Being ‘Broke’ means someone has completely run out of money and has nothing to spend on. In personal finance, it means going to a zero balance or even a minus in your account. In this article, you will learn about the reasons why most people go broke.
Most of the time when they say someone is broke that means, they have no money left and also have debt.
Anyone can go broke regardless of whether they’re in the working class, a Millionaire, or even a Billionaire. Even top-class athletes, celebrities, and lottery winners have gone broke after their successful tenure.
For an ordinary person, it simply means that they have spent all their money and have none left. For a millionaire or billionaire, it means their business/empire failed and they have no liquid assets to sell to raise money.
In simple words, being broke means having no money.
Let’s get started on why most people go broke.
Why do most people go broke?
Most people go broke because they get themselves into too much debt. They gather too many liabilities in the form of luxuries and comfort. They pile up too many credit card debts either to buy fancy luxury items or some lavish lifestyles.
When your monthly bills and payments grow more than your monthly income you will eventually be broke and in most cases continue to go deeper and deeper into debt.
Another type of broke is the lower and the lowest income earners that just can’t get ahead financially as they don’t earn enough for even a basic living expense. Due to inflation and high living costs, they simply cannot meet the desired basic living needs.
People who were once rich and go broke usually do so because they took on too much risk, debt, and/or leverage. When a deal, business, or the economy turns against them they lose everything.
Here are a few of the reasons why most people get broke.
Reasons why most people get broke
#1. Poor Financial Planning – They don’t have financial planning
Most broke people have no clear financial goals or purpose for their money. They will spend their hard-earned money haphazardly, not caring about the future.
In order to avoid being broke, you must save and invest money in anything before spending. Identify where you want to be financially in the future, this will help your decisions and behavior line up with this vision.
#2. Unsustainable Spending – They spend more than they make
When you spend more than you make you will have nothing left and you will always be waiting for your next paycheck.
It doesn’t matter how much you earn or make, if you can’t say no to things you can’t afford, you’ll certainly go broke because you will buy more than you can afford.
If you can’t pay cash and must use debt then you can’t afford it, simple as that. Just refrain from overspending.
Read More: Good Debt vs Bad Debt: The Difference
#3. Lack of Financial Discipline – They waste too much money
People who earn a decent income but are still broke may simply be wasting too much money.
It’s easier for them to spend money on eating out in a restaurant instead of eating at home for much less the cost. It’s easier for them to go to a fancy coffee shop than to make their own coffee at home.
Bringing your own lunch at work every day instead of eating out at some restaurant saves up a lot over a year.
Little consistent acts of spending money daily on things that are overpriced and not needed can add up over time and be a drain on finances even for the middle class.
People need to maintain Financial Discipline on overspending even if it’s a tiny amount of money. Those small savings could compound over a long period of time.
#4. No Budgeting – They don’t use a budget to manage their spending
One of the main reasons most people are broke is that they don’t live on a budget. And without a budget, how are they supposed to know when they are getting off track in their finances?
The strategy and discipline to plan out where your money goes each month will solve your problem of being broke.
You must have a proper spending plan & strategy, to begin with. Knowing where all your money is going is the number 1 step whereas managing it is step number 2.
Budgeting allows you to plan, track, and analyze your spending habits. It is your well-designed path toward your financial goals.
#5. Massive Debt – They have too much debt
Even high-income earners can get broke when they have excessive monthly debt payments. Having a big mortgage, new car payments, high credit card debt, along extra payments luxuries are a formula for being broke.
Large debt payments on depreciating assets will drain your money supply quicker than anything. Your houses are not your assets until you consistently earn rental income (a positive cash flow) from them or you sell them at profits.
Be careful with your payments for debts based on your income level. These high-interest payments can keep the middle class broke.
Also Read: How to Reduce your Debt Quickly 2022
#6. They Borrow Money to Purchase Depreciating Assets
In addition to credit card debt, most people end up being broke because they borrow money to make large purchases they can’t afford.
Most loans are used to purchase depreciating assets like electronics, motor vehicles, furniture, machinery and equipment, and other fixed assets.
Despite not being a financial genius, I believe the key to wealth lies in investing in things that grow, not paying for things that lose value.
In my opinion, the key to wealth is to do things that will grow your money, not spend extra money on things that will lose value.
#7. Not Investing – They Don’t Invest Consistently
It’s important to understand that saving money will not make you rich. To become wealthy, you need to put your money to work, meaning, you need to be consistently investing over a long period of time.
Have you ever noticed the difference between broke people and wealthy people?
While the Broke people pay interest, the wealthy people keep earning interest.
So, essentially, if you don’t want to be broke, you need to do two things: don’t get into debt, and second, invest. In this way, you won’t have to pay interest, and you’ll earn it at the same time.
Also Read: How To Set Financial Goals You Can Achieve For Your Future in 2022?
#8. Not Saving Money for Emergencies
Lots of Americans live paycheck to paycheck and do not bother to save so some extra surplus cash for emergencies. They are not used to it; they just live for the next pay date. And that’s the major problem with broke people.
If you don’t prepare for financial emergencies, you are setting yourself up for the worst financial disaster coming up. Emergencies like medical emergencies, accidents, car breaking down, losing phones, etc. are some of the major risks. Also, what if you lose your job? This is where you need money saved up for emergencies.
If you save up 3-6 months of your living expenses for emergencies then you will never go broke as you will have this money sitting in your savings account.
Start with one week then a month and a quarter of a month focus on putting whatever you can away and you will never g6 broke.
The less prepared you are, the more emergencies you will run into.
How can I stop from going Broke?
If you’re broke, it’s likely because you’re spending more money than you have coming in. To stop being broke, you need to find ways to cut your spending and/or increase your income.
#1. One of the ways to get out of this vicious cycle trap of being broke is to increase your income. If you can find ways to bring in more money, you’ll be in a better position to cover your expenses. Increasing earnings capacity and power is the only way up and out of this type of being broke.
#2. You can start by getting a second job, starting freelancing, a side hustle, a pay raise, working more hours, working overtime, or even switching jobs to one that is higher paying.
#3. Another way is to cut your spending and track where your money goes. For a week or two, write down every penny you spend. This will help you identify areas where you’re spending more than you realize. Once you know where your money is going, you can make specific cuts to your spending.
Here are a few simple tips to turn around your personal finances and stop being broke.
- Stop spending more than you make.
- Set up an emergency fund.
- Budget your monthly earnings to have money left over.
- Increase your earnings through higher pay or working more hours.
- Start acquiring assets.
- Stop acquiring more debt.
The Bottom Line
Knowing why most people go broke and taking precautionary steps to avoid them by being disciplined and consistent is the best way to avoid being broke.
