Have you ever looked at someone rich and felt a tinge of envy, believing you’d be set for life if you had all that money? Well, maybe you would — or maybe you wouldn’t. As many former millionaires have painfully discovered, there’s no such thing as having so much money that you’ll never go broke.
Financial security is determined by financial decisions, meaning everyone is susceptible to financial disaster. That’s why GOBankingRates looked for the many strange ways to go broke.
Getting an Inheritance
Some people who inherit money spend irrationally. They go on shopping sprees, take vacations and immediately start upgrading their lifestyles, ignoring smarter options like investing an inheritance.
“I’ve seen people want to buy everything from yachts to mansions that are completely out of budget after receiving an inheritance,” said Elle Kaplan, CEO and founder of LexION Capital, a New York-based financial management firm. “There’s going to be a huge rush of emotions when you suddenly have money — but those are your worst enemy.”
Failing to separate rational thought from short-term choices is a great way to go broke.
Winning the Lottery
Although hitting the jackpot is supposed to be the key to financial freedom, 44% of lottery winners spend their entire winnings within five years, according to Statistic Brain.
“It’s incredibly strange and unfortunate that individuals who suddenly acquire enormous amounts of wealth would’ve been better off had they never gotten that winning ticket in the first place,” said Kaplan.
Betting On a Concert
When she embarked on her Monster Ball tour, Lady Gaga had just $3 million to her name and spent it all creating the stage to get the attention of Arthur Fogel, current chairman of global music and president of global touring at Live Nation. It left her broke, she revealed in an interview on “Entertainment Tonight.” Fortunately, her stint in the poorhouse was short-lived.
“[Fogel] got Live Nation to write me a check for $40 million, and it changed my life and the life for my whole family,” Lady Gaga said.
Getting Involved In a Pyramid Scheme
Pyramid schemes are illegal. They promise big profits based primarily on recruiting others to join a shady program, rather than a program that involves a real investment or sale of goods, according to the Federal Trade Commission. And if you’re not careful, you could end up working for some of the biggest money scams of all time.
For example, by the time one company, Fortune Hi-Tech Marketing, was deemed a pyramid scheme and banned in 2014, it had attracted over 350,000 consumers, according to the FTC. More than 98% lost more money than they made. You’re almost guaranteed to go broke if you get lured into a pyramid scheme and invest money you can’t afford to lose.
If you get a sizeable lump sum of money, don’t become a banker or a lender, said Edwin Cruz, owner of Prosperity Financial and Insurance in Deltona, Florida.
“I know a couple that was awarded a large sum of money in a settlement. The children and other family members had a lot of business ideas. None of those deals went well, and the couple went broke in about five years,” Cruz said. “Invest wisely, because money can disappear quickly.”
Gambling Your Money Away
For some people, gambling is recreation. For others, it starts out that way but turns into a financially crushing addiction. It’s not unusual for gambling addicts to drain savings, raid business accounts, write bad checks and spend their children’s college tuition.
Although their lives and finances might crumble, many continue playing until they’re broke. The social cost of problems associated with gambling — including job loss, bankruptcy and divorce — is estimated to be $6.7 billion nationally each year, according to the National Council on Problem Gambling.
Coming Down With 'Entrepreneur Syndrome'
Many financially successful people go broke trying to get richer. They start businesses they don’t need and don’t have the experience to run. Washington Post columnist Michelle Singletary called it “entrepreneur syndrome.”
In an article, she cited NFL player Warren Sapp as an example of this. His bankruptcy filing, submitted in March 2012, listed $6.5 million in assets and $6.7 million in liabilities. His lawyer told the Tampa Bay Times that Sapp filed because of his business debts.
Going To Jail
Going to jail leaves some people broke. Home loans, cars loans, child support and other debts don’t pay themselves while you are behind bars. And that mounting debt can cause a person to lose everything.
“It’s smart to make a financial plan before you go and perhaps even file bankruptcy to give yourself a clean start when you get out,” said Randy Tarpey, CPA and owner of accounting firm Sickler, Tarpey & Associates, which has offices in Pennsylvania. “Otherwise, you can end up going to financial jail for longer than real jail.”
Selling Drugs Without Paying Taxes
Tarpey encountered an IRS auditor who had a two-year assignment going to jails to file convicted drug dealers’ tax returns. With back taxes, fees and penalties, some of those people were bound to owe the IRS substantial amounts of money when they were released. If they weren’t already destined to be broke before, a fat tax bill raised the odds.
“Anyone who is convicted, and therefore on record, as committing a crime where they made money, should file taxes. Not filing that income is a separate crime and a separate liability,” said Tarpey.
Divorce sometimes leaves one or both exes broke, as they often have less income and higher expenses when living apart.
In a 2012 New York Post interview, reality TV star Brandi Glanville revealed that it happened to her after splitting from Eddie Cibrian. She said they were living above their means, which left few assets to split. Once on her own, she had little money and no credit. If possible, try to avoid the high price of getting divorced or take steps to prepare your finances in advance.
Finding Bad Business Partners
Choosing a bad business partner is a common reason people go bankrupt, according to Catherine Cooper, founder of Catherine Cooper Qualitative Research. One partner can run up credit, drain the business and essentially run it into the ground.
When the unsuspecting partner discovers what’s going on, there’s no money and a mountain of debt. Even if you were unsuspecting or deceived, you’re responsible for what your partner does, Cooper said.
Being a Co-Signer
In many cases, people go broke co-signing for a family member or a friend.
Michael Eckstein of Eckstein Tax Services in Huntington, New York, recalled one woman in her 20s who co-signed for her aunt’s loan. The aunt stopped paying, and her niece was left to pay the loan, plus interest. The niece had to pay to avoid ruining her credit at a young age.
Co-signing a loan might seem like a simple favor, but it can land you in some serious trouble, Eckstein said. For that reason, it’s best that you don’t co-sign for a loan.
Falling Victim to Forged Credit Applications
Having loved ones secretly open accounts in your name can lead to your financial downfall. In many cases, the victim doesn’t find out until an unpaid creditor starts taking action.
There are legal avenues that can prevent the victim from being liable for the debt, but when the perpetrator is a family member or friend, some people don’t want to get their loved ones into trouble. Those who can’t afford or maintain payments on the debt ultimately face judgments, liens, garnishments and even bankruptcy.
Overindulging as a Single Parent
One parent got a loan to take their child to Disneyland with friends for the child’s seventh birthday, said Cooper. Another parent booked a weekend at a fancy hotel with room service to celebrate their child’s graduation from elementary school. And the parents put it all on their credit cards.
“A lot of single moms stick their necks out and do crazy things to give their kids whatever they want,” said Cooper. “But since kids don’t have an end to what they want, these women end up broke. These women are often driven by memories of their own deprived childhoods, so they overindulge their children [at] their own peril.”
Developing a Cocaine Habit
Some people start using cocaine for fun, but it’s highly addictive. The high doesn’t last long and many people escalate to using several grams a day. An “eight ball,” which is 3.5 grams, costs $150 to $250, or up to $91,250 a year, according to the Pat Moore Foundation, a drug treatment center. That’s clearly a route to going broke.
Being Sued For a Dog Bite
A vicious dog can be costly. On average in 2017, dog bite claims cost homeowners $37,051, according to the Insurance Information Institute. Homeowners insurance often covers the damages, but if the dog’s owners are uninsured or underinsured, they have to pay out of pocket.
Having Failed Restaurant Dreams
A whopping 60% of new restaurants fail in the first year, and 80% close by the fifth year, CNBC reported in 2016. Those failures leave a lot of people broke, and owning an empty restaurant building makes the failure a greater financial disaster, said Tarpey.
A Pennsylvania police officer bought a pizza restaurant for $450,000, Tarpey said. He tried to run it with his family, but it failed. In addition to losing all his money, he had an empty building that didn’t sell until years later — and only for a fraction of the cost.
“I’ve seen this mistake repeated a lot over my career,” said Tarpey.
Investing In Independent Films
Investing in independent films is a gamble, and in the instances Tarpey has encountered, most people lose. In one case, there was a $10 million production out of Philadelphia, and everyone lost their money.
“It was a bunch of rich friends, then not-so-rich friends,” he said. “People who invest in independent films often believe in the movie and the production, but those people aren’t thinking about real channels for profitability.”
Engaging In Dog Fighting
NFL player Michael Vick’s role in an illegal dogfighting ring sent him to prison. He filed for Chapter 11 bankruptcy on July 7, 2008.
Vick came out of prison in 2009, owing his creditors about $18 million. He was fortunate enough to return to playing football and eventually was able to dig his way out of debt. But he did it by living on, what was for him, a restrictive budget of $300,000 a year, reported ESPN.
Falling Victim to Inheritance Scams
It’s not uncommon to find people who lose everything because of advance fee schemes, Tarpey said. One gentleman liquidated his entire IRA trying to help someone in Nicaragua allegedly transfer an inheritance to the U.S.
The victim transferred a couple thousand dollars at a time for travel fees, bank fees and whatever the scammer asked. And, in return, he was supposed to get repaid plus make a profit. Instead, he was broke and got nothing.
“It was a little bit of greed and a little bit of trying to help someone out,” said Tarpey.
Trying an Alternative Housing Project
Author William Seavey’s plan to build a straw bale house in Washington ruined his life. He had licensed the property, had interested parties from three states and Canada there ready to build and was set to pour the foundation. But, the building officials stepped in and put an end to the project, he wrote in an article for the San Luis Obispo Tribune.
Seavey said he was left without a place to house his business, and since he had invested all his money in the project, he was also broke.
Overspending On a Reality Show Persona
What people saw on the reality show “The Hills” was fake, according to one of the show’s stars, Spencer Pratt. But he went broke trying to make it look real.
He was spending money as fast as he earned it on things like a million-dollar wardrobe he didn’t wear and a monster truck he drove only once for an episode. At the time of the 2011 interview, he said he had no real job and was living with his parents because of the free rent, the Daily Beast reported.
Undergoing Excessive Plastic Surgery
Another star of “The Hills,” Heidi Montag, also ended up broke and living with Pratt’s parents, according to the Daily Beast interview. Her financial vice, however, was excessive plastic surgery.
Montag had three procedures within the first year of the show airing, and later she underwent 10 procedures in one day, according to The Daily Beast. Getting plastic surgery was one of the ways she overspent and went broke.
Dreaming of a Music Career
A lot of people dream of making it big in the music business, and some people make serious financial mistakes to pursue their goals. Again, “The Hills” co-stars are examples of this mistake. Pratt told The Daily Beast that they spent nearly $2 million hiring big-name writers, producers and engineers for Montag’s pop music career, which didn’t take off.
Setting Up a Shady Tax Shelter
A tax shelter is supposed to be a legal way to help you avoid or reduce taxes. Country singer Willie Nelson plowed money into one, and it left him owing the IRS $16.7 million, which he couldn’t pay. Most of Nelson’s assets were eventually seized and auctioned off — except his guitar, Trigger, Forbes reported.
Nelson claimed he followed the advice of the accounting firm Price Waterhouse. If so, he’s an example of going broke due to bad professional advice.
Not Paying Back Taxes
People owe back taxes for many reasons, ranging from honest mistakes and lost paperwork to willful ignorance and tax evasion, said Eckstein. In most cases, the IRS just wants the money and will work with you.
But if you’re blatantly deceptive, don’t stick to payment plans or ignore collection attempts, then the IRS can take action — such as seizing your accounts and garnishing your wages — that leaves you broke.
Buying Too Many Houses
Gifting houses to people who can’t afford them isn’t a good financial decision, said Randall Janis, founder and owner of Clear Income Strategies Group.
One former Super Bowl pro bought houses for his mother and father, and his kids and friends. Plus, he had several houses himself. Once he got out of the league, there were all these properties in the possession of people who couldn’t maintain them, which left him with a serious financial dilemma.
“Just because you buy a house in full doesn’t mean you get to keep it. There’s property tax, upkeep and so forth, and somebody’s got to pay for it,” said Janis.
Endorsements are a huge source of income for many celebrities and athletes. In 2016, professional athletes were expected to earn over $924 million in endorsements, based on Opendorse data.
The problems come if they spend everything they make, and when the tides in their career change — they’re not as popular anymore or they leave the league — those endorsement deals go away. Some athletes aren’t prepared to make an adjustment to their standard of living, and that’s one of the ways extremely wealthy people run out of money, said Janis.
Living For Fun
During a 2010 appearance on “The View,” Mike Tyson said he was “completely broke” and “destitute.” This is a man who once had $300 million, lived in mansions and kept tigers as pets. When asked how the financial downfall happened, his reply was: “I had a lot of fun.”
Being Financially Tied To Your Car
A lot of people go broke because of their cars, said Janis. He told a story about one man who was driving a BMW with a $913 per month car payment, which he could barely afford. Add a couple hundred dollars in gas and the insurance, and he was basically paying $1,600 a month for a car.
It was more important to him than his house, so he downgraded where he lived to keep his car. In the end, that car destroyed his credit and left him broke because he couldn’t keep up his lifestyle and keep the car, said Janis.
Ignoring Professional Advice
When your pipes need work, you call a plumber. When your car needs work, you call a mechanic. But when it comes to money, a lot of people don’t call a financial professional — or they call one but ignore the advice — and they end up broke, said Janis.
“A client came in in 2008; he had $1.1 million in the bank,” he said. “I offered him some options, but he decided to continue handling the money his way. He came back in 2010, and only had $680,000 — basically enough to last seven more years at the rate he’d been spending. He was in trouble, and he knew it.”
Having an Affair
Cheating can leave your bank accounts empty. Depending on how long the affair lasts, the person who is cheating might spend hundreds or thousands on dates, gifts, hotel rooms and flights. Some people even pay their lover’s bills. The average affair lasts six months and costs $444 a month, or $2,664 in total, according to a survey by a U.K. retail company, CNBC reported.
Meanwhile, factor in a suspicious spouse or partner who starts forking over cash to investigate what’s going on — a private investigator told CNBC that he charged $100 per hour plus expenses — and the costs really start to add up. While all of this extra spending is occurring, there are still household obligations to cover. Infidelity is a prime example of how emotion-driven decisions make people go broke.
Living On Credit Cards
Using credit cards like free money is another way people go broke, said Cooper. People will get five or six credit cards with $5,000 or $10,000 limits. They’ll feel like they have a lot of free money, and they start living the good life.
But credit runs out and needs to be paid back, and that’s where the problems come in. Managing minimum payments often turns to juggling payments among the creditors that are the most persistent. Interest and finance charges start piling up, and the debt won’t go down.
“A lot of people end up exhausted and file for bankruptcy,” Cooper said.
Becoming a Real Estate Investor
A MarketWatch article outlined the case of an executive who had 12 properties valued at $3 million. When the market tanked and her renters moved out, she didn’t have money to cover the mortgages, repairs and maintenance. She lost all but one property to foreclosure and short sales and had wiped out her retirement savings.
Get lured into real estate without the proper experience or adequate capital, and it’s a countdown to financial ruin.
Paying Extra Taxes When You’re Broke
Typically, if you have to ask your credit card company to forgive a portion of your debt or you default on your mortgage, you’re already going broke or are insolvent. But a tax form 1099-C reports canceled, forgiven and discharged debt as income — and the taxes can be quite substantial, said Tarpey.
“Renegotiating your debt, then paying extra taxes is like taking one step forward and two steps backward,” he said.
Taking Predatory Loans
Hocking your car for cash or getting a title loan can make a bad situation worse. To repay these high-interest loans in a single payment, the average title loan borrower, about 58%, have trouble meeting their monthly expenses. The average payday loan will consume 36% of the average borrower’s paycheck, according to The Pew Charitable Trusts.
A lot of borrowers can’t afford that, so they get caught in a cycle of renewing these loans, which digs a deeper and deeper ditch.
Overspending On Pets
The website of the Sherman Law Group in Roswell, Georgia, featured a question from someone who had more than 43 pets at one point, including dogs, cats, birds, snakes, goats, horses and mice. Trying to pay the animals’ veterinary bills left the person struggling to pay for food, mortgage and car payments. The law group responded that it had several clients who’ve gone broke from pet costs, but that such debts could likely be discharged in bankruptcy.
Maintaining an Entourage
Janis held a workshop in which one of the participants had a 15-person entourage. The participant paid for almost everything for the entourage, including living expenses, cars and vacations. Basically, he was paying for their friendship and when the money disappeared, they were gone, Janis said.
An entourage is a source of ridiculous spending, and it’s definitely one of the contributing factors to many celebrities going broke, said Janis.
Hiring the Neighborhood
Rapper MC Hammer reportedly earned $33 million after the success of his 1990 album “Please Hammer, Don’t Hurt ‘Em,” according to Time. But, he filed for Chapter 11 bankruptcy in 1996.
On the “Opie & Anthony Show,” MC Hammer said he went through the money “giving back to the community.” He was paying 200 employees. It was the crack era, violence was rampant and death was a regular thing in his neighborhood. So, he said he took people out of his community and gave them jobs. Unfortunately, the strategy was ultimately unsustainable.
Living By an Accountant
One of Janis’ financial workshop participants has an accountant who sends him $46,000 per month. He doesn’t know how much money he has in the bank, all he knows is he was a star, and he had a $35 million contract. But if you do the math, he’ll spend about $6 million in 10 years.
“The money’s going to run out because it’s not being handled correctly,” said Janis. “Always know what you have. You can’t assume someone somewhere is looking out for your best interest.”
Allowing Authorized Users on Your Card
Adding an authorized user to your credit cards is risky and could send you to the poorhouse. Unlike a joint account holder who is also responsible for repaying debt, an authorized user has the right to spend but isn’t responsible for paying a penny. You’re on the hook for all bills.
Going Bankrupt by Murder Trial
High-profile murder trials can leave a person broke. After being acquitted in 2011 for the murder of her daughter, Casey Anthony reportedly filed for bankruptcy.
In her bankruptcy filing, she claimed to have $1,084 in assets, including less than $500 in cash and nearly $800,000 in debts. Of that, she owed $500,000 to a defense attorney, $145,660 to the Orange County Sheriff’s Office for investigative fees and $61,505 in court costs, according to court documents posted by MyNews13 via the Los Angeles Times website.
Investing In Penny Stocks
All investments have risks, but if you invest in penny stocks, the risk level is akin to gambling. Timothy Sykes is a seasoned trader who turned $12,415 to $1.65 million, according to Forbes. But even he admitted on his own website to losing his money roughly 30% of the time.
People who ignore the odds and stake money they cannot afford to lose, such as the mortgage or their savings, are destined to go broke. Penny stock investors should be prepared to lose their entire investment, the U.S. Securities and Exchange Commission has warned.
Getting Trapped In Overwhelming Medical Bills
Medical bills wreak havoc on people’s finances, especially those who have chronic and debilitating conditions. When paying such debts, it’s easy to run through savings, turn to credit and take out loans. Despite your efforts, you might still end up broke.
A poll conducted by NPR and its associates in 2015 asked people how healthcare costs had impacted their finances. A total of 27% of those surveyed reported being unable to cover basic necessities, such as food, heat or housing. And 7% had filed bankruptcy.
Not Having Savings
If a $400 emergency popped up, 40% of people would struggle to pay for it, according to a survey by the Federal Reserve reported by CNN Money. A 2018 GOBankingRates survey found that 58% of Americans have less than $1,000 in savings.
A lot of people live on the brink of financial disaster, having little or no savings. So it only takes one unexpected expense, such as a major car repair or a leaky roof, to push them over the edge.
Being Addicted To Video Games
Without a doubt, gamers are dedicated to their craft. But for some players, gaming can become an addiction. Gaming addiction can have social, physical, psychological and financial consequences.
Addicted gamers might neglect many aspects of real life, including their finances and jobs. For example, one sign of addiction is when gamers start staying up all night and are late to work or absent, which can potentially lead to them losing their jobs — and subsequently going broke.
Sending Money to Your Internet Love Interest
Online dating scams can be easy to fall for, especially when a thief hones in on a victim who’s looking for human connection — and who might be too generous for their own good.
In an extreme case, a 48-year-old man living in Illinois sent $200,000 to someone he met online and believed to be his long-distance girlfriend, ABC News reported in 2011. In 2 1/2 years, he wired money to England, Nigeria, Malaysia and Portland, Oregon. Unfortunately, he had been duped.
An FBI spokesperson told ABC News that people should watch out for a “sob story” and always be cautious with money requests, even if the relationship seems to be legitimate.
Going To Graduate School — Twice
People typically go to graduate school to further their careers, with the hopes of increasing their income. But graduate school can also come with a hefty price tag, one the grad is often left paying off for many years.
Forbes reported the story of one woman who got a master’s degree in fine arts at the University of Southern California film school but discovered that she couldn’t command the kind of salary in film that she would need to pay her student loan debt. She then decided to enroll at Pepperdine University School of Law to become a lawyer, in hopes of earning more money. However, in the years following graduation, she had more than $300,000 in student loan debt and was struggling to get by on her new-lawyer salary of $20,000 per year.
When it comes to choosing a graduate school, experts recommend keeping your total student loan debt at or below your anticipated first-year salary. Otherwise, you risk going broke.
Calling the Psychic Hotline
Niall Rice was heartbroken when his relationship ended. So when two self-proclaimed psychics promised to reunite him with the woman, he got “sucked in,” he told The New York Times in 2015. Rice said he paid the Manhattan-based psychics more than $718,000 in total for their services.
This is yet another sad example of when emotions can lead you to make bad financial decisions, leaving you broke and still in search of relief.
Getting an Extreme Home Makeover
The ABC show “Extreme Makeover: Home Edition” took participants’ deteriorating, cramped houses and replaced them with beautiful, brand-new, super-sized homes to help them get a new start in life. These were the kind of success stories that offered some ray of hope in the midst of an economic downturn and recovery.
However, these new, larger and improved homes also came with higher costs — for upkeep, taxes and utilities, the Beaufort Gazette reported. A new, higher home value reportedly bumped one family’s tax bill from $750 to $2,500 per year. The electric bill for the new, larger home cost between $500 and $600 per month, up from $200.
There’s a lesson here for even modest renovations: Consider all potential costs when planning a home remodel or expansion. If you can’t cover the costs of keeping up your new home, you risk going broke.
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