5 Reasons Why People Are Broke

Most people don’t really understand money. There are two things to grasp before you can ever become wealthy. Those two things are illustrated in this top five list of things that explain why people are broke.

Broke Reason #1: Money Is Not Wealth

Having money is not the same as having wealth. You can have a million dollars in your bank account, but if you’re a million and one dollars in debt, you’re still broke. Just because you have money doesn’t necessarily mean you are really rich. Money is a pathway to wealth, but is not wealth itself.

Broke Reason #2: Assets vs. Investments

Assets are things that give you the illusion of wealth, but often just create a facade of wealth. Owning a fancy new car is great, but it is not an investment it’s a liability. It loses money over time, costs you money over time, and is nothing more than a new debt even if you own it outright. One of the best lessons I learned from Thomas Stanley’s Millionaire Next Door is that millionaires spend their money on investments, not assets.

Broke Reason #3: Savings vs. Investments

Having a relatively large savings account or a large amount of money in a checking or money market account is not an investment. It’s important to have cash on hand, of course, in case something happens, but if all of your “wealth” is stored as money in the bank, you are wasting one of your best wealth creation tools. The difference between savings and investments is the principle of wealth building.

Now, I am not saying that you shouldn’t find a good bank for your short-term cash needs. I am just saying that you need to make sure that you are not keeping too much in savings to the exclusion of your investment portfolios. When I am looking for a bank, I often don’t care about the interest rates, I look for great online banking features because that is what is most important to me. Some of the bank websites that I like are Ally Bank and CIT Bank.

Broke Reason #4: Lack of Long Term Thinking

Having a “good job” is a great thing, of course, but if your good job means you think about the next paycheck or the next month’s income, you suffer from a lack of long-term thinking. Your income (job or business) should be thought of in terms of quarters and annuals. Rather than thinking about the next two weeks or the next month, a wealthy person thinks about the next three months, six months and the next year.

Focus on making year over year increases in your income. This might be through the creation of a side business or by simply asking for a promotion.

Broke Reason #5: Obsessing Over Money

If you obsess over where your next income is coming from, how much money you do or don’t have, or are always thinking about how much you can make by doing something, you are not thinking in terms of wealth. Again, money is only a pathway to wealth, but it is not wealth itself.

What is wealth?

Now that you know what blocks your way to becoming wealthy, let’s define wealth and then you’ll understand the critical change in thinking that has to happen if you’re going to ever become wealthy. Since wealth is not money, what is it? Wealth is the ability to not think about money and instead to think about incomes in a broader sense.

For instance, while a car is rarely an investment, property, dividends, and education are. Investments are those things which pay back over and above their cost. If you purchase a second home as a rental and it can pay its own mortgage and expenses through rent over the next fifteen years, you’ve made an investment. What you’ve done is invested some money now so that fifteen years from now, you own property that didn’t cost you much at all. The same can be said for stocks that pay dividends, gold or silver, or an education. All of these things can pay you back over time some faster than others.

Wealth is simply getting more for less over time. Today’s 50-hour work week should become tomorrow’s 40-hour week which becomes a 30-hour week and so on.. all without lowering income.

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5 comments
Big-D
Big-D

I am really confused by this article, since your 5 reasons contradict what you are saying. You define wealth as "the ability to not think about money and instead to think about incomes in a broader sense". So when you look at your 5 points, it really does not make sense to me what you are trying to say for lots of scenarios. I guess the thought that you are stating that people are Broke if they don't follow these list of 5. I will break it down one by one.

Broke Reason #1: Money Is Not Wealth
What you are saying is that having oodles of cash does not mean you are wealthy. The example is that you have someone who has a million is cash and owes a million for their "stuff". Okay I can see that, but your reason is then flawed. I can have a million in cash and no debt and saying that "money is not wealth" is definitely not true. "Money is not wealth if you have a negative net worth." is more apt for what you are trying to describe.

Broke Reason #2: Assets vs. Investments
I whole heatedly disagree with your characterization of the car as a liability. As with any GAAP analysis, you can have an asset, which depreciates over time. You are telling me you have a car, paid off, running, and near end of life which you want to trade into the dealer. If it is not an asset, then there is no point negotiating a higher trade-in value for that vehicle, as it is by definition a liability, and has nothing but negative value for you. Having an asset with ongoing expenses (such as a house, car, lawn mower, etc.) are the cost of living in a modern society and GAAP recognizes it. If you are trying to say that "keeping up with the Jones's is bad", then yes. I agree with that. But telling me that my 7 year old car which is paid off and has a blue book value of 10k is not an asset, that is just ridiculous.

Broke Reason #3: Savings vs. Investments
While I agree you want to have the majority of your money that is not working for you immediately working in investments is a good thing, however I don't see this as a reason why people are broke. This is an investment choice, and they are not growing their money as efficiently as they could. If I had $10k in the bank, and it grew at the prevailing rate of 0.5%, it is still growing. Yes I could make 8% in the stock market, but it is still growing, and if that person is risk adverse, they are happy. You are broke when you have ZERO savings or investments.

Broke Reason #4: Lack of Long Term Thinking
I think this again is wrong for what you are saying. At the end of the day, yes, long term thinking is great and a cool mindset to get into. I have been there for almost 2 decades. However, having long term thinking has ZERO to do with you being broke. I can have one million plans for money, but if you cannot pay the gas bill, you cannot do much about it. Good financial reasoning and planning for the long term with budgets, getting out of debt, and hard work will get you to the point where you have "long term thinking". Someone can be a short term thinker, and still have millions of dollars and no debt in the bank. One does not preclude the other.

Broke Reason #5: Obsessing Over Money
While I agree that if you want to transcend day-by-day thinking of your money for general wealth, stating that if you do think of your money then you are not wealthy is wrong. Many people who are rich obsess over where their next income is, not because they are broke, but because that is what drives them to be richer, motivates them to be good people, etc. Looking again at your definition of wealth, I cannot see your point. You state that "money is only the pathway to wealth, but it is not wealth itself." Okay .. having oodles of money is a pathway to you to "not thinking about money". Yeah, that sounds pretty solid logic. When you have enough of something, then you don't have to worry about it. If you are looking at wealth as this "zen like state where you don't worry about money as it takes care of itself" then yeah - not doing any obsession might be in order. However, understanding and observation of your money will only help you better understand what it is doing for you.

What is wealth?
Again - I disagree with your car analogy. It is an asset with a depreciable expense and ongoing maintenance. Such is the same with your "education" category as well. Go get any technically certification and 5 years again you have to get it again so you are considered educated. Your home has ongoing maintenance. By your own logic those cannot be investments. Same thing with financial investments as they have ongoing expenses within the mutual funds, stock brokerage account fees, etc. The ability to work harder now and work less in to the future is what everyone wants to do. However, it only works if you are independently wealthy (see my definition below) so you can do it. Doing all the things you stated above, I can be a 5 year old and be wealthy.

Final thoughts:
Looking at this entire article, I wonder if you are aspiring to the place like where you have $100 billion and sit around and order people to do stuff for you. If that is your definition of wealth, then good luck attaining it. I have a very different definition of wealth - which can be as simple as this. "When you are at a point, that your income exceeds your expenses and you are not worried about your financial standing." This way anyone who makes $3 or a $100 billion can fit it as long as they live within their means, and do what they love, and feel like they are a king of their own world and not a slave to someone else.

david stuart
david stuart

excellent article

runnings costs/bills size of property are all things people dont take account of--slowly but surely getting into debt

Thomas
Thomas

I think people are broke because they're living above their means. Getting a mansion when a 1BR apartment is all they need. Buying/leasing a new car every 2 years instead of buying/using the same car for a decade. That's all money you don't need to spend.

You know you got problems when you spend more than your paycheck and resort to supplementing your lifestyle with credit cards charging >20% interest.

Instead, cut out unneeded expenses and save at least 10% of your paycheck every time and invest it long term in something that gets you at least 5% every year.

Donny Gamble
Donny Gamble

I believe that people are broke because they spend too much money on the wrong things

Briana @ GBR
Briana @ GBR

I keep telling people if you don't have a long term financial plan, you're not going to reach you goal. It becomes unrealistic. People spend their paychecks as soon as they get it, not thinking of the "what if's" that can occur. If you prepare for those things in advance, it can set you up much better in the future.

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