How to Avoid Going Broke in 5 Steps
Getting rich takes focus, discipline and hard work. It’s tough to become wealthy.
Going broke, on the other hand — that’s really easy. Super easy! In fact, most of us are probably just one misfortune away from it.
But here’s the good news. By being proactive, you can set yourself up to avoid these pitfalls.
Here are the quickest ways to go broke — and what you can do to avoid them.
1. Living Beyond Your Means
Too many of us are guilty of this one, because we live in a consumer society and an Instagram culture: Look at me, look at me, look at how successful I am.
Here are examples of living beyond your means:
- Being “house poor,” with a dream home and a huge mortgage you can barely afford
- Moving to your dream city without the income to live there
- Buying an expensive car to impress people
- Overspending on travel
Get in the habit of spending less than you make.
2. Not Having an Emergency Fund
Living frugally also allows you to build up an emergency fund. If you don’t have an emergency fund, an unforeseen emergency can force you to max out your credit cards and/or borrow money. Then you’re spending money paying back expensive interest.
An emergency fund is a stash of easily accessible money that equals three to six months’ worth of salary, in case you unexpectedly lose your job. And millions of us have unexpectedly lost our jobs over the past year.
With the Aspiration Spend account, you can earn up to 5% cash back on your debit card purchases. With the Aspiration Save account (where you can funnel your tax refund), you can earn up to 20 times the average interest on your savings balance. (The FDIC reports that the average account earns just .05%.)
It takes five minutes to sign up.
3. Making Bad Investments
Investing is a key strategy for growing your money. But there are so many bad investments you can make!
For example, watch out for multi-level marketing schemes. Direct sales companies can be an opportunity to strike out on your own with the support of an established brand. But the MLM model lends itself easily to scams, so do your research before signing up and handing over startup money.
A more straightforward way to invest is through an app like Robinhood. Whether you’ve got $5, $100 or $800 to spare, you can start there.
Yeah, you’ve probably heard of Robinhood. Both investing beginners and pros love it because it doesn’t charge commission fees, and you can buy and sell stocks for free — no limits. Plus, it’s super easy to use.
What’s best? When you download the app and fund your account (it takes no more than a few minutes), Robinhood drops a share of free stock into your account. It’s random, though, so that stock could be worth anywhere from $2.50 to $200 — a nice boost to help you build your investments.
4. Not Having a Budget
Don’t want to go broke? Don’t want to budget? Try the budget for people who hate budgets.
The 50/30/20 method for budgeting is one of the simplest ways to get your spending in check. No 100-line spreadsheets or major lifestyle changes required.
Here’s how it works: Take your total after-tax income each month, and divide it in half. That’s your essentials budget (50%). Take the rest, and divide it into personal spending (30%) and financial goals (20%).
Let’s break it down: That’s 50% for things like utilities, groceries, medications, minimum debt payments and other essential spending. Then there’s 30% for fun: Thai takeout, your Netflix subscription, dressing up a skeleton on your lawn for Halloween.
That leaves 20% for your financial goals, like additional debt-reduction payments (anything above the minimum monthly payment) along with retirement savings and investments.
This is a smart way to avoid going broke.
5. Burning Money on Credit Card Interest
More and more Americans are financially strapped, due to the high unemployment rate, and they’re maxing out their credit cards. The interest rates those cards charge you can quickly rise above 20% and will persistently gobble up so much of your income that you’ll never get ahead.
Truth is, your credit card company doesn’t care. It’s just getting rich by ripping you off with high interest rates. But a website called AmOne wants to help.
If you owe your credit card companies $50,000 or less, AmOne will match you with a low-interest loan you can use to pay off every single one of your balances.
The benefit? You’ll be left with one bill to pay each month. And because personal loans have lower interest rates (AmOne rates start at 3.99% APR), you’ll get out of debt that much faster.
AmOne won’t make you stand in line or call your bank, either. And if you’re worried you won’t qualify, it’s free to check online. It takes just two minutes, and it could help you eliminate this red flag in your life — once and for all.
Mike Brassfield ([email protected]) is a senior writer at The Penny Hoarder. He’s not wealthy, but he’s not broke either.