Heather Taylor
·3 min read
What puts people in a situation where they go broke? Sometimes the answer to this question is a lack of proper financial management, like poor budgeting or not tracking expenses. Other circ*mstances can make going broke beyond one’s control, like a major medical bill. Many external factors can put people in a place of unexpected financial hardship and even lead to bankruptcy.
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GOBankingRates spoke to three financial planning experts about the most common reasons people go broke. Though some are obvious, others may surprise you.
Overspending
Overspending, combined with poor budgeting practices, is a very common reason why many people go broke or experience financial hardship.
Seth J. Diener, private wealth manager at Diener Money Management, said those who go broke due to overspending fail to track their expenses or create a realistic budget. Instead, they spend their money on non-essential items or start living beyond their means. Doing so quickly drains savings and leads to mounting debt which may be accumulated via credit cards or loans.
Outsized Spending Early in Retirement
Jim Eutsler, CFP and wealth advisor at HCM Wealth Advisors, said outsized spending early in retirement can lead to people going broke.
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Some may view their lump sum retirement amount as a lot of money and assume it’s fine to take some from it. However, Eutsler said this amount of money needs to last them for the rest of their lives. Dipping into retirement funds may result in running out of money sooner instead of later and even derail retirement plans.
Lack of Emergency Savings
How does not having an emergency fund contribute to going broke? This goes back to external factors beyond a person’s control, like sudden job loss or a medical emergency.
If there is no emergency savings to provide a financial cushion, Diener said individuals may be forced to rely on credit cards or loans for support. This exacerbates their financial difficulties and can lead to a cycle of debt.
Keeping a Highly Concentrated Position of a Single Stock in a Portfolio
Eutsler has seen instances where individuals have a highly concentrated position of a single stock in their portfolio which they will not part with.
“This is usually either a company they’ve worked for or a very high dividend producer,” he said. “Sometimes it works out, but in other instances the tide turns against them and they lose a dramatic portion, if not all, of their savings.”
Neglecting Investments
Another significant contributor to financial instability is neglecting to invest money.
Sterling D. Neblett, CFP, co-founder and wealth advisor at Centurion Wealth, said those who fail to invest money are unable to take advantage of investment opportunities that could provide them with necessary financial security and growth.
Excessive Debt
Millions of Americans struggle to break free of the cycle of debt. The more one keeps accumulating high levels of debt, like credit cards or loans, the more difficult it is to pay it off in full or to simply manage interest charges and monthly payments.
Excessive debt left unmanaged, Neblett said, can quickly spiral out of control and lead to bankruptcy or insolvency.
Unforeseen Circ*mstances
As stated already, external factors beyond a person’s control can severely impact one’s financial well-being. And while it’s challenging to anticipate these circ*mstances, Neblett’s recommendation is to create a robust emergency fund and have suitable insurance coverage for financial support.
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This article originally appeared on GOBankingRates.com: I’m a Financial Planning Expert: Here Are the 7 Most Common Reasons People Go Broke
