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Star athletes and bankruptcies
You've probably read those stories about star athletes who went through millions of dollars and ended up having to file for bankruptcy. Unfortunately, the same has been true of some lottery winners. People who are just not used to having or investing big sums of money can lose it almost as quickly as they got it.
Not knowing the basics of money management
The root cause of the problem – whether it's a star athlete or a lottery winner – is that he or she received the millions of dollars before learning the basics of money management. It actually doesn't matter whether you earn $50,000 a year or suddenly get a check for $5 million, it’s the same thing. You can get in trouble with overspending, poor tax planning and other mistakes.
A mistake commonly made by both star athletes and lottery winners is called “spending creep or overspending.” It's just hard for people who suddenly find themselves wealthy to resist the urge to go out and start buying stuff. Plus, these people have never had a huge amount of money before and it's hard to leave all of it just sitting there. It's more fun for these people to “reward” themselves by purchasing some expensive toy and then another and then another with no idea as to how much money they’ve spent in total – until suddenly it's gone.
Ignoring the IRS
A second mistake the newly wealthy often make is to forget about the IRS. It's just not good to owe the IRS money. One heavyweight boxer earned more than $250 million during his career but ended up losing his 54,000 sq. ft. mansion due to a $200,000 debt to the IRS. The lesson to be learned here is that regardless of whether you earn thousands of dollars or millions of dollars a year, make sure you report all your income and never forget that the IRS will get its share, one way or another.
Overestimating how long the money will last
Another mistake that both star athletes and lottery winners make is to overestimate how long the money will last. An athlete who lands a $10 million contract might think that he or she is set for life. However, by the time the IRS takes its bite out of the $10 million there may be only enough to live on comfortably for 10 years or fewer. While you might not ever have to worry about how long you’d make $10 million last, you do need to make sure you don't overestimate how long your retirement savings will last.
Bad or risky investments
Just about anyone can make bad or risky investments and star athletes and lottery winners are no exception. Some of these people lost millions of dollars when the housing market collapsed in 2007. And the same was true of some very average people who had put too much money into real estate. The lesson here is that if you have money to invest, it's important to keep two things in mind. First, you should find an expert financial advisor at a firm that can be trusted and pay for his or her help. Second, keep your investments diversified. Whether you're rich or just middle-class, it's important that you have a mix of investments such as bonds, stocks, mutual funds and maybe some real estate. And be careful that you don't fall for one of those risky investments that promise huge returns. Just remember the old saying, if something seems to be too good to be true, it probably is