Why the Young and Wealthy Tend to Lose it All

It’s hard to think of the downside of inheriting a fortune, or earning one as a sports or music star.

Yet about 50 percent of young professionals who make a large amount of money fast, lose it all within ten years, according to statistics from the NAPFA.

Photo by katyspichal/iStock / Getty Images
Photo by katyspichal/iStock / Getty Images

Moreover, families that make fortunes have terrible trouble passing the wealth on to the next generation. About 70 percent of them lose all their money when the children get hold of it.

Why, you may ask, do the young and rich tend to lose it all?

First, because they have difficulty imagining that the money could run out. They have been so wealthy, for so long, that they just assume that there will always be more. They don’t have to take responsibility for money.

During this time young wealthy people should start thinking about their money, instead of only buying frivolous things. Realizing this and taking the time to put at least part of their money in safe investments could make the difference to a safe future.  

Unfortunately, few wealthy young people do this and they miss their chance. The problems begin to arise when they get too old to make the enormous amounts anymore. That’s the moment when they make foolish investments with friends who claim to have a brilliant idea or they open restaurants which they do not know how to manage or they put money into schemes with very little chance of return.

That’s how most of the young and wealthy lose it all. They don’t think carefully about their money, even when their careers or their family support ends.

Typically, they don’t worry about running up debt – they always think they will be able to pay them off no matter how large. Instead of just borrowing without any thought for tomorrow, they should get a professional financial review. A professional advisor could evaluate whether to borrow or use capital to pay down what they owe.

This would be the time for the young and wealthy to take a conservative approach to managing money and to take a long look forward, setting up financial goals and learning the best way to realize them.

It is also hard for people who have been free with the wherewithal to put a good part of it to work. But cutting into the fun money to make good, long-term investments can secure the future. It’s time to think about establishing a regular, safe income with part of the wealth.

Once a good part of this sort of wealth is invested, the young person can start thinking about using some of their wealth for fun. Once the debts are settled, and the investments are made, take part of what is left and be reasonable about spending. No one should just blow money away on absurd splurges. If you're young and wealthy, splurge, by all means, but do it with the idea of having fun, not just spending a lot of money.

Instead of just splurging all the time, young and wealthy people might think of doing something more worthwhile, at least part of the time. Perhaps getting involved with a charity or more education.

This is also a good time to think about what will happen when children come along. Most people, even the young and wealthy, eventually want to have children. If splurging becomes an ingrained habit there may not be anything left.

All of this means that you may want to find a good financial advisor, or keep the one that your parents had. Just when you think you don’t need a financial advisor is the time when you need one most.