Sometimes, it’s the best to learn from your mistakes or those that others have done before. Today, we will look at 6 really obvious ways to go broke.
Sure, they are obvious, but still, they have a lot of value. You may find yourself tapping into one or two of these traps. Maybe you don’t even thought about it or realized it.
I will definitely make use of exaggerations in this post and probably you won’t find yourself in the exact same position. However, I still believe that you may recognize a tendency in one of these 6 ways to go broke.
If none of these things apply to you even a little, then I hope this post is even entertaining for you.
So without further ado, let’s dive in.
Try to impress others
You have probably seen this before. Someone is driving an expensive brand new car and all the other people around them think that they are successful. They are doing well financially. Otherwise, they couldn’t afford such an expensive car.
This is maybe true in some cases. However, very often people just buy a car that they can’t afford just to impress others and disguise their real situation. It’s not just the case with cars. People buy houses, making expensive travels or having fancy hobbies.
At some point in time, they can show or tell others about it and they will be impressed. Sadly, this won’t make you rich. I like this quote of Walter Slezak:
Spending money you don’t have for things you don’t need to impress people you don’t like.
This adds another important component. You try to keep up with the Joneses and have everything the people around you have. This leads to our next to do to go broke.
Not prioritizing (a.k.a. trying to have everything at once)
There are many reasons for this phenomenon. You could really just try to keep up with your neighbor or your friends and buy things that they also have. You make sure to beat them by buying an even more expensive version of their acquisition.
But sometimes it’s even simpler. You cannot (or just don’t want to) decide what is important to you. Therefore, you buy many things that you actually don’t need. For example, you have a gym subscription and just go to workout once a month. Maybe you have a whole set of golf clubs and just go golfing twice a year. For sure, you also need these new barbeque tongs to have more convenience when you make the next BBQ in the summer.
This is probably the most obvious way to going broke. You just try to afford everything! But you don’t need every cool tool that adds a little convenience to your 328th most executed hobby. I have again a quote for you. This time from Ramit Sethi, the author of I Will Teach You To Be Rich:
Spend extravagantly on the things you love, and cut costs mercilessly on the things you don’t.
Add just another $40 per month
Man, 0% financing is such a great thing. You can buy an item that costs $3000 for just $125 per month over the next 2 years! Easily, you can live a much more exclusive life than before. A new TV? Just another $40/month! A new smartphone? Just another $30/month.
There is only one tiny problem. You have to pay back the money at some point in time. You’re not paying $125 for this item but $3000 just split up over 2 years. The next 2 years you have $125 less every single month! And this sum adds up!
You can make it even worse with paying these items through a normal (above 0%) financing and add also these nice interest rates. Then you don’t just buy the item for $3000 but even more than that.
Overall, it’s just a way of being greedy and buy things you actually can’t afford. If you don’t want to make the large payment upfront then it’s probably not worth financing it.
Sure there are exceptions for very big purchases like a house. However, you can easily go broke by adding so many expenses for the next 2 years that you just can’t afford anything for this time period. If you want a longer version of my thoughts on 0% financing, read this post.
Use your raise to buy more stuff
A raise feels great. You were working hard and then you finally get appreciation. You deserve to buy something with this money! Therefore, you use it directly and buy more stuff. You are not saving anything but using the money to improve your life (this at least what you tell yourself) by spending much more money every month. Maybe you even exceed that amount.
The same happens for bonus payments, tax returns or an inheritance.
Don’t get me wrong. It’s okay to use a part of that money to spend. But you should also take care of your short-, mid-, and long-term goals and increase those contributions. This could really help you! Instead, you just act as if there never was money added to your monthly paycheck.
This will probably not make you broke but it will at least take care that you don’t improve your financial situation and continue to live from paycheck to paycheck.
Take on as many loans as possible
Your bank already closed its doors. Now you are asking for money in more obscure places. Finally, you even ask your friends and your family if they can help you out. But hey, you got cool new stuff for yourself.
It’s easy to add as many loans as possible to make sure that you can never pay them back. This is a very dangerous way to get broke. This cannot just damage your credit score but also really hurt relationships with people you love.
It’s okay to take on a loan. I think we all have or had to do this once. However, you shouldn’t get too comfortable with this feeling. I remember when one of my family members first asked me for money and explained me over 3 hours why he needs that money. A few years later, it was done just by a phone call that went like this: “Hey, can you send me over 100€?”. No explanation and no shame.
I think, there are two things to take away here. Never get too comfortable with the feeling to take money from others and also don’t let it happen that others get too comfortable with this feeling by lending out your money every time.
Easy test: If taking on a loan feels normal to you and don’t give you a bad feeling, you’re probably to familar with it.
Don’t build up an emergency fund
Why should you keep money back for bad times? You know exactly, what you want to buy and what happens in your life.
Well, sorry to break you out of your dream world but this is not how life goes. There are emergencies. Your dishwasher breaks exactly one month after the warranty went off. You lose your job and need to cover all your expenses on a single/or no income.
You have probably already heard of emergency funds either on this blog or any other personal finance blog. People are preaching this all over the place that you need to be prepared for an emergency. You can save for 3-, 6- or even 12-months of expenses. However, every single penny is better than nothing. Believe me, you will regret it if you don’t have one at some point in time.
I’ve used mine twice last month for a new kitchen that we were not expecting to buy and a tax prepayment I needed to do for my new freelance business.
Not having an emergency fund is an easy way to go broke and is like skating on thin ice. Just try to avoid this naïve assumption that everything will happen as planned.
So what are the traps you fall into? Have I forgotten something? Let me know by leaving a comment in the comment section below!