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.
Recommended next reads
What to do after generating an extra $5000 per month? Andrew F Coppola 2 years ago Are You Following Your Friends Into Debt? Rodger Friedman, CRPC® 3 years ago
Are You Following Your Friends Into Debt? Rodger Friedman, CRPC® 2 years ago
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.
- Stop spending more than you make.
- 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.
- Save up an emergency fund.
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
FAQs
Common reasons that people file for bankruptcy include loss of income, high medical expenses, an unaffordable mortgage, spending beyond their means, or lending money to loved ones. Often, bankruptcy is a result of several of these factors combined.
Why do most people go broke? ›
Common reasons that people file for bankruptcy include loss of income, high medical expenses, an unaffordable mortgage, spending beyond their means, or lending money to loved ones. Often, bankruptcy is a result of several of these factors combined.
What are the reasons why people don't have money? ›
Here are 5 common reasons people struggle to make their income be enough, along with some handy solutions to change that.
- You're spending more than you earn. ...
- You aren't saving. ...
- You're not tracking your spending. ...
- You don't have financial goals. ...
- You're not budgeting.
High expenses: If you have recently had a significant increase in expenses, such as medical bills, unexpected repairs, or other financial obligations, this can leave you feeling like you have less money than you'd like. Income issues: A decrease in income or job loss can lead to feelings of being broke.
Why most people are still broke? ›
Most people just don't put in the work
Many people don't make the necessary effort to improve their financial situation, instead opting for shortcuts and get-rich-quick schemes. By dedicating yourself to growth, learning, and taking small daily steps, you're more likely to achieve lasting financial stability.
What keeps most people broke? ›
Many people who stay broke do so because they live beyond their means, which is spending more than they earn each month. This is an unsustainable habit that often leads to debt and financial hardship.
Why is the average American broke? ›
High levels of inflation, record household debt, and average salaries not keeping up with the rising cost of living are having a negative impact on Americans' overall feelings of financial security, according to a new MarketWatch Guides survey.
Are we happier without money? ›
The Killingsworth Study
They were also surveyed about their income and satisfaction with their lives. Using this data, which constituted over 1.7 million experience samples, Professor Killingsworth found that larger incomes “were robustly associated” with both greater happiness and greater life satisfaction.
Can we ever live without money? ›
Well, some people can! Living without money runs counter to most of our cultural understandings of success and happiness; however, it is a choice that more and more people are leaning towards.
What does lack of money lead to? ›
They can lead to relationship problems, physical health problems and mental health issues, such as depression or anxiety. You can minimise the impact of financial stress by looking after your health and seeking support from loved ones or professionals.
But what does it mean? For the purposes of this survey, living paycheck to paycheck describes a financial scenario in which an individual or family's income barely covers essential living expenses like housing, utilities, groceries and transportation.
How to make money if you're broke? ›
Once those subside, you'll find there are ways to get your hands on quick cash, without falling prey to scams.
- Sell spare electronics. ...
- Sell your gift cards. ...
- Pawn something. ...
- Work today for fast cash today. ...
- Seek community loans and assistance. ...
- Ask for forbearance on bills. ...
- Request a payroll advance.
- Take care of your Four Walls first.
- Cut extra expenses.
- Start an emergency fund.
- Ditch debt.
- Increase your income.
- Live below your means.
- Save up for big purchases.
- Remember your why.
The great majority of people have an irresistible temptation to spend every single penny they make and whatever else they can borrow or buy on credit. If you cannot delay gratification, and discipline yourself to refrain from spending everything you make, you cannot become wealthy.
Why rich people are still unhappy? ›
Indeed, some wealthy individuals are even said to suffer from “affluenza,” a social condition among those who are excessively focused on material possessions and consumerism, to the point where their personal values and behaviors are negatively impacted.
Why do billionaires go broke? ›
Poor Financial Planning
Rich people who don't create a financial plan often set themselves up for failure. They not only fail to properly track and manage their income and expenses — they also fail to prepare for unexpected events that can drain their money in a hurry.
Why do so many rich people go broke? ›
Poor Financial Planning
Rich people who don't create a financial plan often set themselves up for failure. They not only fail to properly track and manage their income and expenses — they also fail to prepare for unexpected events that can drain their money in a hurry.
Why are some people always 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.
What percent of people go broke? ›
What is the percentage of bankruptcy filings in the US? A: According to government statistics on bankruptcy, 399,269 non-business bankruptcies were filed in 2021. That equates to 0.12% of all Americans filing for bankruptcy.
Do most people not save money? ›
The most recent figure, from September 2023, shows that, on average, Americans are saving 3.4% of their monthly income.
