15 Easiest Ways To Go Broke
- Nihinlolawa 'Lola' Sanni
- Oct 3, 2024
- 5 min read
Going broke might sound like something everyone wants to avoid, yet so many people unknowingly follow habits and make choices that put them on that very path. In this blog post, we'll explore some of the easiest ways to find yourself struggling financially. Consider this a guide on what not to do if you want to keep your finances intact.
1. Living Beyond Your Means
Living beyond your means is likely the most frequent path to financial ruin. The temptation of luxurious cars, high-end fashion, and pricey gadgets often entices individuals to overspend, exceeding their earnings. With the convenience of credit cards, it becomes even simpler to make purchases without immediate repercussions. Falling into a pattern of expenditure surpassing your income can result in accumulating debt over time.
Create a budget and stick to it. Financial stability starts with spending less than you earn, even if that means giving up some luxuries.
2. Not Having an Emergency Fund
Having an emergency fund is like having a safety cushion for unforeseen expenses. Whether it's an abrupt medical bill, car repair, or job loss, life has a tendency to surprise us. If you don't have an emergency fund, you may find yourself resorting to high-interest credit cards or loans, which can exacerbate the situation.
Aim to save at least 3-6 months’ worth of expenses in an easily accessible account; even 2 months' worth is better than nothing. It might take time, but you'll be thankful when an emergency arises.
3. Ignoring High-Interest Debt
Carrying high-interest debt, such as credit card debt, is a surefire way to drain your bank account. Many people make the minimum payments each month, not realizing that the interest is slowly eating away at their finances. With interest rates as high as 20%, you could be throwing away thousands of pounds over the years.
Focus on paying off your high-interest debts first. The sooner they’re gone, the more money you’ll have for saving or investing.
4. Keeping Up with the Joneses
Trying to match the lifestyle of your friends or neighbours can be a fast ticket to financial trouble. From vacations to fancy dinners, it's tempting to keep up appearances, especially in the age of social media where everyone flaunts their seemingly perfect life.
Remember that most people live on credit and debt, which doesn’t always mean they can afford their lifestyle. Focus on your financial goals rather than comparing yourself to others.
5. Not Planning for Retirement
Not contributing to a pension fund or saving for retirement is another way people set themselves up for financial difficulties in the future. If you neglect saving for your retirement, you may find yourself struggling to maintain your lifestyle after you stop working.
Contribute to your workplace pension or set up a personal pension plan. It’s never too early (or too late) to start saving for retirement.
6. Relying on One Source of Income
Many people rely solely on their salary for their income. However, if that income stream dries up, you're immediately at risk of financial ruin. Having multiple income streams can provide a cushion in times of uncertainty, especially if your primary job is at risk.
Diversifying your income with side hustles, freelance work, or passive income streams like investments or renting out property.
7. Spending Windfalls Recklessly
Getting a bonus at work or a tax refund can feel like free money, but spending it all at once is a great way to stay broke. Instead of using that windfall to pay off debt or save for future expenses, many people spend it on short-term pleasures.
A better approach is to treat windfalls as an opportunity to improve your financial situation. Paying off high-interest debt or investing can yield long-term benefits.
8. Neglecting to Track Spending
It’s easy to overlook how much those small, everyday expenses add up. Grabbing coffee every morning or buying takeout regularly may seem harmless, but these costs accumulate over time. Many people are surprised by how much of their income goes toward small, unnecessary expenses.
Keep a spending diary for a month or use an app to track your expenses. You may find some easy ways to cut back.
9. Failing to Set Financial Goals
Without clear financial goals, it’s hard to manage money effectively. Whether it's saving for a holiday, buying a home, or retiring comfortably, goals provide direction and motivation. Without them, it’s easy to spend impulsively without considering long-term consequences.
Set clear, realistic financial goals and create a plan to achieve them. Having something to work toward helps you stay focused and make better choices.
10. Not Investing
Many people avoid investing due to fear of risk. While it’s true that investments carry risks, keeping all your money in a savings account means you lose out to inflation. Over time, investing in assets like stocks, bonds, or real estate can grow your wealth significantly more than keeping money in the bank.
Start with index funds or ETFs, which spread the risk across many assets. Investing doesn’t have to be complicated or risky if approached wisely.
11. Relying on "Buy Now, Pay Later"
Buy Now, Pay Later (BNPL) options are convenient, but they can quickly spiral into a cycle of debt if not managed carefully. Many people use BNPL to afford items they otherwise couldn't, not realizing that failing to pay on time can lead to fees and damage to their credit score.
Use BNPL sparingly, and only for purchases you can afford to pay off in full before the due date.
12. Ignoring Insurance
Skipping insurance—whether it’s health, car, or home insurance—may save money in the short term, but it can be financially devastating if something goes wrong. A medical emergency or major accident without insurance can wipe out your savings and plunge you into debt.
It’s crucial to have adequate insurance coverage for major aspects of your life. While it might seem like an unnecessary expense, it can be a financial lifesaver in an emergency.
13. Lack of Financial Literacy
Not understanding basic financial concepts is another common reason people go broke. If you don’t understand how interest works, the dangers of credit, or the benefits of investing, it’s easy to make mistakes that cost you dearly.
Invest time in learning about personal finance. Books, podcasts, and online courses can provide you with the knowledge needed to make smart financial choices.
14. Gambling and Get-Rich-Quick Schemes
Trying to get rich quickly, whether through gambling or dubious "investment opportunities," often ends in disaster. The lure of easy money is hard to resist, but the truth is that most get-rich-quick schemes are just that—schemes.
Building real wealth takes time, effort, and patience. There are no shortcuts, and trying to take them can leave you worse off than before.
15. Ignoring Inflation
Lastly, ignoring the impact of inflation can make you poor without you even realizing it. If your income and savings aren’t growing at the rate of inflation, your purchasing power is actually decreasing over time. Keeping all your money in a low-interest savings account means you're losing money in real terms.
Look for investments that have the potential to outpace inflation, such as stocks, real estate, or inflation-protected bonds.
Final Thoughts
While it’s easy to make financial mistakes, the key is to be aware of the habits that lead to going broke—and to actively avoid them. Financial health is about balance: spending wisely, saving for a rainy day, investing for the future, and making informed decisions. By being conscious of your spending, setting financial goals, and continually educating yourself about money, you can build a foundation for long-term financial success. Avoiding the pitfalls discussed in this post will put you on the path to financial stability and growth, ensuring that you thrive rather than just survive.
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