Living paycheck to paycheck? Struggling to pay bills and get food on the table? Don’t have the money to pay for unexpected expenses like car repairs, broken heaters or dentist bills? Do you have mountains of credit card debt? You’re broke.
You’re not alone. And no matter the cause of financial crises in your life, you can overcome it.
Shortly after college, I was broke. I was single and living in a cheap apartment and making do substitute teaching and writing. I didn’t have money for extras, or sometimes gas, and I frequently had to ask my parents for money. That’s embarrassing. I went to the library for video games and books and free internet, which is also embarrassing.
Eventually, I got more writing jobs and a full-time job at Walmart and was still substitute teaching and I managed to get my finances mostly under control. I worked a lot. It was worth it. I learned a lot. It hurt. I still managed to make more poor decisions, but learned from those, too.
So can you.
But first you need to identify why you’re broke. Or possibly the many reasons you’re broke. Here are six major causes of financial crises and what you can do about them.
#1 You Don’t Have a Financial Plan
If you don’t have a financial plan, you’re screwed.
Without a financial plan, you don’t know where your money’s going, you don’t know how much of it you’re spending, and you’re not spending money the way you think you are.
It doesn’t matter if you’re Bill Gates or making minimum wage at the grocery store. Not having a financial plan is the primary cause of financial crises. Your financial plan needs to address your finances as they are now, but also your future, into retirement.
To overcome this cause of financial crises, you need to create a financial plan you will follow.
Many financial advisors recommend writing down every cent you spend for the next month, and that’s a good idea, but if you can access your bank account online, start by printing out your last three bank statements. With those in front of you, take a good hard look at where your money is really going.
Ready to be surprised?
My husband and I were. The first time we did this, we had 4-5 charges for $3 or less every week day. He would get thirsty or hungry while he was on his route (he’s a truck driver) and buy soda or water or a sandwich or a slice of pizza. Since they were all “small” purchases, he didn’t think they were anything to be concerned about. The problem? Altogether, he was spending $250 that was NOT budgeted for.
Once you identify a problem, you can create a solution. Now he gets “road money” and I buy freezer meals, soda and water for him to bring with him to work.
To create your basic budget:
- Write down fixed expenses: rent/mortgage, electricity, satellite, internet, cell phones, etc.
- Write down variable expenses: gas and groceries
- Put money into savings
- Track where the rest of your money is going
- Expect to have “surprise” purchases come up
For the first month you should to get an idea of where you’re overspending and underspending. You don’t need to plan out every cent for the rest of your life, but it’s wise to start there. To create your budget, you can use a planner that does most of the work for you, like Mint, or create your own.
Credit card debt is a huge cause of financial crises. Obviously, if you bring home $2,500 each month and you’re spending $2,600, you need to find things to cut back. But credit card debt is a less-obvious way to spend more than you earn. You charge it and pay it back slowly over time. In doing that, you’re paying more than it’s worth for each purchase over the course of several years – several times over.
If you have credit card debt that you’re adding to and not paying back every month, it’s bad for your credit score and your finances.
Having a credit card you pay off every month or you only use for emergencies can be acceptable. Several people use credit cards for the rewards. But if you’re carrying a balance, it’s bad, the end.
To break the cycle, pay extra on one credit card to pay it off faster. You may have to cut something out, like going out to dinner with the girls or buying cool car parts or reduce the data plan for your phone. Do it. After you have one card paid off, move on to the next one. When you’re debt free, you can decide which extras are most important to you and indulge freely.
#3 You’re Not Saving Money
Saving money is necessary for your future, whether it’s the long-term future that is retirement, the short-term future that is your next emergency or the mid-term future that is next year’s vacation. You need to have a savings accounts and at some point you will probably have several.
If you’re not saving money, you’re setting yourself up for failure. It can become a future cause of financial crises in your life.
Imagine you have everything under control. You’re making good money that covers your bills and gives you plenty of room for extras. And then the car breaks down. You take it into the shop. While it’s in the shop, your basement floods, soaking your office carpet. And your books. It’s not enough to take out an insurance claim, but it does cost a few hundred dollars to clean up. You get your car back. $632 of ouch.
And then the basement floods again because the broken gutter wasn’t replaced correctly. This time it sits half a day. The carpet is ruined, you have dozens of ruined books, your desk is ruined and now there’s mold.
Sounds far-fetched, but that happened to my husband and I in May of 2015 – when our son was a month old.
We were able to pay for it, but if you don’t have an emergency savings account – or some other savings account – you’d need to put it on credit cards, borrow money from friends or family or take out some other loan.
How can you save money when you’re broke? Thoughtfully, and not all at once. Start by saving a little bit of money every month. Cut back on the number of times you eat out or on a service you never use. Put that money in a savings account. Gradually save more. Earn extra money (more on that later) and stash it away. Create savings goals, like:
- Opening a savings account
- Depositing $5 each week automatically
- Putting $100 in an account
- $1,000 in an emergency fund
- $600 toward next year’s vacation
- $300 toward car repairs
- Setting aside a month of income
- 6 months of income set aside
- Saving $200 each month
Your goals should fit you, but always make sure you have something to fall back on when you need it. Get started today: even small amounts can add up and can help belay financial crises in your life.
#4 You Need to Earn More Money
Imagine you’ve added up your fixed and variable expenses and you’re having a hard time making those, even though you’ve cut out everything you can: no TV, you have the most basic phone plan and your car is a beater that still gets pretty decent mileage, even if people can hear it coming 10 miles away.
You’re not making enough money.
It’s time to get cracking. Consider how much more money you need to make every month. Then:
- Ask for a raise
- Ask for discounts on services you pay for every month
- Find a part-time job (or two)
- Earn money from websites, like survey sites
- Become a mystery shopper
- Sell some of your things
- Monetize your website
- Get cash from search websites
- Tutor a student
Want more ideas? Check out The Penny Hoarder. It’s dedicated to helping people earn, save, and grow their money.
#5 You’re Spending Money On Things You Don’t Need
Everyone buys things they don’t need, that’s one of the fun parts about being an adult. It’s also a major cause of financial crises.
My husband smokes cigarettes. He spends around $120 per month on his pack-per-workday habit. I spend money on books. And coffee. Lots of coffee. On average, I spend $80 per month on coffee (some of which I sneak into my grocery budget).
Neither of us needs those things, yet they take up $200 of our budget.
If you track your spending – and what you’re purchasing – you’ll realizing your spending money on things you don’t need, too.
Do you eat most of your meals out? I get it. It’s easier. But it costs more. At a restaurant, what you’re paying for the meal – before taxes and tip – is about a third of what it would cost for you to make it at home. Add on tip and ouch.
Maybe clothes are your thing. Shoes. Guns. Cars. Technology.
Those things aren’t bad, right?
Of course not. But if you already have plenty of clothes or are buying designer labels with money you don’t have,it’s become a cause of financial crises in your life.
If it’s not a need, you can cut it out of your budget. Look at what you’re spending money on each month. If it’s not a bill, it’s probably a want. If it comes up a lot, that’s why you’re broke.
But don’t stop cold turkey. It’ll just make you less-likely to stick to your budget. Instead, cut back:
- Buy one Frappuccino each month or each week.
- Buy a pair of shoes, just not Jimmy Choos.
- Go out to eat once per month.
- Allot yourself spending money
Also identify which wants you’re not willing to sacrifice. I’d sacrifice coffee to become a bleary-eyed Zombie to keep my daughter in swim lessons. She loves them and it allows us to spend one-on-one time together. Plus, swimming is a valuable life skill. (And let’s be honest: she sleeps like a log for about three hours afterward. It’s fantastic.)
#6 You Don’t Have Money You’re Allowed to Spend
When we got married, I discovered that my husband believed that you spend the money you want and then, if you have money left, then you pay your bills. I’m not joking. He really thought that – because that’s how he was raised.
Let’s be really clear: you have to pay your bills first. You also have to feel like you’re not working for nothing.
This seems like an odd cause of financial crises, but when you don’t have any money to spend on the things you want, it becomes too hard to stick to the budget and you probably won’t see the point and you will start to overspend.
To balance this, pay yourself (and not just your savings account.) I’m a big fan of spending money. My parents recommended this when we got married. We each get $20 per week. I buy coffee or a book or go out with my friends without feeling guilty because I know the money is in our budget. (Too much for your budget? My sister and her husband get $10 each per month and it works for them. They’re better with money than we are.) If you don’t have money for your bills and for spending money, you need to find ways to earn more money or cut back.
A word of warning: a friend and her husband tried allotting spending money and it didn’t work for them. He would spend his money the first day and then keep spending. He spent MORE doing this when he just bought things for himself now and again. You need to find out what works for you. If this is the case for you, you might try buying one “fun” thing each week for a certain amount or under.
Whether you’re in credit card debt, buying things you don’t need or don’t have a financial plan, you can make changes today. Take the first step toward creating a plan. There are many causes of financial crises and when you identify which one (or ones) you’re susceptible to, you can turn it around.Small steps today can yield big results down the road.