How Rich People Go Broke

How Rich People Go Broke - picture of broken piggy bank

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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?

Additional reading:

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  1. You hit the nail right on the head. I also feel that it has a lot to do with the old saying, “Easy come, easy go.” They see it come in like a flood and spend with wreckless abandon. Never is the possibility that the gravy train will stop crossing their minds. Also a good helping of entitlement probably adds to that desire to live it up like there is no tomorrow. Well, either way, most of the people you mentioned lived lives none of us will ever see. Ahh, memories.

    Keep cranking,

    Robert the DividendDreamer

    1. I know. If only they would save 20% of their money to begin with, they would have plenty. They just think the gravy train will never stop for some reason!

  2. I think it’s so sad when I hear stories of people making ginormous incomes and blowing it all. It’s also sad when regular folks blow their entire income, but I think the reason these particular stories sadden me is because they seriously could have had it all had they been smart with their money. Many of them probably could have been set for life, and never had to work again, had they made better choices. Ah, well.

    1. Yep. It really is sad. Greg reminded me of Speidi this morning- Spencer and Heidi, remember them? I think I read somewhere that they spent all of their “The Hills” money on expensive crystals and had to move into Spencer’s parents house.

  3. You know, l used to have a lot of these actors for clients in the past. Pretty much, they would come in, pick up whatever they wanted,and we charged it to their accountants. They never knew how much they owned, and what was happening to their money. A lot of them of course ended up having money troubles, including one of the names you mentioned, who l saw go from a well mannered person with a young son to an egotistical twat. The only client l ever dealt with who wrote her own checks and knew where every penny went was Joan Collins. She said she worked hard for it, cos you know l was nosy, and had to mention it.. Bet she’s not broke 🙂

    1. Yep, me too! I would work one year and never work again.

  4. As you say (or imply?), those mega-earners went down in financial flames for the SAME reasons that many middle-income people end up either at a payday loan office or in bankruptcy court. Or first the one and then the other.

    And that makes the 4 lessons at the end of your post all the more pertinent. If you want to be in financial control of your life — never mind if you want to be financially independent — those 4 lessons are AXIOMATIC. They must be followed. No matter how much money you make.

  5. Just so you know… Allen Iverson gets $30M when he turns 55. When Reebok signed him to an endorsement deal that amount was put into a deferred trust until then. I don’t know if this was Reebok’s idea or his agents, but it looks like a genius move now.

    Hopefully he has just learned his lesson and his co-trustee(s) don’t let him go crazy with this money.

    1. 55! That’s in like- what- 15-20 years? I hope he makes it that long! I also hope he doesn’t figure out a way to take out loans against it.

  6. Saving for the future is key. In some of these cases, they see the money coming in and never think it will stop. They are usually OK with their spending up until then just because they have so much money still coming in. But once it stops, it goes downhill quickly.

    I live in Philly and know all of the tales of Allen Iverson. It\’s well known that he never packed a suitcase when the team went on road trips. He would buy a wardrobe in the city where he was playing and then, get this, would leave the clothes behind and buy new clothes in the next city. Blows my mind even to this day.

    1. That is insane. It’s hard to feel sorry for him if that’s the case.

    2. That also skeeves me out. I don’t like to wear new clothes until I wash them (other than trying on the clothes in the store). Man, I just don’t understand people.

  7. I think another point to think about is sports athletes and the realization for them that the money will definitely stop once they retire. There are a lot of former NHL players in my hometown who coach or run hockey camps, which is great but they’re not making the $40k/month they once did in their glory days.

    1. Yep! No matter how much you make, you have to plan ahead. Your career-high earnings won’t last forever.

    1. If it’s on Netflix, we’ve probably seen it. It seems like I remember watching something like that!

  8. I saw the same documentary that Stefanie mentioned and it was a really good piece. It’s sad, on one level, but just goes to show you that having money – even gobs of it doesn’t bestow being wise with it. The other common theme I’ve seen with many of these stories is many seem to be up to their eyeballs in tax problems. It may not be sexy for everyone…but that’s why planning for the future and spending less than you earn is so vital.

    1. Yep, tax problems all over the place! Get an accountant, people!

  9. Just because someone has a talent doesn’t mean they are smart. Some of them are so needy for attention and validating that they rely on an entourage to make them feel important. Those hangers on suck the money out of the athlete or actor etc. like sucking liquid through a straw…a very big straw. They want even more money so they invest in questionable ventures and are probably doomed to go bust from the start and if the person would just think about it for a while, they should be able to see that as well. But they are more concerned with keeping up the appearances by buying mansions, expensive cars, gold jewelry and traveling everywhere with their groupies who of course need airfare also. As soon as the person loses their money, the groupies are gone. Old saying is, “no one cares more about your money than you do.” So true.

    1. I like your first sentence. You’re right- just because someone has a talent, whether it’s acting or athleticism, doesn’t mean they are financially literate!

  10. I think there is a huge emotional part of the equation as well. People are not secure in who they are so they go through all kinds of changes, especially when the money comes very quickly, that they don’t know how to handle it and revert back to their comfort zone of not having much money. At least that’s what this Jack Canfield book Im reading is saying. ha ha! I’d really, really like to test that theory! 🙂

  11. One of the craziest stories of an athlete going broke is Latrell Sprewell the basketball player. He was obviously way above his means and when he was offered a contract of $21 million for 3 years which he found insulting saying that he has a family to feed! I don’t think he ever signed a contract after turning that down. I think a lot of athletes came from poverty and don’t know how to deal with all the money…much like lottery winners who go broke quickly.

  12. Anyone can go broke. It amazes me that people don’t set aside something for a rainy day. I think lots of professional athletes and famous people go from nothing to millions and have no clue other than to party. I also think they get sucked up in supporting friends and family who crawl out of the woodwork. If I won the lottery, I wouldn’t tell a soul and I’d still act the same, but with a 7 figure bank account!

  13. Great solid advice and tips that we need to pass on to our children to live by. You’re right it is hard to have sympathy for people who have lost millions. Living below your means I believe is so important. The funny thing is that if all these people lived a little below their means it would still would have been a standard of living of what we average folk call rich.

  14. I never understood why people don’t get that if you spend more than you make, you’re going to go broke.

    One of the first personal finance books I ever read was the millionaire teacher and it quickly taught me that appearances can be deceiving. I prefer to focus on saving instead of material goods.

    That being said, I’m happy to spend on experiences like travel.

  15. I hope the sports leagues are doing some kind of financial education for their athletes. These stories are all to common. It doesn’t matter the size of the pay check if you don’t live by these common sense principals, you go broke making $10 or $10 million.

  16. I see it all the time with high earning clients and friends. There is a great sense of lifestyle inflation with paycheck inflation and a lot of it has to do with the Joneses. The crazy thing, though, is that all of those Joneses are broke or swiftly heading there. I have to remind my clients of that all the time when I am forcing them to reign in their lifestyles.

  17. Live within your means is the best way to make sure you never go broke I think. It’s always sad to see and hear about these rich people going broke. I did not know that Iverson had to beg. Oh my!

    I think it should really be mandatory to teach kids about personal finances in elementary school and high school so they have some knowledge on PF.

  18. I think one of the lessons we can learn is that we need frugality at any income level. My hubs and I have had our income go up and down multiple times. As our income rose we would spend more money, however we still had to watch how we spent the money. If you want the best of everything you may lose all your money trying to find it.

  19. So I am wallowing in my own stupidity and don’t really feel sorry for these stars who like some one else mentioned would have put just a tiny percent of their wealth away, could retire early. But instead you see them on TMZ or whatever buying this or flaunting that. I do feel sorry though that their fall from grace is so public. And I still don’t understand how lottery winners go broke? They are common folk like us so I would have thought they wouldn’t be all crazy when winning a large sum.

  20. Hate to see this, but it happens more times than we care to admit. I would also add that many try to prop up their friends and family with their money. The entourage grows large and they are left with paying them. Just unnecessary, really!

  21. Ben Luthi says:

    Or they put their trust in the wrong people—like that hockey player whose parents spent all his money!

  22. Living on less and investing the difference is the perfect formula for not continuing to need a high income. It seems like some celebrities or rich people have an income that is really not sustainable. Not every actor gets great parts for the rest of their life. And most athletes cannot continue their sport for over a decade. Eventually the books deals and endorsements are going to dry up and then if you\’re used to living on millions, with lots of debt, you\’re in for financial ruin. I think it makes normal people feel like they could never get ahead, when that\’s not true at all.

  23. I think one of the greatest problems people who accumulate wealth and fame very quickly is that they tend to surround themselves with yes-men, in large part because they want to ride the gravy train while it lasts. And while the average person earns significantly less, we still have the tendency to surround ourselves with people who tell us “you deserve it”, “everyone has debt” and “YOLO”, rather than encouraging us to save/invest wisely and spend purposefully.

  24. I never understand it when I find out rich people take out mortgages. You want a $6 million home? Well, you made $20m in your last flick. So even after agent and taxes, why not just pay for it outright?

    I know they then have to keep up with property taxes but sheesh, people.

  25. The other group whose financial behaviour boggles my mind is lottery winners.

    Some of them are penniless again within a few short years. How do you blow millions of dollars and not have one single sale-able asset left?! When you’re talking about the kind of $$ the lottery winners, actors, athletes etc are receiving surely the simple logic is to live off the earnings not the capital???

    I’m hoping this will be a ‘challenge’ for me in the future… what will I do with that $20 million I just won on lotto? 🙂

  26. I can’t believe Iverson was begging for change. That’s a sad story.

    That $30M trust with Reebok (that he can’t touch for years) is a brilliant idea though. There’s probably an investment idea in there somewhere: a voluntarily-agreed upon trust, which keeps people away from windfalls.

  27. The rich certainly spend a lot to keep up appearances where the frugal prefer to blend in as normal simple living folks. It does seem that the downfall of many wealthy and famous is tax related because of bad people they trusted. Actually the fallen seem to surround themselves with people with bad advise, tax related or otherwise.

  28. Seems like famous rich people are more susceptible to the keeping up the with Joneses mentality than perhaps us normal people are.

    I like these extreme examples though–they help highlight why it’s so important to save and to wisely manage whatever amount of money you do have. Money works the same way for everyone and you can either control it or it will control you!

  29. It is so sad to read about these stories, but it’s a confirmation of the point that it is not important how much money you make in order to save for the future. However I can’t stop thinking that with such an amount of money I would live a RICH frugal life ….

  30. I think the biggest thing I’ve learned is that you never know when your source of income — or your ability to keep earning at your current level — will no longer exist for you. That’s why we’re prioritizing investments while we know we’re making money so that if there’s ever a time that we struggle to earn it we won’t be SOL 🙂

  31. What?! MC Hammer went broke? That guy was the man back in the day. Hopefully other rich people will read your post and avoid his (and others) mistakes.

  32. ESPN has a 30 for 30 which are mini documentaries, a similar topic is called “Broke” I highly recommend it. It’s amazing what athletes do with mass amounts of money and end up broke.

  33. I know it’s not possible, but somehow they should mandate that when entertainers get to a specific point they must have financial literacy courses. They actually do it in a number of the pro leagues for younger athletes. Hopefully, it will prevent future cases like Allen Iverson. I do wonder who are the people giving them advice and I want to tell them listen to me and you won”t be so screwed up!

  34. The answer is simple – living with your means. When Mike Tyson was at his peak he lived in a gigantic mansion complete with pet tigers. Not exactly what I\’d call frugal

    1. No, but that is about the dumbest thing I have ever heard. She wouldn’t know broke if it slapped her in the face. Ha!

  35. Interesting read! I can’t believe how many people don’t realize that earning millions, doesn’t make you rich, if you spend multi-millions. I think Patrick Ewing was the one quoted as sayings (in reference to why pro athletes make so much money) “People don’t understand, yes we MAKE a lot of money, but we Spend a lot of money”.

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