10 Foolish Ways You Could Lose All Your Money by Trying To Get Rich
Everyone wants to get rich quickly, but no one likes the risks involved in chasing that elusive fortune. If you want to learn how to get rich, you’ll receive conflicting advice and run into a dizzying array of investment opportunities. And low returns aren’t the only danger. If you choose a bad method for making money, you could end up losing a big chunk instead of gaining one. Here are 10 dumb ways you could lose it all by trying to get rich.
1. Expecting High Returns From Cheap Properties
Inexperienced rehabbers often drool at the prospect of a cheaply priced house, thinking it will bring them riches as a rental. They ignore the fact that there’s a reason for the price. Brian Davis, the co-founder of SparkRental, learned this the hard way.
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“My particular mistake was investing in super low-end properties, chasing super high returns,” he said. “In rental investing, bad neighborhoods look great on paper, because the typical numbers that investors use to forecast income and expenses miss many of the risks. An investor sees cap rates of 14% in the bad neighborhood compared to 7% in a good neighborhood, and think they’ll earn twice the return without having to invest nearly as much money per property. Meanwhile, they don’t realize they’ll constantly battle crime, vandalism, rent defaults, evictions, property damage, break-ins and high turnovers.”
2. Following Advice From Stock-Trading Seminars
The stock market historically provides good returns, but those who want to get rich quick dream of putting all their money into the next big stock rather than diversifying their investments and waiting things out.
The U.S. Securities and Exchange Commission warns that some companies run seminars claiming to help you cash in on the stock market when they really want to rope you into expensive, and often worthless, investments. No one can guarantee how stocks will perform, so be suspicious if anyone at a seminar makes promises that sound too good to be true and applies high pressure for you to invest.
3. Trying To Pick One Stock for Quick Riches
Everyone would love to get in on the ground floor of the next Apple or Microsoft or Amazon, but you can lose your money if you go all in and don’t choose wisely. Jon Vlachogiannis, the founder of AgentRisk, said, “Machine learning algorithms create better portfolios and manage them more efficiently because they don’t try to predict. They just remove all our prejudices. … Even the best algorithms cannot predict the future — and they analyze billions of data. Why do individual investors think they can?”
Instead of picking a hot stock, the S&P 500 is popular with investors because of its steady gains. You won’t get wealthy overnight by putting your money into those companies, but you’ll build long-term wealth instead of taking a gamble.
4. Trading Penny Stocks
Stocks that trade for less than $5 a share are considered “penny stocks” by the SEC. The name sounds innocent enough. After all, how much can you lose trading such cheap shares? Quite a lot if you try to use them as a method to get rich quick.
These stocks have very low liquidity, and the companies that issue them are often new and unproven. Sometimes unscrupulous investors try to pump up the stock to lure in new investors at higher prices and then dump their shares, leaving the later buyers holding the bag. While the low cost is tempting, these stocks could cause you to lose it all if you put too much money into this volatile investment type.
“Whenever someone tells you that he made money trading penny stocks, 99% of the time he lost money. The other 1% is when he made money and then lost them all in another stock,” Vlachogiannis said.
5. Starting a Business for Fast Returns
If you’re seeking a path to riches, you might have considered starting your own business. This method works for many people, but Morgan Taylor, a finance expert, warned that going into business for yourself is not a way to easily get rich quick, and you can lose a lot of money if you don’t realize that.
“Most people don’t understand what goes into that business,” she said. “It’s a lot of work and in the end, patience is going to be your virtue. Nothing is going to make you rich today, but it might make you rich in 10 years if you do your research, know your stuff and have a little patience.” If you’re not willing to wait, don’t buy a bunch of supplies and equipment and plunge into business. If you do, you’ll come out poorer on the other end.
6. Gambling
It’s easier than ever to gamble because the internet and sports betting apps make it accessible to anyone. Just enter your credit card number, place your bet and hope for a big win. While most people realize they won’t get rich quick by gambling, others take things too far and lose significant amounts of money.
CPA Logan Allec, owner of the personal finance site Money Done Right, said, “Betting on sports and horse races on websites has become very popular, and these sites are now almost legal in every state. The danger in these sites is how easily accessible they are, and the tempting sign-up bonuses they have. You may get lucky and win a large sum, but unfortunately, many people dig themselves into a hole and then keep digging deeper with sports betting. Once you lose a few thousand, you may place a bet double that size, and then lose that bet, and continue doubling until you have lost a huge amount of money.”
And, there is still the old-fashioned way to lose big — at the casino.
7. Buying a Timeshare as an Investment
Timeshares are the gift that keeps on giving, but not in the way that the salesperson tells you. If you agree to sit through a sales pitch in return for some sort of free gift, the person trying to sell you on the timeshare might claim that it’s an investment that appreciates in value over time — in addition to being a money-saver on vacations.
Unfortunately, if you pay $20,000 for a timeshare rather than invest it, you lose out on the $32,578 you would have at the end of a decade at a 5% rate of annually compounded interest. Worse, you’re paying maintenance costs on the timeshare, and you’ll have trouble finding a buyer, even at a loss, if you decide to sell it.
8. Flipping Houses
The numerous home improvement shows make flipping houses look easy, and you can’t help but wonder if snatching up cheap properties and fixing them is the road to those riches you crave. Unfortunately, you could easily lose it all in this business because it’s so easy to pay too much for the house, spend too much on the repairs or simply just misjudge the market.
If you’re tempted to give house flipping a try, remind yourself that TV shows always show the success stories. You don’t want to end up as one of the unseen losers in the house-flipping game.
9. Putting Your Faith in Financial Books and Gurus
Books purporting to tell you how to get rich are all over Amazon, and some even hit the New York Times bestseller list. The financial gurus who write them assure you they have the secret to great wealth, but can you figure it all out from some book written by some person?
“Reading a book and thinking that you can become rich is the equivalent of going up the stairs and thinking you can climb Mount Everest,” Vlachogiannis said. And just remember that anyone can write a book, and you have no way of knowing whether the advice is good or the anecdotes on the pages are real.
For example, Robert Kiyosaki wrote the book “Rich Dad Poor Dad,” and its success happened despite any evidence that the rich dad was a real person or that Kiyosaki himself had successfully applied the lessons to building his own fortune. One of his companies ended up in bankruptcy in 2012 and, more recently, he found himself embroiled in a multimillion-dollar dispute with the company that handled seminars based on his book.
10. Taking a ‘Job’ That Requires You To Recruit
You probably have some annoying Facebook friends who beg you to join their team selling makeup, essential oils or slimming wraps, promising they’ve found the secret of how to get rich. “These typically end up being pyramid schemes, and they only work if you can get five or 10 people beneath you buying a product that they can never unload,” Taylor warned. “There aren’t enough people in the world, much less willing ones, to make anyone rich like this beyond the person at the very top.”
The FTC cautions that, while some multilevel marketing companies, as they are known, don’t qualify as pyramid schemes, it’s still extremely difficult to make money with them. An AARP Foundation survey once found that 73% of people who tried network marketing lost money or didn’t make any money.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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