Riches to Rags: 4 Reasons Wealthy People Go Broke

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The income gap is a common topic of discussion. We talk about the wealthy as opposed to the middle class, the rich compared to the poor. We have come to know what a middle-class household’s finances look like, but how do you define the term “rich”? And how much money does one have to earn to be considered rich? A CNN publication addressed this question a while back, in which experts offered their thoughts. Those interviewed seemed to think it takes somewhere between $2 million and $12 million to be considered rich, depending on age and other factors. The higher end of this $2 million-to-$12 million nest egg would equal around $300,000 per year in annual retirement income. This is enough to pay all taxes, spend around $3,800 per month on housing, and have $12,000 per month for discretionary spending.

OK, so we’ve established what it means to be rich. That level of income truly is a great deal of money when you compare it to the average household, which brings in a little more than $50,000 annually. For most people, having a stable $300,000-per-year salary would mean no more scraping for savings, no more high amounts of debt, and much more financial freedom. For some, though, this money would be gone as fast as they could spend it, and they would be broke yet again. Why is it that some rich people go broke?

Stories of athletes and celebrities who earn millions and then go bankrupt a few years later have become fairly common. From older stories like MC Hammer to more recent tales like that of NFL player Warren Sapp, many of these riches-to-rags stories have common characteristics.