There is a difference between being broke and being poor.
Broke is a temporary state of finances.
Poor is a mindset.
Before you go on, promise me you will never refer to yourself as poor again. Even if you feel like you are.
You may be broke, but you’re not poor.
Here is why you may be broke and how to stop it…
1. You Bought Too Much House
If your house payment is more than 50% of your income, you can’t afford it.
25% of your income or less is where you really want to be with a house payment. Or even better…0%!
How to Fix it:
- Sell your house and buy a less expensive home
- Refinance your home if it makes sense
- Rent one of your rooms out to a friend or relative
- Sell your home and rent if it makes sense for you
2. You Bought Too Much Car
This one blows me away.
Most middle class people are broke because they bought a vehicle they can’t afford.
Figure out how to buy a car you can afford here.
If you have to finance it, you can’t afford it. Most people don’t want to hear that, but it’s true.
Just think about what your retirement would look like if you were able to invest that car payment each month.
New cars and luxury cars are nice, but wait until you can afford them and you don’t have to finance.
How to Fix it:
- Sell your car and buy a car you can afford
- Find a lower interest rate if you are too stubborn to sell
3. You Spent Money You Didn’t Have
You may be broke because you thought having a credit card meant you didn’t actually have to pay for things.
This is one of the most common reasons to be broke (especially for us Americans).
The good news is this is one of the easiest to fix!
How to Fix it:
- Find extra work to pay it off quicker
- Call the company and ask for a settlement
- Consolidate to a lower interest rate
4. You Decided to Go to School
There is nothing wrong with that. School is expensive.
If you have excessive student loan debt, you really only have one option.
It doesn’t go away.
How to Fix it:
- Be disciplined and hard-working to pay it off
- Look into loan forgiveness programs
5. You Had Medical Issues
Sometimes your finances are out of your control.
Medical debt can eat you alive, but you can do something about it.
There are a few ways to reduce or eliminate medical debt, depending on the situation.
How to Fix it:
- Call the company/collector and negotiate
- Ask the collector for a settlement
- Be disciplined and hard-working to pay it off
Final Words
Ultimately, if you’re broke, it’s because you spend more than you earn.
That comes in the form of financing, credit cards, and other creative ways.
People come up with new ways to go broke every day.
Stop spending more than you earn and you will stop being broke. It may take time, but it will happen.
Once you get out of the rut, stay out!
Remember one last thing…there are other situations that can make you broke that aren’t as common. Some are in your control and some are not, but either way, only you can fix it.
Photo Credit: Matt Shalvatis, As U Like, Shawn MacEntee, Fr Lawrence Lew, O.P., Julen