There are many levels of personal finance with the lowest levels being broke, being deeply in debt, and bankrupt.
Being bankrupt means you can no longer pay your debts and must seek the courts protection and settle with your debt collectors.
Being deeply in debt means that all your earnings go to debt payments each month with nothing left over. Being broke simply means going to zero in cash. Broke people can be, but are not necessarily bankrupt or deeply in debt, they just don’t have any money.
At what point are you considered broke?
Broke is an adjective meaning someone has completely run out of money. In personal finance it means going to a zero balance in your account. Most the time when someone is broke they have no money left and also have debt. Anyone can go broke regardless of whether they’re in the working class or a millionaire.
For an ordinary person it simply means that they have spent all their money and have none left, for a millionaire it means their business failed and they have no liquid assets to sell to raise money. Being broke is simply having no money.
Why are most people broke?
They have no financial goals
If you don’t have goals and a purpose for your money it will all just be spent haphazardly. You must have goals to not be broke so you save and invest money if you want to have anything left after spending. Identify where you want to be financially in the future, this will help your decisions and behavior line up with this vision.
They don’t save money for emergencies
If you save up three to six months of your living expenses for emergencies then you will never be broke as you will have this money sitting in your savings account. Start with one week then a month and focus on putting whatever you can away and you will never be broke.
They don’t use a budget to manage spending
The discipline to plan out where your money will go each month before it begins will cure your problem of being broke if your income is high enough to support your bills. You must have a spending plan to avoid being broke. Knowing where all your money is going is step 1 and managing it is step 2.
They don’t plan for their financial future
If you plan for your retirement and have money put into your 401k each paycheck you will never be broke as you will always have money in this account. Investing money in you retirement account or brokerage account will give you a portfolio and a chance to build up capital so your net worth will likely never be zero dollars.
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They spend more than they make
When you spend more than you make you will always be broke waiting for your next paycheck. It doesn’t matter how much you make, if you spend it all you will be broke. The inability to say no to things you can’t afford will keep you broke due to your excessive buying above your income level. If you can’t pay cash and must use debt then you can’t afford it. If you are broke you can’t afford it. Living beyond your means insures staying broke due to overspending.
They have too much debt
Even high income earners can be broke when they have excessive monthly debt payments. Having a big mortgage, new car payments, high credit card debt, along with extra payments on boats or motorcycles are a formula for being broke. Large multiple debt payments on depreciating assets will drain your money supply quickly. Houses are not assets until you sell them, in the mean time they can be large payments with unrealized value. Be careful how many payments you take on based on your income level. Payments can keep the middle class broke.
They waste too much money
People that earn a decent income but are still broke may simply be wasting too much money. It’s easy to spend money on dining out in a restaurant instead of eating at home for much less the cost. It’s easier to go to a fancy coffee shop than to make you own coffee at home. Eating out for lunch at work everyday instead of bring your own lunch can add up 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.
Why do most people go broke?
Most people go broke because they get themselves in too much debt. When your monthly bills and payments grow to more than your monthly income you will be perpetually broke and also in most cases continue to go deeper in debt.
Another type of broke is the lowest income earners that just can’t get ahead financially as they don’t earn enough for basic living expenses. The only way out of this trap is to increase income by getting a second job, a side hustle, a pay raise, work more hours, work overtime, or switch jobs to one that is higher paying. Increasing earnings power is the only way up and out of this type of being broke.
People who were once rich that go broke usually do so because they took on too much risk, debt, and/or leverage and when a deal, business, or the economy goes against them they lose everything.
How can I stop being broke?
There are a few simple ways to turn around your personal finances and stop being broke.
You will stop being broke when having money is more important than having fun or buying new things. If you take your career seriously and put in the effort to move up in earnings power and manage your personal finances with a budget then the odds are in your favor that you will never be broke.
Habeeb Mahmood
