Why Do Rich People Go Bankrupt

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I often hear people say, “When I make a lot of money, my money problems will be over. ” In reality, their new money problems are just beginning. One of the reasons so many newly rich people suddenly go broke is because they use their old money habits to handle new money problems.

In 1977, I started my first big business. which was my nylon and Velcro surfer wallet business. As I said in a previous chapter, the asset created was bigger than the people who created it. A few years later I created another asset that grew rapidly and again the asset got bigger than the people who created it. Again I lost the asset. It took the third business for me to learn what my rich dad had been guiding me to learn.

My poor dad was shocked at my financial ups and downs. He was a loving father but it pained him to see me on top of the world one minute and in the gutter the next. But my rich dad was actually happy for me. He said after my two big creations and disasters, “Most millionaires lose three companies before they win big. It took you only two companies. The average person has never lost a business and that is why 10% of the people control 90% of money.”

After my stories about making millions and losing millions, I am often asked an important question, “Why do rich people go bankrupt?’ I offer some of the following possibilities, all from personal experience.

Reason #1: People who have grown up without money have no idea how to handle a lot of money. As stated earlier. too much money is often as big a problem as not enough money. If a person is not trained to handle large sums of money or does not have proper financial advisors, then the chances are very strong that they will either stash the money away in the bank or just lose it. As my rich dad said, “Money does not make you rich. In fact, money has the power to make you both rich and poor. There are billions of people each day who prove that fact. Most have some money but they spend it only to get poorer or greater in debt. That is why today there are so many bankruptcies being reported in the best economy in history. The problem again stems from people receiving money and then buying liabilities they think are assets. In the next few years, I am certain that many of today’s young or instant millionaires will be in financial struggle because of their lack of money management skills.

Reason #2: When people come into money, the emotional euphoria is like a drug that boosts your spirits. My rich dad said, “When the ‘money high’ hits, people feel more intelligent, when in fact they are becoming more stupid. They think they own the world and immediately go out and start spending money like King Tut with tombs of gold.”

My tax strategist and CPA, Diane Kennedy once said to me, “I have been an advisor to many rich men. Just before they go broke after making a ton of money, they tend to do three things. One, they buy a jet or big boat. Two, they go on safari. And three, they divorce their wife and marry a much younger woman. When I see that happening I begin preparing for the crash.” Again, much like reason number one, they buy liabilities or divorce an asset, which then creates a liability, and then they marry a new liability. They now have two or more liabilities.

Reason #3: When you have money certain friends and relatives tend to become closer. The hardest thing for many people is to say “no” to people they love when they ask to borrow money. This has not happened to me, but I have seen many families and friendships break up when one person suddenly becomes rich. As rich dad said, “A very important skill in becoming rich is to develop the ability to say ‘no’ to yourself and the people you love.” The people who come into money and begin buying boats and big houses are not able to say “no” to

themselves, let alone their family members. They end up further in debt, just because they suddenly had a lot of money.

Not only do people want to borrow money from you when you have money, banks want to lend you more money. Which is why people say, “Banks lend you money when you don’t need it.” If things go bad, not only do you have trouble collecting the loans you made to friends and relatives, the banks then have trouble collecting from you.

Reason #4: The person with money suddenly becomes an “investor” with money, but without education and experience. Again, this goes back to rich dad’s statement that when people suddenly have money they think their financial IQ went up also, when in fact it has gone down. When a person has money, they suddenly begin receiving phone calls from stockbrokers, real estate brokers, and investment brokers. Rich dad also had a joke about brokers, “The reason they are called ‘brokers’ is because they are broker than you.” My apologies to any “brokers” who are offended, but I think my rich dad’s stockbroker is the one who told the joke to him originally.

I had a friend of my family who came into a $350,000 inheritance. In less than 6 months all that money was lost in the stock market, not to the market but to the broker that “churned” the suddenly rich person who thought that money made him more intelligent. For those who do not know what churning means, it is when the broker advises the person to buy and sell regularly, so the broker makes the commission on each buy and sell. This practice is frowned upon and severe fines are levied if brokerage houses find their brokers involved in this practice. yet it does happen.

As stated at the start of this book just because you meet the qualifications of an Accredited Investor, simply a person with money, does not mean you know anything about investing.

In today’s heated stock market, many companies are investing as foolishly as individuals are. With so much money in the market, many companies are running around buying other companies they hope are assets. In the industry it is often called M&As, or mergers and acquisitions. The problem is, many of these new acquisitions can become liabilities. Often the big company that bought a small company ends up in financial trouble.

Reason #5: The fear of losing increases. Many times a person with a poor person’s outlook on money has lived a life being terrified of being poor. So when the sudden wealth hits, the fear of being poor does not diminish, in fact it increases. As my friend who is a psychologist for professional day traders says, “You get what you fear.” That is why so many professional investors have psychologists as part of their team, at least that is why I have one. I have fears like everyone else. As stated earlier. there are many ways to lose money other than through the investment markets.

Reason #6: The person does not know the difference between good expenses and bad expenses. I often receive a phone call from my accountant or tax strategist saying, “You have to buy another piece of real estate.” In other words. I have the problem of making too much money and I need to invest more money in something like real estate because my retirement plan cannot take any more money. One of the reasons the rich get richer is because they buy more investments by taking advantage of the tax laws. In essence, money that would have been paid in taxes is used to buy additional assets, which provide a deduction against income, reducing the taxes due, legally.

The tetrahedron illustrated earlier is to me one of the most important diagrams for wealth creation as well as keeping and increasing the wealth created. When I show people the diagram, I am often asked why expenses are part of the structure. The reason is because it is through our expenses that we become richer or poorer, regardless of how much money we make. Rich dad often said, “If you want to know if a person is going to be richer or poorer in the future just look at the expense column of their financial statement.” Expenses were very important to rich dad. He often said, “There are expenses that make you rich and expenses that make your poor. A smart business owner and investor knows which kind of expenses they want and controls those expenses.”

“The main reason I create assets is because I can increase my good expenses, ” rich dad said to me one day. “The average person has mainly bad expenses. ” This difference in good expenses and bad expenses was one of rich dad’s most important reasons for creating assets. He did so because his created assets could buy other assets. As he said to me when I was just a kid walking along the beach looking at the very expensive piece of real estate he had just purchased, “I can’t afford this land either. But my business can.”

If you understand the tax laws available to the B quadrant, you soon realize that one of the reasons the rich get richer is because the tax laws allow the B quadrant, more than other quadrants, to spend pre-tax dollars, to build, create, or buy other assets. In fact, the tax laws almost require you to buy more investments with pre-tax dollars, which is why I receive those phone calls telling me to buy more real estate or buy another company. The E quadrant on the other hand, must often use after-tax dollars to build, create, or buy other assets.

What to Do with Too Much Money

“If you want to be rich, you must have a plan on how to make a lot of money and you must also have a plan on what to do with that money before you make it. If you do not have a plan on what to do with it before you make it, you will often lose it faster than you made it. ” One of the reasons he had me study real estate investing was so that I would understand how to invest in real estate before I had a lot of money. Today when my accountant calls and says, “You have too much money. You need to buy more investments,” I already know where to move my money, the corporate structures to use, and what to buy with that money. I call my broker and buy more real estate. If I buy paper assets, I often call my financial planner and buy an insurance product, which then buys my stocks, bonds, or mutual funds. In other words, the insurance industry produces special insurance products for rich people who are business owners. When a business buys insurance, it is an expense to the company and it often becomes an asset to the owner with many tax advantages. In other words, when my accountant calls, much of the money is already spent according to a predetermined plan. It is spent as expenses that make the person richer and more secure. That is why a financial advisor and an insurance agent for the rich are very important members of the team.

Over the years, I have seen many people start very profitable businesses and still end up broke. Why, because they did not control their expenses. Instead of spending money to acquire other assets, assets such as real estate or paper assets, they expensed it through frivolous business expenses, or bought bigger homes, nice boats, fast cars, and new friends. Instead of getting financially stronger. they became financially weaker with every dollar they made and then spent.

The Other Side of the Coin

Rich dad often said, “It is through the expense column that the rich person sees the other side of the coin. Most people only see expenses as bad, events that make you poor. When you can see that expenses can make you richer, the other side of the coin begins to appear to you.” He also said, “Seeing through the expense column is like going through the looking glass as Alice did in Alice in Wonderland. Once Alice went through the looking glass, she saw this bizarre world that in many ways reflected the other side of the looking glass.” Both sides of the coin really did not make much sense to me but rich dad said, “If you wanted to be rich, you had to know the hopes, the fears, and the illusions on both sides of the coin.”

During one of my meetings with rich dad, he said something that changed my thinking from a poor person to a rich person. Rich dad said to me, “By having a plan to be rich, understanding the tax laws and corporate laws, I can use my expense column to get rich. The average person uses their expense column to become poor. That is one of the biggest and most important reasons why some people get rich and others become poor. If you want to become rich and stay rich, you must have control of your expenses.” If you understand this statement you will understand why rich dad wanted low income and high expenses. That was his way of getting rich. He said, “most people eventually lose their money and go broke because they continue to think like a poor person and poor people want high income and low expenses. If you don’t make this switch in your head, you will always live in fear of losing money, trying to be cheap, trying to be frugal, rather than being financially intelligent and becoming richer and richer. Once you can understand why a rich person would want high expenses and low income, you will begin to see the other side of the coin.”

A Very Important Point

This last paragraph is one of the most important paragraphs in this book. In fact, this book has been written around this one paragraph. If you do not understand it, I suggest sitting down with a friend who has also read this book and begin a discussion to deepen your understanding of what it says. I do not expect you to necessarily agree with it. It would be good just to begin to understand it. You may begin to understand that there is a world of too much money and you may understand how you can become a part of that world. Rich dad said, “People who do not change their point of view about money in their head, will see only one side of the coin. They will see the side of the coin that only knows a world of not enough money. They may never see the other side of the coin, the side where the world is a world of too much money, even if they do make a lot of money.”

By understanding that a world of too much money can exist, understanding a little of the tax laws and corporate laws, and why control of your expenses is so important, you can begin to see an entirely different world, a world very few people ever see. And seeing that world begins in your head. If your mental view can change, then you will begin to understand why rich dad always said, “I use my expenses to get richer and richer and the average person uses their expenses to become poorer and poorer.” If you understand that statement you may understand why I think the teaching of financial literacy is important for our school system. It is also why my educational games CASHFLOW can help you see a world of money that few people ever see. The financial state is much like the looking glass in Alice in Wonderland. In the game CASHFLOW, it is via the mastery of the financial statement that the player moves from the Rat Race of life onto the Fast Track of the investment world, the world that begins with the Accredited Investor.

How Can Low Income and High Expenses Be Good?

So as rich dad said, “Money is just an idea.” And these last few paragraphs contain some very important ideas. If you understand fully why low income and high expenses is good then move on. If not, please invest some time in discussing this point with someone who has also read this book. This idea is the pivotal point of this book. It also explains why many rich people go broke. So please do your best to understand this point because it makes not much sense to be creative, build an asset, and make a lot of money—only to lose it all. When I studied the 90/10 rule the one thing I discovered is that the 90% who earn the 10% are people who want high income and low expenses. That is why they stay where they are.

A Guide Line

So the question is, “How can low income and high expenses make you rich?” And the answer is found in how the sophisticated investor utilizes the tax laws and corporate laws to bring those expenses back to the income column.

For example:

This is a diagram of what a sophisticated investor is working to do. This is the Diagram of the 10% Who Make 90%

Again the question is, “How can low income and high expenses make you rich?”

If you can begin to understand how and why this is done, then you will begin to see a world of greater and greater financial abundance.

Compare the previous diagram with the following diagram:

This is the Diagram of the 90% Who Make 10%

This is the financial diagram of most of the world’s population. In other words, the money comes in and goes out the expense column and never comes back in. That is why so many people try to save money, be frugal, and cut back on expenses. This diagram here is also the diagram of the person who will emphatically say, “My house is an asset. ” Even though the money goes out the expense column and does not return, at least not immediately. Or the person who says, “I’m losing money each month but the government gives me a tax break to lose money.” They say that rather than say “I ‘m making money on my investment and the government gives me a tax break to make money.”

My rich dad said, “One of the most important controls you can have is found in this question. And the question is, ‘What percentage of the money going out your expense column winds up back in your income column in the same month?’ ” Rich dad spent hours and days on this subject with me. By understanding his point of view I saw a completely different world that most people do not see. I could see a world of ever increasing wealth, unlike people who work hard, earn a lot of money and keep their expenses down. So ask yourself the same question. “What percentage of the money going out your expense column comes back in your income column in the same month?” If you can understand how this is done you should be able to see and create a world of ever increasing wealth. If you are having difficulty understanding this idea, find someone else and discuss how it might be done. If you can begin to understand it, you will begin to understand what a sophisticated investor is doing. I would say it’s worth the discussion and why you may want to read and discuss this book often. It really was written to change a person’s point of view from the view of not enough money to the view of creating a world of too much money.

What Is the Value of a Network Marketing Business?

When I speak to network marketing companies, I often say to them, “You don’t know the value of your network marketing business .” I say that because many network marketing businesses only focus on how much money such a business can generate. I often warn them that it’s not how much money they make, but much money they can invest with pre-tax dollars that is important. This is what the E quadrant cannot do. To me, that advantage is one of the biggest advantages of a network marketing business. If used properly a network marketing business can make you far richer than merely the residual income the business generates. I have several friends who have made tens of millions of dollars in network marketing and are still broke today. When I speak to the industry, I often remind the leaders of network marketing that a vital part of their job is to not only educate people on how to make a lot of money, it is as important to educate them on how to keep the money they make and it is through their expenses that they will ultimately become rich or poor.

Why Are More Businesses Better than One?

It is not only network marketing people who fail to realize the true value of their business. I have seen entrepreneurs who are good at building a business yet do not realize the true value of that business. The reason this happens is because there is a popular idea going around today that you only build a business to sell it. That is the idea of a business owner who does not know what a sophisticated investor knows about the tax laws and corporate laws. So instead of building a business to buy assets, they often just build the business, sell it, pay the taxes, put the cash in the bank, and start all over again,

I have had several friends who have built businesses just to sell them. Two friends of mine have sold their companies for cash and then lost all that cash in their next business venture. They lost because the 90/10 rule for business survival is still in effect. These two were individuals from the S quadrant who built B quadrant business. They then sold those businesses to people from the B quadrant. The buyers recognized the often-unseen value of a B quadrant business. So the friends who sold their businesses ultimately went broke, even though they had collected several million dollars. The businesses they sold went on to make the new owners even richer.

A sophisticated business owner and investor would do their best to keep the business as long as possible, have it acquire as many stable assets as possible and then trade the business with as small a tax consequence as possible, while keeping as many of the assets as possible. As my rich dad said, “The main reason I build a business is for the assets the business buys me.” For many entrepreneurs, the business they build is their only asset because they utilize a single corporation strategy and fail to harness the power of a multi-corporation investment strategy. (Again, to utilize such a strategy requires a team of professional advisors.) This points out that the big advantage the B quadrant has is that the tax laws for that quadrant allow you to spend pre-tax dollars to make you financially richer and in fact, the laws reward you for investing as much money as possible. After all, it is the rich who write the rules.

The Power of Expenses

So this is why expenses can be an asset or liability, regardless of how much money you make. One of the reasons 90% of the people only have 10% of the money is because they do not know how to spend the money they make. As rich dad said, “A rich person can take trash and turn it to cash. The rest of the people take cash and turn it to trash. ” So what is the answer to the question, “Why do rich people go bankrupt?” “The same reason poor people remain poor and the middle class struggles financially.” The reason the rich, the poor, and middle class go broke is because they lose control of their expenses. Instead of using their expenses to make them rich, they use their expenses to make them poor.