Toni Braxton. Pamela Anderson. M.C. Hammer. Mike Tyson. Evander Holyfield. What do these stars have in common?

They all went broke. That’s what.

Even one of my favorite actresses – Lena Headey – reportedly had less than $5 in her bank account after she endured a divorce in 2013.

And let’s not forget the Guidice’s – Joe and Teresa. Not that they were all that famous in the first place, but their rise to the top and subsequent fall was rather spectacular, wasn’t it?

Some other examples:

  • Nicholas Cage once had homes all over the world, including a haunted mansion on Bourbon Street and a castle in Germany. In 2009, he owed over $6 million in back taxes and his homes were auctioned off. His career has since floundered.
  • Allen Iverson earned over $200 million dollars during his professional sports career yet managed to blow it all. Last summer, he was seen begging for change outside of a popular mall in Atlanta.
  • Stephen Baldwin filed for bankruptcy protection in 2009 claiming that he owed almost three times the value of his $1 million dollar mansion. He was also charged with tax evasion in 2012 after amassing a $350,000 unpaid tax bill in the state of New York.

All of these rich stars, and others, prove that anyone can go broke – even the richest among us. But it’s still perplexing to those of us who manage to get by on much, much less. So, how does it happen?

How Rich People Go Broke

Each situation is unique, but the basic reasoning behind the phenomenon is almost always the same. For the most part, rich people go broke for the exact same reason middle class people do. They spend more than they earn. 

The only difference between us and the very rich is that when they fall, they fall hard. Here’s how the richest of the rich manage to lose it all:

  • They spend more than they earn. No matter how much you earn, the magic formula for losing it all remains the same. When you spend more than you earn, you will inevitably run out of money one day. The stupidly rich just get to live the lie a little longer than the rest of us.
  • They take on huge amounts of debt. When rich people lose it all, it’s usually because they borrowed way more than they could afford to pay back. Instead of taking out realistic loans, they push the limits of what makes sense. Remember the Giudice’s mansion in New Jersey? Michael Jackson’s Never Never Land? R. Kelly’s 22,000 square-foot Chicago-area mansion? You get the picture.
  • They listen to bad investment advice. Almost every formerly-rich person has been preyed upon by a shady financial manager, family member, or friend. Stars who get rich seem to forget the golden rule of investing: “When something seems too good to be true, it probably is.”

What Can We Learn from Rich People Who Lose It All?

Most of us have little sympathy for people who have millions yet manage to lose it all. Still, there is plenty we can learn from their tragic stories. Even though their financial situations may seem polar opposite of our own, the same rules apply to all of our financial lives. Here’s what I think we can learn from rich people who go broke:

  • Live within your means. Whether you earn $50,000 per year or $5 million per year, you need to learn to live well within your means so that you have a cushion for life’s ups and downs.
  • Save for the future. High-earning stars never seem to realize that the money will stop flowing in some day. Whether you’re rich or middle-income, it’s important to save for the future so you have money to fall back on when times are tough – or when you’re ready to retire.
  • Don’t take investment advice from people who stand to benefit. When someone is trying to get you to invest in X, Y, or Z, ask yourself whether they stand to benefit. Also consider working with a fee-only financial advisor; they get paid for giving you advice and never benefit from your individual investments or transactions.
  • Don’t Keep Up with the Joneses. No matter how much you earn or where you live, we all have our Joneses. Ignore what others are doing financially and make the best financial decisions for your situation- and your family.

Whether you’re rich or poor – old or young – the same financial principles can spell your downfall or set you free.  So if you want to be rich – and stay rich – look at situations like the ones I mentioned above and try to do the exact opposite. No matter how much you earn, the key to financial freedom is in your hands.

What have you learned from rich people who go broke? Do you think the same financial principles apply to everyone?

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