Strange Ways People Go Completely Broke
We've all heard the horror stories that stem from a person hitting the lottery or receiving a large inheritance, only to be flat broke several years (or less) later. Put that down to mostly bad money management and obviously ignoring our guide to the first five things you should do when you inherit a large amount of money. Besides those lucky individuals receiving an unexpected née unearned windfall, actors, athletes, and other highly paid celebrities may have similarly wasteful spending habits with their newfound fortune.
Irrational, unsustainable spending is definitely one way to go broke, but having a substance abuse problem, gambling habit, or falling prey to scammers can also put a serious crimp in your financial solvency. That said, some folks simply make some downright strange decisions with their money, even though their intentions might be good. Let's take a look at a few of the more intriguing ways that once-hearty bank accounts have been drained.
Selling drugs but not paying taxes
Yes, this is actually a thing. Even if you're earning an income illegally from criminal activity, like being a drug dealer, you're still required to pay taxes on that revenue. Obviously, the goal of such a profession is that neither the IRS nor law enforcement ever discovers your illicit activity. However, if someone does get busted for a crime that generated significant income, the IRS will very likely become aware of the presence of this income through the prosecution process, then demand its cut.
In comments to GOBankingRates, CPA Randy Tarpey explained, "Anyone who is convicted, and therefore on record, as committing a crime where they made money, should file taxes. Not filing that income is a separate crime and a separate liability" (via Yahoo Finance). As if going to prison isn't bad enough, tax evading criminals are going to learn the hard way what really happens when you don't pay your taxes on time. Spoiler alert: It's heavy penalties, interest, and fees that can result in you going broke. Talk about making a bad situation worse.
Keeping an entourage around
In the comedy film "Vegas Vacation," young Rusty Griswold goes on an incredible bout of luck at multiple casinos, but when his family is desperate for money later on, Rusty confessing to having already squandered all his winnings. "I spent it all. Having an entourage is expensive," comments the teenager.
Someone else who can take that advice to heart is rapper MC Hammer, who reportedly amassed a fortune worth more than $33 million from his success in the early-1990s. By the end of the decade, the money was gone and Hammer was forced to file for Chapter 11 bankruptcy. The primary reason to blame is that the rapper kept an entourage of up to 200 individuals, including his family members and associates from his old neighborhood. Although the move may have been well-intended to get people off the streets and out of the way of violence, ultimately, funds ran dry.
The moral of the story is to choose your friends carefully, which is particularly true if you've accumulated significant wealth. Make sure that people are hanging around you for the right reasons, not merely free clothes, meals, vacations, or other nefarious intentions.
Falling for online dating scams
At one time, online dating may have been maligned with a slight negative connotation, but it's definitely a mainstream way to meet nowadays. A 2023 Pew Research Center study shows that 30% of U.S. adults have used a dating app or website, while that number jumps to 53% for those under age 30. However, this medium is also filled with scammers looking to separate lonely individuals with their hard-earned cash.
In one instance, ABC News reports an Illinois resident was scammed for an estimated $200,000 by someone he was in a long-distance relationship with for over two years. The man's "girlfriend" first claimed that she was ill and needed a doctor. Later, the girlfriend was kidnapped and needed to pay a ransom to be freed. Over time, the small money transfers really added up to financial ruin for the victim. An image that the girlfriend sent of herself turned out to be a sample driver's license photo from the Florida DMV.
The moral of the story is don't send money to a person you befriend online — either platonically or romantically. Similarly, don't provide your personal information, like banking credentials or a Social Security number. The counterparty may claim they need the information to send you money or a gift, but what they really want is to commit fraud or identity theft, which will require learning how to freeze your credit to remedy.
Getting too much education
The recent tug of war between the Supreme Court and the Biden administration over student loan forgiveness lays bare just how expensive it is to receive a higher education. You'll definitely want to make sure your degree is both necessary to enter a field of work and lucrative enough to offset the expense, and not one of the college degrees least likely to pay off financially.
That's especially true when it comes to advanced college degrees. A cautionary tale appearing in Forbes outlined the story of a graduate student who received her master's degree from the University of Southern California's film school. Post-graduation, she learned the job opportunities and salaries would never be sufficient to repay her significant student loans back, never mind support a newly born child.
So what to do next? Go to a law school to become a lawyer, of course. Between the two advanced degrees and taking the bar exam in multiple states. The woman (known only as Lisa S.) racked up debt of more than $300,000 against an entry-level lawyer's salary of about $20,000 per year. Though her income as a lawyer is expected to rise to approximately $50,000 annually with experience, that's still insufficient to justify taking on such a large debt for education. When it comes to evaluating how much student loan debt to take on, experts recommend not exceeding the amount you can expect to earn from your first-year's salary after graduation.
Spending excessively on pets
Make no mistake: There's nothing wrong with having a pet or two. And considering how many U.S. households consider their fur babies part of the family, it's hard to say no to providing proper medical care following an illness or injury. In fact, some savvy pet owners will opt for pet insurance, which could pay off big time. However, others either have no pet insurance or have simply accumulated an overly large — and expensive to feed — number of animals under their care.
The latter contributed heavily to the financial troubles experienced by actor Nicolas Cage, who was worth ~$150 million at one time. Among the celebrity's other financial indiscretions, like buying a private island or two, Cage purchased a rare octopus for $150,000, a pair of king cobra snakes for an estimated $276,000, plus a two-headed snake for $80,000 that was later donated to a New Orleans zoo, according to the New York Post.
When the housing market took a downturn about 15 years ago, followed by the Great Recession, Cage took a hit on some real estate assets. That, combined with tax troubles, led to the actor-cum-investor's financial demise. Though to his credit, the actor accepted roles in many questionable films just to continue receiving a paycheck and avoid bankruptcy. Perhaps he'll stick to a pet dog or a couple of cats going forward?