Top 8 Reasons Why You’re Broke

Sanket Patil

Updated on:

Lack-of-Financial-Planning-1

Everyone wants to be rich. But often, we that dream of getting rich or become billionaires, often end up being broke and having little or even no money. Now, how does that happen? After all, we never really plan to go broke, regardless of the circumstances or the situation.

If you’re one among the millions of persons that have little or no money or who is finding the answer for ‘Why I'm broke?”, there’re could be as many as eight reasons why you’re broke. And in this article, I will be discussing each of these eight reasons in detail. That might help you to tighten your belts and start taking the necessary steps to achieve your financial goals of becoming rich.

Maybe you’re aware of the problems that come by being broke. The shortage of money can land us in really distressful situations. Here’re some unpleasant circumstances that could arise when you’re broke.

Problems of Being Broke

If you’ve ever been short of money, you might have already experienced or encountered all or even some of these problems. Here’s a list of the most common problems that arise when we’re broke.

Stress

Mental stress is the greatest fallout of being broke. Sometimes, we’re also unsure about where our next meal will come from or where to stay. If left untreated, such negative stress can eventually lead to a severe mental disorder- clinical depression, which requires expensive psychiatric care and medication.

Poor Health

Having no money combined with mental stress often leads to poor health. Furthermore, we can also experience poor health when broke because we’re unable to afford nutritious food or care for our physical well-being. Though we might get some financial assistance from the government for falling below the poverty line, the money isn’t usually enough to afford good health.

Inability to Pursue Dreams

All of us have dreams. To give wings to our dreams and make them a reality, we need money and good health. However, being broke means we cannot fulfil those dreams, which eventually leads to sorrow and a lack of joy in our lives. This can be a very tricky situation when you’re broke because the inability to fulfil even simple dreams due to lack of money can set back your life by a few years.

Crime

Not every poor person is a criminal. However, poverty does count as one of the major factors for crime. When we’re broke, we could be tempted into committing some illegal acts that can land us in serious trouble with the law. Having even a minor criminal record can severely disrupt or ruin a career and personal life. Therefore, being broke can also lead us to a crime.

Negative Impact on Lifestyle

Being broke means you won’t have the lifestyle that you desire. Instead, your life will be full of needs and wants that you can barely fulfil. And this can be a very stressful situation. All of us want to lead a joyful life, but the paucity of funds renders this impossible. We’re unable to afford a lot of things that others take for granted in their life.

Now that you know about all the bad things that you could suffer from if you’re broke, let’s proceed to discuss the main reasons.

How to Stop Being Broke? 8 Reasons.

Actually, there are several reasons why you’re broke. I will list eight of the main reasons. Maybe you would be able to identify with some of these reasons and take steps to correct your situation and have more money at hand for your personal and household needs. I’ll discuss these reasons in details for you to get a better understanding.

1. Lack of Financial Planning

Lack of Financial Planning

There’s an old axiom that says: “Failing to plan is planning to fail.” The lack of financial planning is often the biggest reason why you could be broke. Financial planning means setting short-term, mid-term and long-term goals for your money. And often, we fail to do this.

Having a financial plan means having a proper roadmap about what you wish to do with the money you’re earning and how to manage your money in the future.

It includes a lot of things, such as setting a budget for every expense, such as education for kids, household and personal needs, plans for retirement and every other sphere of life for which you would need money. This isn’t as complex as you might believe. Normally, people who’re broke don’t do any financial planning.

You can take the help of a freelance financial advisor to do some planning for you. Financial consultants and financial advisors are qualified to draw a superb roadmap for where your money should be going. They can help you invest in the right plans for your future so that you never run broke again. Understandably, a freelance financial advisor would cost you some money. However, this expense would be definitely worth it since it could save you from going broke again.

2. Not Saving Enough

Not Saving Enough

Not saving enough money is why you’re broke. Actually, everyone, including people with smaller incomes, can save some money and invest it to make it grow. But you might falsely believe that you can’t save because your income is small.

There’s one magic formula for savings that would definitely work for you. And that is: Income minus savings equals expenses. (Income-Savings=Expenses).

In simpler terms, it means deducting your savings first from your income. And whatever remains of your income after such a deduction should be used for expenses. This formula is known to work wonders because it helps you stay within a fixed budget and wipes out unnecessary expenses.

You also have to consider something that’s known as the time value of money or TVM. To explain it better, the money you have in your hand today loses its value after one year. For example, if you take two $100 notes and keep one of them at your bank and the other at home. The $100 that you saved at a bank will gather interest at, let’s say, 4.5 per cent per annum. That means that after a year, the bank will pay you $104.50. In stark contrast, the money you kept at home hasn’t grown and will be $100 only.

During the year, the cost of living has gone up by 2.5 per cent. This means the $100 you kept at home is only worth $97.50 now. However, the money you kept at the bank and fetched you $104.50 is higher than the inflation. Meaning you still have gained $2 by saving the money at the bank.

Use these two formulas to save your money. As a matter of fact, most Americans don’t have enough money for their retirement or at the time when they’re no longer earning. Surely, you don’t wish to be in such a situation. Therefore, start saving some money right now.

3. Unpaid Student Loan

Unpaid Student Loan

If you’ve an unpaid student loan, you could be broke unless you wipe it off completely. According to a report released by Lendingtree.com in June 2023, over 43.4 million Americans are stuck in student debt. Collectively, they owe a whopping $1.71 trillion to banks, credit unions, and other lenders.

A student loan can cause severe problems in your life. One of them is that you’ll be broke. Other major problems include delays in house ownership because your credit score will be poor when you have an unpaid student loan therefore, always take care of your credit score as a student. Secondly, you might find it difficult to marry and lead a family life when you’re paying a student loan even after graduating and starting to work.

Furthermore, student loans delay savings for your retirement. A student loan also makes it harder to buffer the negative impact on personal finances that come along with economic recession in America or the world.

All said and done, an unpaid student loan is one of the greatest reasons why you could be broke today. As a matter of fact, a student loan sets back the life of a person by as many as seven years. And that’s a considerable period of time in anyone’s lifespan.

There’s only one way to counter student debt. That’s by stepping up repayments and getting rid of the student loan at the earliest. If possible, look for one-off settlements of student loans because you can negotiate for a lower interest with the lender by paying the full amount earlier in your life. Student loans may sound normal to most Americans. However, it is the greatest reason why you could be broke.

4. Credit Card Debt

At the beginning of 2023, Americans had a staggering $986 billion worth of credit card debt, according to a report by the news website CNBC. Unfortunately, this figure continues to grow as unemployment caused by the economic fallout of the Covid-19 pandemic of 2020 continues to persist.

It’s worth remembering that credit cards come with something known as the Annual Purchase Rate or APR.  This APR can run as high as 32 per cent, depending on the credit card you hold and its issuer.

Credit cards generally allow you to pay only a small amount of money as your repayment during each billing cycle. And they add APR on all your unpaid dues. Now, the more you delay settling the credit card bills in full, the more the APR goes on compounding. This means the APR gathers more APR. In some cases, you might find that you’re paying almost double the rate of something you’ve bought on a credit card due to APR. Therefore, one of the reasons why you’re broke could be large credit card bills.

Additionally, credit cards also tempt us to spend money that we don’t have on stuff that we don’t need. Since we might not have the cash to buy some fancy stuff, we use credit cards because they give us the freedom to spend without having enough money on hand. And that leads to piling up of credit card bills and the inescapable APR.

If you’re caught in a credit card trap, the best thing is to step up repayments and if possible, repay the dues in full. This can save you from wasting a lot of money as APR that you could otherwise save and invest.

5. Frivolous Expenses

Frivolous Expenses

Who doesn’t love shopping? Personally, I’m some sort of a shopaholic. However, excessive or even addictive shopping could also be the reason you’re broke. If we look around the house, you’ll surely find a lot of stuff that you bought with the intention of using them. However, you never really got down to utilizing that stuff for whatever reasons. This is an unwanted expense that costs you money.

Another frivolous expense is buying new or latest electronics and smartphones. This could also happen because you have a credit card or a seller is offering easy credit with soft repayment terms.

Regardless, any expenses on stuff that you don’t really use or need is a frivolous expense, in my humble opinion. This doesn’t apply only to expensive gadgets. I’m also considering the cable TV channel packages that we seldom watch, magazine and newspaper subscriptions though we barely read and lots of such expenses that’re done without any real need.

Therefore, if you’re serious about moving away from being broke, the first thing to do is stop these frivolous or useless expenses immediately. Instead, save and invest the money where it can grow and fetch superb returns.

6. Addictions

Addictions

Broadly speaking, there are two types of addictions. One is substance addiction, where you’re hooked on drugs, alcohol or even food. The other is non-substance addiction, such as sex, social media and spirituality. Regardless of the nature, almost all victims of addiction are always broke. Because addiction makes their lives “unmanageable,” as defined by the First Step of Alcoholics Anonymous.

When we’re addicted to anything, we go to great lengths to fulfil the craving. For example, an alcoholic would end up spending most of their income on liquor. A social media addict will spend prolonged hours before a computer or smartphone, which causes a lack of concentration at work and, hence, results in job loss or absence of promotions.

It is an undeniable fact that all addicts go broke at some point of time in their life. If you’re an addict, then you could be facing a shortage of money even for basic needs and might have to depend upon others for your daily needs.

However, there are medical and other treatments available to get rid of addictions, such as support groups. You could try any of these to get rid of addictions and start living a happier life without being broke again.

7. Neglecting Investments

To begin with, it’s a myth that most people believe. That it takes a lot of money to invest on stocks, Exchange Traded Funds, currencies and cryptocurrencies or commodities. Actually, there’re five amazing apps that allow you to start your investment journey with as little as $5 only. Some of these apps include TD Ameritrade, Acorns and Robinhood. You can download them for free and register.

For $5, you might not be able to buy a full stock or ETF or other financial instruments. However, these apps enable you to buy fractional stocks, meaning a small part of the stock. As you go on investing, these fractions add up to give you a full stock or ETF unit.

Not investing small amounts of money regularly is one of the reasons you could be broke. The reason is simple. The small amounts of money that you invest work to create a sort of emergency fund for you. Since the money you invest grows considerably, you would have enough cash at hand when you sell these investments, if you find you’re going broke.

Having an emergency fund not only prevents you from going broke but can also help you from having cash on hands when it’s most needed. And as I mention earlier, you can begin investing with very small amounts of money too, through these apps.

8. Wasting Free Time

Wasting Free Time

And finally, wasting free time on sleeping, watching TV excessively or playing games on your smartphone is one of the other main reasons you could be broke. While I’m not against entertainment as it might sound, what I oppose is wasting free time instead of utilizing it for some gainful purposes.

For example, millions of Americans use their free time to do superb side-gigs that earn them an extra income. Therefore, if you’re broke, you too can stop wasting time and find a side-gig to make extra cash.

There’re several apps that can help you to find superb side-gigs that match your skills. Working on these side gigs for a couple of hours daily can prevent you from going broke.

For example, you could do deliveries for Amazon through their wonderful Amazon Flex program and earn $25 per hour or more. Or you can find simple and easy to do tasks on TaskRabbit. Such work during your free time can help you earn a lot of money.

One of the best things about using your spare time is that you can use the extra cash to save and invest to build an emergency fund. That way, you needn’t have to worry about going broke again. This is one of the best ways to prevent being broke too.

Wrap Up

Now that you’re aware of the eight reasons why you’re broke, it’s also possible to act on these reasons and get rid of that money shortage that’s nagging you. It’s easy and simple and doesn’t require any extra educational qualifications or knowledge of finances.

Financial planning and spending discipline are the two main factors that can prevent you from facing a shortage of money or going broke. Use the tips I mention in this article to stop going broke.

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