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Intro
If you're wondering why a lot of people are broke, you're at the right place. I used to be like that, so I know what makes it happen even better. I fixed my money problems by doing the total opposite, and you can do it too.
In this post, I'll share the most common reasons why most people are broke, and if you don't want to be like most people, all you need to do is not make these money mistakes.
They haven't set clear money goals.
Money goals are the foundation of every step you take with your money. In simple terms, when you create money goals, you're planning your future money moves. They provide you with a financial roadmap and a sense of purpose.
Plus, without them, there's no way to keep your money habits in check. For instance, if you choose to save ten thousand dollars this year, every time you think about spending money, you should ask yourself: will this help me save ten thousand dollars or make it harder? Honestly, just asking yourself that simple question can mean the difference between buying stuff on a whim and spending wisely.
In fact, asking yourself questions like this could be what separates being poor from being rich.
They don’t set a budget.
A key reason why many people are broke is because they don't follow a budget. In fact, a recent study by the U.S. Bank revealed that just 41 percent of Americans actually use a budget.
And if you don't have a budget, how can you tell when your spending is going off the rails? Making a budget lets you plan, keep track of, and examine your spending habits. It's like a well-marked road leading to your money goals.
Not Keeping an Eye on Their Spending
One reason people are broke is because they don't keep an eye on what they spend. But that's like missing the whole point of having a budget. If you're not watching what you spend, it's easy for money to just disappear.
Then, before you know it, you're broke, and you don't even know how it happened. I like to compare watching your spending to looking after a child. Little kids can easily wander off, so what do you do as a parent? You keep an eye on them. The same thing applies to your money.
If you're not careful with your spending habits, money can just vanish, whether it's at the supermarket, shop, or eatery. You need to watch your spending. If not, you might end up wondering where all your money went.
They use too many ways to pay.
Adding complexity to your money matters just makes handling your finances tougher. Let me paint a picture for you. Imagine a world without credit cards or borrowing money. Everyone would need to pay cash for anything they wanted to buy.
Imagine how straightforward that would be when dealing with money. The more loans and credit cards you bring into your financial life, the more tangled things get. Before you know it, you're using money from six different credit cards with different amounts owing.
Then, to pay all those debts, you have to sign into separate accounts since each account has different interest rates and records transactions at different times. It's super hard to know how much money you actually have and how much you owe.
This is a really messy way to handle your finances, and it often results in bad spending habits and money mistakes. On the other hand, if you just use a debit card to buy stuff, you can sign into one account and know exactly how much money you have.
This makes keeping an eye on your spending a lot easier, and budgeting becomes a lot more enjoyable.
They have credit card debt.
It's no secret that having credit card debt is a bad thing. Not only does it make your spending habits more complicated, like I mentioned before, but it also hits you with sky-high interest rates.
Actually, these interest rates are so steep that, unless you're really committed to paying them off, you could be stuck in credit card debt forever. Credit card debt is a big roadblock to being good with money, and it's one of the main reasons why lots of people are broke.
They take out loans to buy things that lose value.
Besides credit card debt, a lot of people are broke because they take out loans to buy big-ticket items they can't really afford. Also, most of these loans are used to buy things that lose value over time, like cars, RVs, boats, and just about anything else with an engine.
I may not be a money expert, but I think the secret to getting rich is to do things that make your money grow, not pay extra for something that's losing its value.
They make money choices based on monthly payments.
One of the biggest money mistakes you can make is deciding if you can afford something based on what the monthly payment will be. For example, if you want to buy a new car, you might think I can handle the monthly payment so I can afford it, but a smarter way to think would be that I can't afford this car because I can't pay for it all at once.
If you make your buying decisions based on the cost of the monthly payments, whether or not there's interest, it's easy to end up broke. Why? Because sooner or later you'll use up all your income on monthly payments, and the worst part is you'll be stuck with those payments for months or even years.
Making purchases based on cash flow and monthly payments is like slowly locking yourself in financial jail.
Living Beyond Their Means
Another straightforward reason why people end up broke is simply due to the numbers. They're spending more than what they're bringing in. They could end up in this situation for many reasons: maybe they're overspending to keep up with their friends or buying stuff they don't really need, or perhaps they're making impulsive purchases instead of planning and saving in advance.
So what's the solution? Get a clear understanding of your monthly cash flow. The money that's coming in and going out after taxes determines how much you're actually taking home from each paycheck. Review your expenses and identify areas where you can reduce spending if you're going overboard.
They don’t plan for unexpected costs.
A 2018 study from the Federal Reserve Board found that almost one-third of U.S. households would have to sell something or borrow money to handle a $400 surprise expense. Now I don't know about you, but that seems like a big issue, especially because, uh, 400 unexpected costs isn't something I'd call rare.
Actually, I'd say that's a pretty small unexpected cost. Just one visit to the emergency room will show you what I mean. If you don't plan for unexpected money problems, you're setting yourself up for a financial mess, and while health emergencies are common, they're not the only thing to worry about.
What if your car stops working? What if you lose your job? The worst part is that the less prepared you are, the more problems you'll face. Don't believe me, okay? Think about this situation. Let's say there are two people. The first
They don’t regularly invest.
It's crucial for you to know that just saving money won't make you rich. To build wealth, you need to make your money work for you, which means investing regularly over a long period of time. In fact, do you know what separates people without money from those with wealth? People without money pay interest, while wealthy people earn interest.
They spend money before saving it.
Another reason why most people are broke is because they spend before they save. The usual pattern is that people take their income, subtract their monthly expenses, and then use whatever is left to save and give.
The issue here is that this approach puts spending before saving, which often leads to a pretty weak savings account and slow progress towards financial goals.
So if you want to budget the right way and avoid the common pitfalls of people who are broke, flip this money process around. Instead of making spending a priority, make giving and saving the first things you do with your money.
They’re consumed by fear.
Assessing their current financial status and creating a budget and long-term plan are the initial steps. Remember, failure is not the end of the world; they shouldn't let it prevent them from moving forward.
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