As a CPA, I’ve been advising wealthy individuals in money matters for more than 30 plus years.
Plus I spent five years studying the money habits of the rich.
In my CPA business and from my research, I’ve documented a few common money blunders even smart, wealthy individuals make.
You would think they’d know better but they don’t.
The wealthy minority who make these mistakes all seem to be reading from the same script.
So, I thought I’d share a few of the most common money missteps of the rich:
1. Penny Wise and Pound Foolish
Many millionaires have the Rich Habit of frugality.
They penny pinch dry cleaner costs, bank fees, credit card fees, landscaper costs, grooming expenses such as haircuts and manicures, professional service fees such as CPAs, attorneys, doctor and dentist charges.
They will fight like a Tasmanian devil if they think they were overcharged for a grocery item or a restaurant charge.
And then these same penny pinchers will go out and buy a boat, Tesla, a diamond ring, or take an absurdly expensive vacation.
I have seen far too many wealthy business owners fight to keep wages down at their business only to spend that savings on yachts, big homes or expensive cars.
It’s as if they have Jekyll and Hyde battling it out inside their very own body.
While it’s a Rich Habit to watch your pennies, it is a Poor Habit when you take those hard earned pennies and make an expensive emotional purchase.
2) Sheep in Wolf’s Clothing –
The vast majority of the successful investors in my study and in my CPA practice are long-term investors.
They buy, hold and never panic. In fact, when the economy turns south they might double down on their investments, buying more at a discounted price.
But I’ve seen certain wealthy individuals who fall into a class that invest aggressively and continue to do so until the economy turns south.
Then they panic and begin unloading their investments.
These so-called “aggressive investors” are actually conservative investors, disguised as aggressive investors.
And their wolf disguise comes flying off when they begin to lose money.
3) The Devil is in the Details
Most wealthy individuals become wealthy in one of four ways:
#1 They Live Below Their Means, #2 They Expand Their Means, #3 They Do Both, or #4 They Inherit Their Money.
Some of the individuals who fall into the Expand Their Means or Inherit Their Money categories have something in common – they often do not pay attention to the details.
What I mean is that they don’t regularly (i.e. daily) audit their monthly bank statement, monthly bills or monthly credit card statement to make sure there are no unauthorized transactions or fees.
They also don’t review hotel bills or purchases to make sure they were not overcharged and are paying the right amount.
They also don’t review their expenses or fees at least once a year to see if they can reduce those expenses or fees for the next year.
For example, cable and cell phone costs keep going down due to increased competition.
If you don’t spend any time trying to find the lowest price, you are likely paying too much.
4) Eggs Are All in One Basket
In my Rich Habits study I discovered that the wealthiest individuals have multiple streams of income.
Three seemed to be the magic number.
This way, when one stream dries up due to economic downturns, the other streams of income come to the rescue like a knight riding on a white horse.
But some rich people make the mistake of tying the bulk of their assets up in one place, such as their own business or real estate, two very illiquid investments.
For these wealthy individuals, when something goes wrong they are forced to scramble to their bank or wealthy friends for money to relieve their temporary cash flow crunch.
5) Lack of Proper Planning
Another common money misstep is lack of proper planning.
The three big missteps in this category include:
#1 Lack of Adequate Retirement Planning, #2 Lack of Adequate Estate Planning and #3 Not Having an Updated Will.
Imagine working your entire life accumulating assets that, upon retirement, you are forced to sell because you never set aside any funds for retirement.
That happens far too often.
When Prince died he had no will and no estate planning.
Settling an estate with an old will or no will at all increases the costs of probate.
Also, without an estate plan in place, you will pay higher federal and state estate taxes and inheritance taxes.
Millions of dollars of Prince’s estate will now go to paying the salaries of politicians.