How to go from crorepati to broke?

Burning ₹1 crore quickly can be very simple. Extravagance, splurging, mismanagement, pretence, there are several ways to lose a crore, really fast. This article covers how a person can lose a large sum of money and become broke. The idea is not to become bankrupt, but to know our fallacies and take corrective actions before it is too late. Read on…

Ritesh lost his grandfather in 2018 and inherited ₹ 1 crore. Seven years later, he finds that only ₹5 lakh remains of the inheritance. Explaining this to his father, he blamed inflation and expensive life of a metropolitan city. Ritesh is a working professional. In ideal scenario, persons like him should build wealth for their future. Another person, Satender spent his retirement corpus within 5 years.

There are many people like Ritesh and Satender who overspend and lose large sums of money really fast, reaching a situation of financial distress. Spending more than what a person can afford can be out of compulsion, for example medical exigencies. Notwithstanding genuine needs, there are many other expenses that can at least be postponed, if not avoided

For several, financial disaster is not on account of the circumstances, rather it is on account of choices they make. Given below are some of the possible reasons why people with reasonable earnings lead themselves to a financial disaster.

Spending to impress, not to progress

A common reason to gradual degradation of finances is extravagant lifestyle. Living beyond means happens when expenses are more than the income. Over time it can lead to debt accumulation and financial stress. Common mistakes include:

• lifestyle inflation leading to increase in expenses with rise in income
• Purchasing designer cloths and luxury labels
• Purchasing expensive luxury items, big size television, music systems, furniture, etc.
• Replacing or purchasing a luxury car
• Renting house way above affordability
• Expensive renovation
• Frequent dining and parties
• Lavish vacations
• Avoidable expensive gifts to family and friends

Putting savings in the backseat

Quality investments can help money grow. It is safe to put money in a bank account, but over time, inflation will erode its value; at least the incremental gains are minimal. Continuous and planned investments provide benefits of compounding leading to small amounts growing into large corpus. Common mistakes include:

• Expenses like a king, savings like a pauper
• Keeping money in low interest yielding saving accounts and fixed deposits
• Not having diversified portfolio
• Purchasing penny or high risks stocks
• Falling for quick get-rich scams or Ponzi schemes

Reckless use of credit facility

Many times, people overspend using credit cards and loans without considering the real need to purchase. This leads to high-interest debt, financial strain, and potential credit score damage. Unable to pay credit card bills, people fall into the vicious trap of making minimum payments, which results in huge interest outflow, debt accumulation and long-term financial instability. Common mistakes include:

• Purchasing luxury items on high interest loans
• Swipe credit card and make partial repayments
• Borrow money to go for vacations

Money mismanagement

Financial stability is not about earning money, it is about managing it sensibly. It involves investing it wisely to generate passive sources of income. Failing to budget and ignoring inflation can lead to financial stress. Common mistakes are:

• No budgeting that leads to expenses getting spirally out of control
• Living paycheck to paycheck
• Creating no emergency fund
• Not having clear financial goals
• Falling into debt traps
• Invest only in savings account and fixed deposits ignoring Impact of inflation.

Have a lavish marriage

Quickest and sure shot way to lose a large sum of money is to have a lavish marriage. A person can also top it up with loans. Saddled with loans, you not only lose existing resources but create charge over future earnings. The financial strain doesn’t end with the celebrations, rather it continues for years. Monthly instalments eat into future earnings, limit savings and investments, and hinder financial growth. Common mistakes are:

• Selection of expensive venue way above abilities
• Organising multiple functions in grand manner
• Having destination weddings at expensive locales
• Splurging on designer outfits, jewellery
• Expensive gifts
• Taking large loans to fund expenses

Start a venture without a plan

Another way to lose a large sum really quick is to start an unplanned venture. At times entrepreneurs with their enthusiasm dive into business ventures without proper knowledge and planning. While entrepreneurship is inherently prone to risks, it is also fraught with possible misadventures. Common errors include:

• Invest large amounts beyond abilities without risk assessment
• Quitting job without a proper backup plan
• Not conducting thorough study and market research
• Starting venture without a well-defined strategy and competition analysis
• Renting high end office spaces and overspending on employees and branding
• Ignoring cash flow management

Thus, there are many reasons for wealth to deplete fast. While, it is difficult to earn one crore rupees, it is surprisingly simple to lose one. Bad money decisions and reckless spending can quickly wipe out wealth.

A disciplined approach, planning, and managing money well are the keys to financial stability. If you wish not to fall into a situation like Ritesh, Satender and many others, start by making a budget, spend wisely, invest carefully, and stay out of avoidable debt.

Remember – what you do today shapes your tomorrow. A disciplined approach, planning, and managing money well, are the keys to financial stability.