This Is What Keeps People Broke
According to a study by the Federal Reserve, if you have at least $400 saved to cover an unexpected emergency, you’re already financially better off than one third of Americans.
It’s well known that most people do a poor job of managing their finances and there are seemingly few people that are responsible with their money.
Having a good relationship with their money doesn’t necessarily mean being ultra-wealthy or earning a fat paycheck.
It just means that you are making smart money choices, not making reckless decisions on a regular basis and are comfortable with your income and expenses.
In this article, we will go over seven common reasons that people are broke and how to avoid these mistakes.
Mistake #1
The first point would be not having a clear financial goal.
Financial goals are always the starting point to every decision that you make about money.
How would you be increasing your income, paying off your debt or working less if you have no direction whatsoever?
When you set financial goals, you are establishing a destination for your future which will then allow you to make decisions that will help you achieve them.
For example, becoming debt-free within the next two years is a clear and concise goal that you can use to execute a plan that will help you get there.
Another one would be doubling your income next year.
What are some things you can begin doing today that will help you realize it if you don't want to be broke?
The very first thing you should do is to come up with a goal of exactly where you'd like to be financially and when you'd like to be there, whether you want to save 1000 dollars, pay the down payment for a new car, or pay off your credit card debt, these goals all have a clear end goal which you can plan for and execute on.
Mistake #2
Which brings me to the second point, people who are broke don't prepare for emergencies.
Since a third of the people don't have $400 dollars available to cover an emergency, this can be a clear problem.
Unexpected expenses are common throughout our lives and 400 dollars isn't exactly a lot of money.
According to AAA, the average repair cost on a car is around 500 to 600 dollars.
If you don't find a way to prepare for financial emergencies, you're setting yourself up for disaster.
What if you lose your job one day and you are not prepared for a common unexpected expense.
Therefore, you will be forced to fund them with other less desirable ways such as with credit card debt, then it will not only be a struggle to save an emergency fund, but it will also be a struggle to pay off the debt when you're being charged insanely high interest rates.
Mistake #3
The 3rd reason would be not budgeting, this is one of the main ones.
According to US Bank, approximately 41% of people would be poor and remain that way as they don’t stick to a budget.
The problem with this is that without tracking your income and expenses, you won’t know your cash flow.
Less so on where your money went.
You will know why this is extremely important if you plan to get ahead and not be broke.
You might think budgeting is a huge waste of time because the thought of putting all your income and expenses on a spreadsheet can be uncomfortable, however doing this can be a powerful exercise especially for those who are trying to take control of their finances.
Mistake #4
Not thinking about the future is a deadly sin when it comes to being financially responsible.
When asked about their poor financial standing, most people give the excuse that they want to spend money and enjoy life today, not save until they are too old to enjoy their money.
It's understandable that some people don't want to pinch every penny until their 50s or 60s.
It really doesn't make sense to sacrifice your younger years planning for a potentially lavish retirement.
However, it's important to strike the right balance of thinking ahead and having a good time right now.
You want to invest for your future while making smart decisions that will also allow you to enjoy your life while you're relatively young.
I would bet that most of you reading now would agree with me, that the right balance would include decisions that let you retire comfortably and also have fun in the present, right?
Mistake #5
You know what else makes you broke?
Expensive Hobbies!
People with these hobbies often find it hard to save money.
While not only rich people have expensive hobbies, poor people also have them.
One example is smoking, while it’s not exactly a hobby, but do you know how much a pack of cigarettes cost?
This is just one of those things that cost more money than people often realized.
If a smoker is smoking one pack of cigarettes per day, at seven dollars per pack, that's over two hundred dollars per month.
Now, how many smokers would claim that they are not able to invest $200 per month for their future, because they don't have enough money?
Another expensive habit is eating out regularly, this isn't just about grabbing a bite a few times per month.
What I am talking about is eating out on a regular basis, sometimes more than eating at home.
People think nothing of spending fifty dollars on a meal out, but then turn around and claim they have no money.
Fifty dollars here and there isn't a big deal but if you're living paycheck to paycheck, avoiding an expense like this on a regular basis, say three or four times per week, then you really will start to see the magic happen.
Mistake #6
The 6th thing that keeps you broke is bad debt.
Now, not all debt is created equal, there are generally two forms of debt, good debt and bad debt.
The first kind is good debt, which is money you borrow that helps you put money back into your pocket, this would be something like a mortgage on a rental property.
The other kind is bad debt, this is the form of debt that people usually think of first, when it’s used for buying depreciating assets.
When I say depreciating, it means that the value of your item decreases over time, things like cars, computers and most items that are bought with credit cards.
When using bad debt, not only are you being charged interest, instead of earning it, the items are depreciating and have little to no residual value.
Furthermore, debt allows people to make purchases they can't afford and don't have the money for.
Let’s say John wants to buy a fancy new car, so he chooses to finance it because he can't afford to pay cash.
John is now paying interest to the lender, which is the bank, while his new car is depreciating at a rapid rate and it was out of his budget in the first place, meaning it's too much car for him.
As Dave Ramsey says, many people will go through ego purchases, which are things that they do not need, but still buy to impress people they don’t like hanging around.
Furthermore, he says nothing will make you go broke faster than trying to impress others, as silly as this sounds, this thinking and behavior is common and it happens all the time.
Many people make purchases to show off to others, maybe subconsciously, because they feel like if they look rich, those people will be envious and impressed by their success.
The thing is you might feel a sense of satisfaction when making a large purchase to look good, but that feeling will be short-lived, usually at most 3 months, that feeling will have mostly subsided.
But that purchase you made 3 months ago, can set you back long-term many years after that initial purchase.
This is a losing battle and the financial setback for this false sense of fulfillment usually isn't worth it.
Mistake #7
While the last point is a cliche, people who don't pay themselves first will remain broke.
Aside from making responsible spending decisions, paying yourself first is one of the easiest and most actionable ways to improve your finances that most poor people don't do when trying to get ahead.
It is important to understand that it's nearly impossible to build wealth by saving money alone.
You need to consistently put your money to work over a long period of time.
Taking a portion of each paycheck and directing it towards investments is an easy and painless way to invest automatically.
By doing so, you would be less likely to miss the money and you don't need to make an active decision to invest on a regular basis.
If that money sits in your bank account burning a hole in your pocket, you will feel wealthier than you are and it would eventually be spent on various items, most of which you don’t even recall what they were.
When faced with the option of whether or not to invest your money, you are much less likely to choose to invest.
The reason most people are broke is because they make poor financial decisions, not just in some areas but usually in many.
Now there are obvious exceptions to this, but if you analyze the behavior of the average broke person, you would find this to be true.
However, the silver lining is it’s entirely possible for just about everyone to improve their financial situation to a point where they're comfortable.
- Ivan