your marital assets, but your combined earning power could disintegrate into just one income – or very little. You’ll still need a place to live, have utility bills, etc. – but have less income to cover your costs. Plus, there isn’t a safety net of another person to bring in money if the other loses his or her job.
We live in a litigious society. One false move, no matter what a person’s intention and another could sue. While not an attorney, I’ve read and heard enough about crazy lawsuits that it’s clear that there are enough people who want to extract money from other people. Best to do what you can to protect yourself and be willing to fight back if necessary.
When someone loses a job, there is a reduction in income. Unemployment might help for a while, and if a person maneuvers a good severance package, it could ease the pain a bit. However, many expenses don’t simultaneously vanish just because income does. Long-term unemployment can really wreak havoc with one’s finances.
Okay, so health insurance might cover a lot of things. But if health problems are serious enough, one might be not be in a position to work and make money. This, on top of medical bills that a person might have to pay out-of-pocket, could really impact one’s wealth.
So, what could one do to avoid such issues? How about living within your means, focusing on your career, having the right insurance, and being mindful of risks in life as good starting points.
What do you think?
Do you see these as being major reasons for people losing money?
Have you known people who have lost wealth due to these or other events?
What suggestions do you have for people to avoid such fates?