From Riches to Rags: Why people go bankrupt?

Just as super rich and famous people go bankrupt, even a common man can face the same fate. The only difference is in the magnitude of their financial failure, but the reasons are usually the same. Here are some of the reasons why people go bankrupt and how to avoid meeting such an ignominious fate.

The world recently witnessed the sad saga of the auction of Boris Becker’s prized Wimbledon trophies. For Boris Becker, the former World No. 1 Tennis Player, it was a sad day indeed to see his precious trophies and other memorabilia go under the hammer. But he had no option but to sell his coveted trophies to pay off his creditors.

How and why did things come to such a pass for the legendary German tennis player? As per media reports, ‘Becker’s extravagant and playboy lifestyle, failed business ventures, divorce settlements and taxation problems cost him a large chunk of his estimated USD
167 million fortune and ultimately landed him in financial soup.’ With the kind of lavish lifestyle that Becker lived and the mega business misadventures that Becker got into, he had to go bankrupt.

Or take the case of Mike Tyson, the legendary boxer who made his opponents bite the dust in the boxing ring. Tyson reportedly made $300 million in prize money during his boxing career, but blew most of it on drugs, cars, women, lawsuits, entourages, planes, tax bills, attorneys, houses, clothes and divorce. Burt Reynolds, one of the biggest Hollywood actors, declared bankruptcy in 1996 after a messy divorce, failed restaurant and bad investments. Nicolas Cage, the Academy Award winner Hollywood actor, landed into a massive financial sinkhole by splurging money like a king.

There are many lessons to be learnt by one and all from the saga of the likes of Becker, Tyson, Renolds and Cage. It is obvious that these celebrities dug up their financial grave with their own hands. Let us try to understand the reasons why people go bankrupt and how to avoid such a financial disaster befalling us.

Living beyond means: Your average expenses should always be less than your average earnings at all times. If you are living beyond your means, that is, if your average expenses are more than your average earnings, you are inviting big financial trouble. Even if you are rich or super rich, you should not live beyond your means. Avoid superfluous expenses and spend only on what you must and can afford. So, for example, if you are earning Rs. 50,000 per month, you cannot think of buying a luxury sedan costing Rs. 50 lakh or more. A Rs 10. lakh sedan would be just fine.

Debt trap: Debt is a double-edged sword. It can help you meet your financial needs or tide over temporary financial crunch. It can help you acquire a new asset, be it a house, car, machinery for your business or any other productive asset. But if you borrow only to spend on unproductive things, it can be a millstone around your neck. Remember, a loan taken for day-to-day expenses is akin to living on borrowed money.

Taking a loan for creating an asset such as home or car is okay, but if you are borrowing for your day-to-day expenses, you are in for big trouble. Also, borrowing more than your capacity to service the debt and repay the loan is a sure shot recipe for financial disaster. It is like swallowing more than you can chew. You are bound to vomit out when you have more than mouthful. Excessive borrowing leads to debt trap, where you keep borrowing more to repay your old debts. Moreover, servicing the debt is a drain on your financial resources. Remember, loans taken on credit card and personal loans carry very high interest rates ranging from 30% to 42% per annum. So, avoid credit card loan, personal loan and other high-cost loans.

Financial misadventures: Many celebrities and super rich people have become bankrupt due to their financial misadventures. If you want to start your own business, you need to do your homework first. Do a thorough research on the market for the product or service you wish to launch and have a proper business plan in place. Scan the business environment and assess the scope and prospects of your business vis-à-vis your competitors. Make sure your product or service has some distinctive USP to stand out from the crowd. Put in your own money and borrow only if you must. Also, avoid excessive borrowing as servicing the debt can be a real pain.

Here, it would be interesting to recollect the saga of Big B Amitabh Bachchan and how he avoided going bankrupt. Big B had started his own film production house and event management company Amitabh Bachchan Corporation Ltd (ABCL) in 1995. The venture flopped badly and landed Amitabh in dire financial straits. So much so that Amitabh was planning to sell his Juhu bungalow in Mumbai to pay off his creditors. Then came ‘Kaun Banega Crorepati?’, the Indian version of the quiz show “Who wants to be a millionaire?” Amitabh grabbed the opportunity with both hands and the super-hit show turned around his fortunes. So, while ABCL landed Big B in financial mess, KBC saved the day for him.

Mismanagement of finances: Even if you are rich or super rich, mismanaging your finances can spell financial ruin. Don’t gamble or speculate too much. Excessive gambling or speculating is an invitation to financial catastrophe. If you are a risk-taker, take calculated risks. Take risks that you can put up with if your call goes wrong. Also, as an investor, pay heed to the old adage: “Don’t put all your eggs in one basket”. Diversify your investments across various asset classes having varying degrees of risks and returns. Also, don’t make haphazard investments. Give your investments the direction and the purpose to achieve specific financial goals. For this, you need to have a financial plan in place. A financial plan helps you to set definitive goals and motivates you to work towards achieving them in a time-bound manner. It inculcates financial discipline and gives your finances the much-needed purpose and direction.

So, live within your means, borrow only if you must and within reasonable limits, avoid financial misadventures and manage your finances prudently. If you follow these cardinal principles of financial life in letter and spirit, you will never have to face the prospect of going bankrupt.

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