Many people believe that once they hit that wealthy income bracket, they’ll stay that way. But according to experts, that’s not always the case.
“One of the best ways to go from rich to middle class is by thinking that you can do whatever you want and forgetting what has gotten you to being rich in the first place,” said Joe Osborn, finance and business editor at DealAid.
See: This One Mistake Can Tank Your Credit Score 100 Points Instantly
Find Out: 3 Things You Must Do When Your Savings Reach $50,000
“This is why a lot of rich people splurge on homes they can’t afford, cars they don’t need and investments they know nothing about,” he explained. “It’s a common pitfall, and most people who’ve made it to rich status should always remind themselves what has gotten them there and that losing money is a lot easier than making it.”
Below are the top ways people go from being rich to middle class.
A luxurious lifestyle can be really expensive to maintain, experts say — especially for the newly rich who have yet to understand how to properly manage their finances.
Sponsored: Open a new checking account and earn early paycheck access; up to 2 days early with Discover® Cashback Debit with Early Pay
Living on Debt
“The truth is, when people overlook the necessity of always living within their means, spending excessively on frivolities can quickly add up in the form of an overwhelming load of credit card debts,” said Mafe Aclado, general manager of Coupon Snake.
She explained that it’s not so much about getting rich, but staying rich. “And living a lifestyle that is supported by borrowed money is indeed one of the fastest ways to go from rich to middle class.”
Similarly, McKinzie Bean, personal finance mentor and owner of Moms Make Cents, agrees that one of the most popular ways that someone rich would lose money and be downgraded to the middle class is by incurring too much debt.
“Rich people tend to get into a lot of debt, thinking they have it all figured out,” she explained. “However, when a financial emergency occurs, like an investment failure or an unforeseen crisis, their debt payment structure comes crashing down, resulting in penalties and surcharges, eventually eating up resources allocated for other purposes.”
Bean said this can ultimately lower their net worth and cause a significant switch from rich to middle class.
I’m a Financial Advisor: Here’s the No. 1 Piece of Advice I Would Give My Younger Self
Bad Investments
Poor investments are another common reason rich people end up middle class.
“The more money people have at their disposal, the more likely they are to invest in high-risk, high-reward opportunities,” said David Kemmerer, CEO of CoinLedger.
These kinds of investments aren’t necessarily always bad, he explained. “People just need to make sure they aren’t the only investments they have. Rich people also need low-risk, safe investments to diversify their portfolio and create a safety net.”
Poor Money Management Skills
Even the rich sometimes make the mistake of financially biting off more than they can chew, and Aclado said this is another way they go from rich to middle class. “Sometimes, this poor money management could come in the form of buying a new car that costs too much to maintain, expensive vacations that they simply can’t afford at the moment or living in homes that simply cost them so much money.”
“Especially when all these factors are combined, and with all these costs adding up, it’s only a matter of time before the rich take a few steps down the ladder into the middle class,” she added.
Jake Hill, CEO of DebtHammer, agreed that overspending contributes to poor money management practices.
“This doesn’t just mean spending too much on clothes, but on many aspects of living — from the size of one’s home, to the type or number of vehicles, to hiring help around the house, etc.”
He added that people often have the tendency to scale up their lifestyle when their money scales up. However, when that’s not kept in check, it’s easy to go back down.
Neglecting Wealth Building
If you don’t build your wealth and invest in things with growing and lasting value, every bit of your wealthy lifestyle depends on your income, said Melanie Musson, finance expert with Clearsurance.
“If you lose your job, you’ll instantly lose your lifestyle,” she explained. “However, if you build your wealth, you’ll be able to maintain your lifestyle even if you face an emergency.”
She said this includes building passive income as another key component to conserving wealth. “Income from several sources will help you build sustainable, reliable wealth for life. If you don’t build passive income sources, you can quickly become middle-class if something goes wrong with your primary source of income.”
More From GOBankingRates
This article originally appeared on GOBankingRates.com: 4 Ways People Go From Being Rich to Middle Class
Credit: Source link
