According to the National Endowment for Financial Education, 70% of lottery winners or people who receive large windfalls end up broke in a few short years. This generally takes less than five years on average. And a full 30% will declare bankruptcy aka – go broke.
The issue impacting most of these folks is that they do not seek professional help in managing their newly acquired assets. As a result, they give away loads of money to their ‘close’ friends and relatives who somehow feel a sense of entitlement to the winner’s money and actively play on the winner’s feelings of guilt to coerce financial support.
We often overspend because we are trying to fill an emotional gap in our lives. No object will ever satisfy your soul.
– Dave Ramsey
Not everyone will receive a financial windfall during their lifetime (and certainly not from winning the lottery), but many do. For these lucky individuals, large infusions of cash can be a double-edged sword. Windfalls are often the result of lottery winnings, inheritances, and large cash or stock bonuses. For most, the first instinct is to spend lavishly on things they’ve always wanted or dreamed of owning. Usually these are things society has told us we need to communicate our success: oversized homes, exotic sports cars, and first-class vacations. Before you know it all your money has evaporated! You’ve gone broke!
If windfall recipients are not generously giving their money away, they often choose to spend it on depreciating assets like cars, boats, collectibles, fashion, home décor, etc. Or blow it on expensive 5-star vacations, fancy dinners, gifts, addiction, or other transient things. This isn’t necessarily the fault of those receiving the windfall. Afterall, financial education in school can at best be described as poor or nonexistent.
How is someone who lives paycheck to paycheck supposed to understand the magnitude of a multi-million-dollar influx of cash? These folks do not automatically become sophisticated investors due to their newfound riches. Worse, many times are lured into shady or risky investments that don’t pan out. Often they lose their fortunes to drug and gambling addictions.
But you don’t need to receive a financial windfall to blow your money on ego pumping excess! You can do it in grand style living paycheck to paycheck. In this article, we’ll focus on 5 ways keeping up with the Joneses will make you go broke!
1. Fancy Houses
There are houses and then there are HOUSES. It is natural after receiving a large windfall to either buy a home if you didn’t previously own one or to upgrade into something bigger and swankier. There’s no better way to broadcast your good fortune than through the purchase of a large ostentatious mansion to show The Joneses that you’ve arrived.
And why stop at just one house? Many who receive windfalls will go on to buy vacation homes, ‘investment’ properties, and homes for family members. Unless you’ve owned a home, you can’t appreciate the maintenance, utility, insurance, and tax burdens home ownership brings. As you might guess, the larger the home, the larger the costs of running and maintaining that home. Throw in luxuries like pools, spas, saunas, built in appliances, home theatres, acreage, outbuildings, housekeepers, gardeners, pool guys and the costs can rack up fast.
And you can’t forget all of the furniture and home décor required to fill all of your plus sized properties. It better not be the cheap stuff either. That would be embarrassing. Only the finest will do. The finest multiplied by thousands of empty square feet.
Home experts say that a typical homeowner should set aside 1-2% of a home’s purchase price for maintenance. Using this this rule of thumb, a home costing $2,000,000 will require up to $40,000 per year in maintenance on average. If the home is older or in a harsh climate, maintenance costs will be even higher.
Since windfalls feel infinite to those without financial experience, extreme, pricey, and multiple homes become a heavy financial burden that resembles a snowball rolling downhill. That maybe the reason Warren Buffet stills lives in the same house he purchased in 1958 for $31,500. If the Oracle of Omaha isn’t blowing his money on fancy mansions why should you?
2. Planes, Trains, and Automobiles
Huge homes and their oversized garages wouldn’t be complete unless you filled them to the brim with luxury and exotic cars, boats, jet skis, and other toys. Why not throw in a plane or two for good measure so you can fly to Napa to lunch with The Joneses all while skipping the TSA lines. Perhaps a yacht and a prime slip location would scratch that spendy itch.
Of course, the costs don’t stop with the purchase of these fine machines. Hefty insurance premiums, operation, and maintenance costs pile up on top of the six figures+ purchase price. For sake of illustration:
- Lamborghini oil change – up to $2,000
- Bugatti oil change – up to $25,000
- Bugatti tires – up to $42,000 per set of four
- Yacht’s annual maintenance – 20% of yacht’s initial cost
- Yacht insurance – 1.5% of the yacht’s value
- Plus, you’ll need to dock it somewhere, fuel it, and potentially hire a crew to operate it
- Gulf Stream? Forget about it!
While any one of these expenses in isolation may not break the bank, what we’re talking about is a multiplication problem – e.g. the more of these you have the spendier it gets. Thus, impressing The Joneses in such a fashion creates a ‘death by 1,000 cuts’ situation as all of these possessions require a constant flow of money. The fancier the machines and the more of them you acquire, the greater the sucking sound on your rapidly diminishing windfall. The greater the chances you’ll go broke.
3. Addiction Makes You Go Broke
Chances are quite good that if a fortune is acquired via gambling, you will lose it in the same fashion. Stories abound of fortunes being lost to gambling, alcoholism, and drug addiction. How is this an issue with The Joneses? Well, The Joneses love to party! And what better party than the one the Windfaller (person who receives a windfall) is paying for.
First, the big house, then the endless parties. Soon, a collection of ‘friends’ take up residence and expect their lifestyles and addictions to be generously funded – by you, of course. Some addictions, like cocaine, are quite expensive while others, such as alcoholism, can lead to chronic poor decision making. Gambling addiction combined with substance abuse is a real deadly combo and all but ensures wealth destruction in grand fashion. This combo pretty much ensures bad decision making and it a recipe for going broke.
4. Giving it Away
This may not seem all that bad since the Windfaller’s heart is in the right place when they pay off their relative’s mortgages, purchase them cars, and give money to their favorite charities. But excess giving is a primary avenue through which windfall recipients go broke. I’m not suggesting that a Windfaller be an Ebenezer Scrooge, but generosity deserves planning if it is to continue for any length of time.
Since most lotto winners and many heirs don’t hire professionals to assist them with financial planning, money is typically given away in large chunks (like $100,000 in a shot) versus doled out over time and as cashflow permits (cashflow from the proper investment planning).
Generally, the friends and family receiving these monies are no more financially savvy then the Windfaller. Therefore, they typically blow through it in glorious fashion and keep coming back to the well. In turn, through some combination of guilt and coercion, the giver often feels compelled to keep giving. Without proper planning, in time, there’s nothing left to give.
5. Lifestyles to Go Broke For
When you have the mansion, the Ferrari, and the yacht, you now need the lifestyle to match or else you’ll fail to impress The Joneses. They’ll expect to see you at the yacht club, at the charity ball bidding in the live auction, at the country club, in Punta Mita, Hawaii, Paris, and Rome.
And while you’re there, they’ll expect you to be loading up your social media with photos of exclusive resorts, expensive excursions, and Michelin rated dinners. Of course, it would be a shame if you neglected to dress for the occasion in your finest designer threads.
Next will come recommendations for the plastic surgeons, the private schools, interior designers, nannies, pool guys, landscapers, personal chefs, and private trainers. Afterall, since you can you afford mansions and Lambos, you can certainly afford to pamper yourself a little.
Tempting as it is to adopt the A lister lifestyle. Resist the urge. Doing so might be the very thing that keeps you from going broke!
Do not save what is left after spending, but spend what is left after saving.
– Warren Buffett
