5 Ways Wealthy People Lose Their Money and How To Avoid It, According to Experts

While wealthy people may have more disposable income than the average person, it does not mean that they are smart with their money. In some cases, the world’s richest can see their savings dwindle because of poor financial decisions or a failure to plan for the future.

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Even if you can’t afford to vacation aboard a private yacht or even upgrade to first class, you can still learn how to avert common money mistakes rich people make. Here are five ways wealthy people lose their money and how you can avoid it .

Money mistakes the super wealthy never make - that you might be doing now.

Unnecessary Expenses

More money can only mean more problems for some people, mainly if they are prone to overspending. According to a recent Clever Real Estate survey, around 74% of people have an overspending problem and 55% say they spend recklessly.

“The biggest way many wealthy people lose their money is not through dramatic and large financial mistakes, but through small ones. Just like anybody else, wealthy individuals can overspend and fritter their money away on unnecessary purchases,” said Erika Kullberg, an attorney and personal finance expert who founded Erika.com .

“Even wealthy individuals should try to avoid wasting money and should keep an eye on their budget. Money spent on subscription services, impulse purchases and status items can all be better spent to improve your financial life,” she continued. “Even if you have extra money on hand to spend, it can go to much better use if you use it to pay off debt, invest in your stock portfolio or max out retirement contributions for the year.

“While wealthy consumers may be able to afford to spend more on unnecessary purchases, those purchases can still be damaging to their financial life,” she added. “Ultimately, we all want our money to work for us, whether by earning interest in a high-yield savings account or by growing it in an investment portfolio.”

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Lack of Diversification

While the affluent often invest their money to help accumulate additional wealth, they may not know how to protect it in the long run. While some strategies are ideal for the short term, they may not be the best method for maintaining wealth down the road.

“Usually, accumulation of vast wealth occurs with highly concentrated ownership positions,” said Mark Eid, managing director of Acts Financial Advisors . “Diversification of that wealth into noncorrelated assets protects the long-term viability of that wealth. It is one of the paradoxes of wealth. The wealth accumulation and wealth preservation stages need to be managed differently.”

Overleverage

Another mistake wealthy people may make is taking on too much debt. Working with a financial advisor can help to ensure that you are on the right track and not overextending yourself or getting into an insurmountable amount of debt.

“Assuming too much debt, whether that is within a business or personal finances, can be a significant wealth eroder. Compounding interest, which amplifies the cost of borrowed funds over time, can divert necessary resources away from savings and investment opportunities,” Eid said.

Overconfidence Bias

It is not uncommon for the world’s wealthiest to mistakenly believe that they have a superior financial IQ and may be immune from ordinary pitfalls or have expertise in an area they truly know little about.

“This well-documented cognitive bias is where individuals overestimate their knowledge or abilities in one area and mistakenly believe this expertise extends to other, unrelated domains,” Eid said. “Overconfidence bias can lead to investing in high-risk ventures or speculative investments, underestimating risks and overlooking proper due diligence.”

Unforeseen Expenses

Even with solid savings, unexpected expenses can wreak havoc. The death of a loved one or a sudden job loss can create an unbearable financial hardship.

“Unfortunately, despite doing everything correctly, sometimes life just throws a curveball that comes with unforeseen expenses,” Eid said. “Some we have seen include medical emergencies, long protracted legal battles and business interruptions.”

The best way to avoid these common mistakes and mishaps is through proper planning. Working with a financial planner or advisor can help to ensure that you spend your money wisely, invest prudently and prepare for unexpected expenses.

This article originally appeared on GOBankingRates.com : 5 Ways Wealthy People Lose Their Money and How To Avoid It, According to Experts