The Only 3 Reasons Anyone is Ever Broke (And How Not to Be)

Honestly, I was broke for most of my 20s.

In fact, for a time, I was spending way more than I was making, and I really dug myself deep into credit-card debt.

It wasn’t fun.

But I climbed out, and now, looking back, I’m able to see what caused the problem. I can also what helped me out of it.

If you are living paycheck to paycheck, are constantly broke, and are struggling to stay above water—and  you are ready to start living differently, this article is for you.

Now, being broke has three possible causes (not four, not two: three!) and in all reality—it’s probably caused by a combination of all three.

So I’m going to discuss each cause, one at a time. Let’s get started.

1. Not Enough Income

Several years ago, in my late twenties, a close friend told me how much money he made that year, and I was blown away.

I thought, how can someone in their twenties be making so much?!

But, two years later, I made that same amount. In two years. My income more than quadrupled in that time.

How?

I am 100 percent a believer in the idea that “you are the average net worth of your five closest friends or associates.” Now, I didn’t make all that money from real estate. Some was from cash flow, some from flipping, some from selling books, some from other random side projects. But I attribute a lot of it to my friend telling me how much he’d made.

Everyone has an internal thermostat that defines how much money they should earn. When they earn more, they subconsciously decrease their efforts. When they slip below it, they hustle (subconsciously or otherwise) to make up the difference. So, when my friend told me he made $500,000, my thermostat rose to his level.

Now, if you really want a mind-blowing thought (at least it was for me) Brian Tracey, author of The Psychology of Selling says that the internal income thermostat is set by how much your dad earns.

Mind blown.

My internal thermostat had been set by my dad’s income and I had no idea. It wasn’t until I recognized that internal limitation that things began to change.

Of course, getting more income is not as easy as just turning up the thermostat. You still have to do the work.

Now, when talking about making more money, we have to differentiate between two types of people. Some people have the ability to earn more money by working harder and smarter (for example, a real estate agent, a salesperson, or a small business owner). Others, though, get paid a certain amount because that’s just what they get paid, like teachers, firefighters, and police officers.

First, let me speak to those careers without a serious income cap. Let’s say you are a real estate agent, and you want to start investing in real estate. It helps to have plentiful income or savings when you go to real estate deal. And you are currently broke, I actually wouldn’t necessarily recommend that you start investing in real estate; instead, I’d probably encourage you to get “un-broke” by focusing on the agent side of things. After all, is it easier to start generating an extra $1,000 a month from a brand new venture or something you’ve been doing for years?

So,to continue this  real estate agent example, how can a real estate agent increase their current income? Here’s a few ideas:

• Read every book on becoming a successful agent.
• Wake up at 4 a.m. each day to work on personal development skills.
• Take other successful agents out to lunch.
• Find the daily processes that will help you increase your real estate sales within the next six months. Maybe that means making 100 cold calls a day. Maybe it means spending five hours a day knocking on doors. Whatever it is, find the process and stick to that. The results will take care of themselves.
• Forget small goals like “increase my commissions by 10 percent.”  Instead, think, how can I quadruple my sales volume this year? Bigger questions lead to bigger results.

Now, of course, this was an example just for real estate agents.

But what if your job doesn’t allow you to make more money?  Maybe you are a stock broker, a fisherman, an insurance agent, a high-school teacher. If you want to earn more income, you will likely have to look outside your job to discover ways you can add value to the world.

Yes, value. That’s how you make money.

So, maybe you are a math teacher and you make $50,000 per year but have no ability to earn more. That’s it. What skills can you provide to the world that people may pay for? How about tutoring? Could you create a math tutoring program that helps kids improve their math skills? Or perhaps you can create a simple online course that teaches a certain math concept (sites like udemy.comare fantastic for creating online courses.) Or maybe you’ll do something that has nothing to do with math but involves something else you are passionate about.

The point is: there are always ways to make money. In fact, making money is a skill that anyone can master, but few do.

Everyone has an excuse for why they can’t make more money, but those excuses generally boil down to one thing: laziness and an unwillingness to learn. I’m not saying that everyone is lazy, but they are lazy when it comes to learning how to make money.

So get out there and start reading books on how to make money. Start practicing. Like any skill, the more you learn and the more you practice, the better you’ll become.

However, all that said, earning enough money is rarely the problem.

Yes, that’s correct. Most likely, you already earn enough. The problem is likely how much you spend.

Related: 5 Side Hustles to Help Sustain Newbie Real Estate Wholesalers 

2. Too Many Expenses

When most people say they are really broke, I tend to wonder which of the following they currently pay for (and I don’t meant to judge—we all pay for things we want).

• Car payments
• Netflix/Hulu memberships
• Magazine subscriptions
• Restaurants
• Pre-packaged foods
• New clothing
• Bottled water
• Smart phones (and data plans)
• Vacations
• Cable TV

Again, not all of these expenses are bad. But many people I know who are super broke spend their money on not just one or two, but dozens of things that they could likely cut out in order to save hundreds (if not thousands) of dollars each month.

“Brandon,” you complain, “you can’t seriously be telling me to get rid of my iPhone, are you!?”

Yes. If you are broke, you have no business owning an iPhone. That is, unless you don’t mind being broke.

“But I’m so much more productive with my iPhone!”

No you aren’t. But that’s beside the point. You’d be much more productive with a team of two-hundred personal assistants, but you can’t afford them and you can’t afford a fancy phone.

And it’s not just fancy phones. It’s everything! Let’s take a look at a couple more common (and expensive) monthly payments: car loans and house payments.

“But, I need a nice car to get to work and I don’t want a junker car I’m going to have to fix up; so that’s why I have this big car payment.”

The problem with this thinking, though, is that it assumes there are only two options:

1. get a cheap car and it will break down
   or
2. buy a nice car with a car payment

But there is an enormous middle ground! A person can definitely get a car for $3,000 that won’t break down every month. And if you do have to fix stuff, I can almost guarantee it’ll be cheaper than the $400-per-month car payment that most people carry around.

The same applies for house payments.

“But my wife/kids/family deserve to live in a nice place. After all, I don’t want them to get shot!”

I’m sure you do feel that they deserve nice stuff; but again, there is a middle ground. I’m not suggesting that a person goes to live in an unsafe neighborhood where their family might get murdered for crossing the street. But I am suggesting that there are a lot of nice, blue-collar neighborhoods where a person could rent. (It’s true, I don’t believe everyone should own their home, especially if it’s cheaper to rent.)

In my early twenties, when I realized I had a major spending problem, I went and lived in a church parsonage (the little house next door where the pastor usually lives) for free, in exchange for doing the labor and fixing the place up. Yes, it was a sacrifice. But the year I spent there helped me stabilize my life and build a more financially secure foundation. Did my wife deserve to live in a nicer home with air conditioning and a garage? Of course emotionally I want to say yes. But to be honest,we didn’t deserve it yet because we had not earned it.

Last year, however, I bought my wife her dream home with the most incredible view I’ve ever seen, because finally we’ve earned it.

Now, let’s move onto the third (and most important) reason most people are broke: they don’t manage their money correctly.

3. Poor Money-Management Skills

Finally, understand that the reasons above can affect every person, no matter what income level they find themselves in. I know people who earn $300,000 a year who are just as broke as people I know earning $12,000 per year.

Because it’s not what you earn, nor what you spend, it’s how you manage it.

This is the primary reason I was so broke: because I didn’t stop to manage my finances with the same degree of care that I was managing my rental properties. I just spent what I wanted with my magic debit card and just let myself do what I wanted to do.

This was a bad idea.

Money must be managed by you or it will rule over you, causing you to always play the defense and live reactively.

But good money management is about knowing what money is coming in, what money is going out, and making sure that the latter is less than the former. Good money management is about knowing what you have spent money on so that you can make informed decisions on what you should spend money on. It’s about working with your spouse or significant other to establish boundaries and guidelines for how money should be spent.

Related: How My Journey Out of $2.5M in Debt Inspired Me to Live a Charity-Focused Life

I would recommend three things to begin developing better money management:

1. Know Where You Are at Right Now. Sit down and look at your finances over the past month and place every expense into a category. How much do you spend on rent/mortgage? How much do you spend dining out? What about car payments? How much income is coming in? Take a look at the past three months to get an idea of where you mostly spend. I’d recommend using Mint for this task, as it’s much easier (and prettier) than staring at spreadsheets. And it’s free, so that’s a win.
2. Establish a Budget. I know, everyone talks about budgeting. I know you know that you should have a budget. But do you? And more importantly, are you sticking with it? Set up weekly appointments with your significant other or with an accountability partner to go over your finances at least once a month (if not more). Make sure you keep yourself on track.
3. Automate Your Savings. Finally, be sure to place a line item in your budget for saving part of your income. Even if you are just saving $5 a month, do it. And increase it over time. Challenge yourself to see how high you can get. And don’t rely on yourself to remember to set aside money for savings. Automate it. Most bank accounts give you the ability to set up automatic transfers to a savings account. Do that today. Like, right now. I’ll wait.

Once you have a firm handle on your money management, you can further improve your life by increasing your income and/or further decreasing your spending. For example, if you are able to get on a budget and essentially break even (aka living paycheck to paycheck) every extra dollar you make or save will help you reverse your broke status.

• Shut off your cable TV. Take that $75+ and add it to your automatic savings.
• Downgrade to an old-fashioned 2004-style flip phone. Save the $50 a month and add it to your savings.
• Start driving for Uber in the evenings and bring in another $500 a month. Add that money to your savings.

Summary: How to Stop Being Broke

So, are you ready to stop being broke? Are you ready to stop living paycheck to paycheck? Are you ready to stop stressing about paying your next bill?

Then recognize that you being broke is 100 percent your own fault… but t’s also 100 percent within your ability to fix. Get to work fixing it.

Clean up your finances with better money management, decrease your spending with sacrifice, and start earning more through hustle.

By effectively combining these three steps, you’ll never be broke again.