Has Excessive Lavishness Drained the Wealth of High Net Worth Individuals?

In the United States, a high net worth individual (HNWI) is defined as a person with investable assets of over $1,000,000. It is fairly evident that individuals with such vast wealth can squander this amount, particularly if the money is the result of a windfall or disproportionately high income.

The Path to High Net Worth: Chronic Earning

The most common way to reach the $1,000,000 mark is through consistently earning a good income over many years and saving and investing a significant portion of that income. People in this category tend to maintain their wealth as these habits sustain the accumulated assets over time.

Risks for Wealth Made Suddenly

The biggest risk for wealth accumulated in a one-shot scenario or through unsustainable income is the threat of financial hardship. For instance, lottery winners, entertainers, and professional athletes are often poster children for this problem. These individuals might have a lot of money but may lack the habits required to maintain their wealth indefinitely.

Strategies for Sustainable Wealth

People who become wealthy through such one-shot scenarios should consider seeking advice from knowledgeable and competent individuals. Since HNWIs often have between $1-5 million in investable assets, it is relatively easy for these individuals to lose everything if they engage in lavish spending at a high level, especially if they attempt to “Keep up with the Joneses”.

NBA as an Example

To illustrate, consider the salaries and expenditures of professional athletes in the National Basketball Association (NBA). The minimum salary for a rookie varies between approximately $1 million and $3 million for a 10-year veteran, after accounting for taxes and fees. For a marginal player earning the minimum, after all deductions, the take-home salary might be around $600,000 to $2 million.

This player’s colleagues, who potentially make upwards of $35 million, can afford things that the rookie cannot. For instance, dropping $10,000 per night on a club for 41 road games can lead to an expenditure of $410,000. This spending spree, combined with a few exotic cars and a big house, can spell financial trouble.

Conclusion: Managing Wealth Wisely

High net worth individuals should be mindful of their spending habits and seek advice from those who can guide them on managing their wealth effectively. By doing so, they can avoid the pitfalls of excessive lavishness and ensure their financial stability.