How do you define wealth? Is it “a large amount of money and possessions”? But consider this definition: wealth is the financial security that comes from managing your money wisely.
Most of us want to be rich because we think it’ll make our financial problems will go away. Sadly, research shows that people who suddenly come into large sums of money, like lottery winners, are more likely than average Americans to declare bankruptcy within 3 to 5 years.
Professional athletes are another group of people who can suddenly earn enormous salaries, notably while young and not too experienced with personal finance, only to lose their wealth after they retire. A 2015 paper from the National Bureau of Economic Research estimates about 15 percent of NFL players are bankrupt after being out of the league for about 12 years. A Sports Illustrated article revealed that 60% of former NBA players are broke within 5 years of retirement and 78% of NFL players have gone bankrupt or are under financial stress within 2 years of retirement.
Why does this happen? The problem is a lack of basic financial skills: If you don’t know how to manage money, it won’t matter how much you have. Your habits are what contribute to financial success or failure. When people without those skills suddenly come into more money, they often increase their spending. They haven’t learned the financial restraint needed to keep and, most importantly, grow their money.
Being rich means you have money. Being wealthy means you know how to hold on to money and make it work for you. The good news is that if you earn a living wage, you can change your financial habits and create personal wealth. Focus your spending on needs (housing, groceries, retirement savings, etc.) rather than wants (a new sports car, expensive jewelry, etc.). Spend wisely rather than carelessly. Start a savings account if you haven’t done so yet, and then acquire assets with the money you save, like investment accounts and retirement plans. These will provide you with long-term financial stability.
By curbing your spending even just a little, you can begin to develop personal wealth and habits that will stick with you as your income increases.