It’s one thing to reach a particular status like being part of the upper class, but it’s an entirely different thing to stay there.
“Just as difficult as it is to reach, staying in the upper class may also prove to be a struggle,” said Zachary Jarvinen, vice president of Exact Payments. “One mistake that most people make is failing to adapt with the changing fortunes of the economy.”
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A good example, he said, is when some individuals put all their eggs in one basket, only for them to lose almost everything after an industry downturns.
“Does the bursting of the dot-com bubble or 2008 housing market crash ring any bells?” he said. “Well, those who were solely invested in technology stocks and real estate had to learn this lesson through such experiences.”
In other words, being wealthy isn’t foolproof. If you’ve worked hard to accumulate your riches and climb up the socioeconomic ladder and suddenly find yourself in a financial crunch, there are some signs to know why you’ve backtracked.
Below, experts explain the key reasons you may have slipped from the upper class. Also see signs you are no longer in the middle class.
Extravagant Lifestyle Spending
“Extravagant lifestyle spending without corresponding growth in assets or income is a typical factor that erodes wealth,” said David Blain, chief executive officer at BlueSky Wealth Advisors. “I’ve coached many clients on the importance of matching their spending with not only their current financial landscape but also their future financial goals.
“One notable case involved advising a high-earning client who, despite a seven-figure salary, was on the pathway to financial instability due to unchecked personal expenditures. By restructuring their financial plan and integrating a budget aligned with their income, we managed to revert the potential financial decline.”
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Failing To Diversify Your Investments
“I’ve noticed that one of the key reasons individuals slip from the upper class is their approach to investment strategy,” Blain said. “Often, lack of diversification and overexposure to high-risk investments can lead to significant financial losses.
“For example, following the 2008 financial crisis, I saw many clients’ portfolios suffer because they were heavily invested in real estate and lacked a balanced array of assets.”
Melanie Musson, finance expert with Clearsurance, noted that people lose their upper-class status when they neglect investments.
“The more diversified your investments, the more stable your wealth,” she said. “Someone who earns an excellent income can be considered upper class; but, if they spend more than they make or face a pay cut or job loss, they’ll instantly fall from the upper class.”
Remaining Stagnant
“People lose upper-class status when they are stagnant,” Musson said. “If wealth isn’t growing, inflation will shrink your assets. If you’re not always looking for ways to make your money work for you and grow, your stagnancy will look like financial failure.”
For this reason, she recommends investing in real estate, business, the stock market and precious metals.
Neglecting Tax Strategies
Another factor for slipping from the upper class, according to Blain, is mismanagement or neglect of tax strategies.
“For high-net-worth individuals, sophisticated tax planning is crucial,” he said. “In my role, I’ve devised strategies that incorporate everything from the timing of investments to choosing tax-efficient accounts, which significantly impacts long-term wealth accumulation.
“A specific case involved advising a family to alter investment venues, which safeguarded them from potential millions in tax liabilities over a decade.”
The above scenario, according to Blain, reflects the complex nature of wealth management and underscores the necessity of strategic thinking and proactive financial planning to maintain and grow wealth effectively.
Inadequate Liquidity Management
“From my experience, one prevalent issue is inadequate liquidity management,” said Vincent Cerniglia, president of Noreast Capital Corporation.
He said many businesses and high-net-worth individuals fail to maintain an appropriate balance between their liquid assets and fixed investments.
“For example, in several cases,” he said, “clients invested heavily in equipment or real estate without securing sufficient liquid assets. This imbalance often leads to cash flow issues that, when compounded with market downturns or unexpected expenses, escalate into significant financial distress.”
Lack of Financial Literacy and Discipline
Financial literacy and discipline matter a lot, experts say.
“It’s common among many individuals not knowing how best they can manage their huge sums of money,” Jarvinen explained.
He said this might involve risky investments, overspending or failure to consider future requirements for diversification and saving.
“Have you ever come across stories about lottery winners or heirs who squandered fortunes on extravagant living then ended up broke again?” he said. “Such tales really emphasize the importance of being well-versed in matters of finance while making prudent financial moves — if one wants to remain financially stable over time.”
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This article originally appeared on GOBankingRates.com: 6 Key Reasons You Have Slipped From the Upper Class
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