“There’s a lady who’s sure
All that glitters is gold
And she’s buying a stairway to heaven.”
(Thanks, Led Zeppelin)
This may be hard to digest but it’s true: some wealthy people get into debt troubles- and there are plenty of reasons why. People may take on huge debts that can’t afford to pay off, and a massive debt load can lead to bankruptcy. Understanding how this can happen can help you manage your personal finances.
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How credit scores impact your total debt
Debts and credit score are interconnected. When your debt level rises, your credit score can rapidly decline, because you’re debt is rising faster than your income. The debt vs. income comparison affects people in every economic category, including the wealthy.
But the main question is, how do rich people get into debt problems? They earn a lot of money. They can easily pay off their credit card bills, utility bills, mortgage, etc. Unlike middle class, they aren’t living paycheck to paycheck.
And yet, many celebrities and professional athletes file bankruptcy every year. Here are the four reasons why wealthy people get into debt problems. Consider whether or not these issues apply to your personal finances.
A better lifestyle
As you earn more money, your expenses may also increase.
Think about it: you want a better home. When you buy a spacious home, you tend to buy lots of furniture. And, that’s just the beginning. You buy a better car- with higher car insurance premiums. You have dinners in nicer restaurants. Plus, there is higher maintenance cost on the expensive assets you buy (homes and cars). The spending can start to spiral.
Spending beyond your means
Wealthy people can end up spending more than what they earn. Say, for instance, that a pro athlete earns $25,000 per month but spends $30,000. The total debt amount increases gradually, and the person often don’t recognize the problem right away. Sometimes, the spending doesn’t stop until it’s too late.
Money gives you power, and that may increase your self confidence- maybe even overconfidence. You assume that your income will increase in the future, since your pay has substantially increased in the past. So, you overspend- confident that you can easily pay your outstanding balance as your income increases.
But what if your income doesn’t increase? What if you lose your job? What if your business collapses all of a sudden? If you keep on splurging even after your financial situation has drastically changed, then you’ll be in big trouble.
Rich people often get used to a lavish lifestyle. They can’t change their expensive habits even after their income has dropped. As a result, their debts increase and the borrower’s credit rating suffers.
Some people live on the maxim – spend now, worry later! They want to enjoy life to the fullest. They don’t anticipate non-recurring expenditures. Nor do they keep an emergency fund. If there is any crisis, they use credit cards to get out of it. As long as they can pay off credit card bills, they’re able to kick the “debt” can down the road. But once they can’t pay back their creditors, the credit cards balances become a huge problem.
What’s the solution?
The best solution is to be conservative when it comes to spending money. Make an effort to live below your means, and make spending cuts when your debt load is too heavy.
There is no shame in taking solid steps to follow a smart plan and eradicate debt problems. At the end of the day, you’re much better off.
Guest Author bio – Patricia Sanders is a content creator at Debtconsolidationcare.com. Her passion is exploring the financial world through her articles. You can check out her updates at https://www.facebook.com/patricia.sanders.18294 and find her articles at https://wiki.debtcc.com/.
Thanks to Patricia for her guest post. As always, this is for educational purposes only. Consult a CPA or financial advisor.
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