Every single person has a different philosophy when it comes to saving or spending money. Some people are penny pinchers and can save a ton of money quickly, while others spend it as soon as they get their hands-on money, no matter how much or how little they make.
Saving habits are one topic, but what I want to focus on today is a few good habits to adopt when you are broke. Remember, all types of people in this are broke in this world and it’s nothing to be ashamed or embarrassed about.
Warren Sapp is the perfect example. He made over $75 million playing in the NFL, but in 2012 he filed bankruptcy with just over $1,000 to his name and more than $7 million in debt. It doesn’t matter how you got where you are; what matters is how you react to change the narrative of your story when you are broke.
On the flip side, one of my very best friends from high school works at a local factory packaging items, making $19 per hour, and he drives a $60,000 truck, owns his own home, and has zero debt. So, rule number one is, don’t think because you don’t make a ton of money there is no reason to not be broke.
Remember, even when you are broke, there are always options. It just depends on how hard you want to work to rectify the situation. Below is a list of tips and habits to try for when you are broke along with a further explanation.
- Things won’t change overnight
- Plan out debt
- Create a budget
- 30-day cleanse
- Road to recovery
Things won’t change overnight:
Perhaps the biggest takeaway I want you to have from this article is, you can’t change things in the snap of a finger when you are broke. Deciding that you want to start watching your spending won’t pay off bad debt or put an additional $10,000 in your checking account just like that.
This is a long process that will take time and patience to overcome. Debt is just like your weight, it’s easy to add to it, and seems like it takes forever to go away even when you’re trying really hard.
The most important thing when you are broke is to remain patient and stick to a long-term plan. I was in a gas station one time and heard a guy tell the clerk he needed $100 worth of lottery scratch-offs. He said it was the last of his money and he needed to hit it big to get out of a “situation”.
I honestly don’t know what the outcome of his lottery tickets was, but the gentlemen would have been better off buying a mower and earning some extra money than trying the “get rich quick” scheme.
No matter how quickly you accumulated the debt or drained your savings, it’s going to take time to build it all back. That’s why you must buckle down for the long-term plan and start to plan out a strategy. Once you accept the fact that you can’t change this situation at the snap of your fingers, you are ready for the next step.
Plan out your debt:
Let’s just be honest, when you are broke, this likely means you also have some outstanding debt. Not only do you not have any liquid cash to spend, you also likely owe the bank, hospital, and/or friends/family money. Again, you don’t need to feel embarrassed, but you do need to plan out your debt and come up with an action plan to get out of this hole.
I recommend putting it all on paper or an excel spreadsheet. Comb through every single expense you have and write down where your debts are. Things to include in the list would be a loan on your car or house, past-due medical bills, credit card debt, unpaid child support; the list can go on and on, but the important thing is you include it all in a detailed list.
In my experience of chasing down and tracking debt, the best solution is to run a hard credit check (I know, we’ve all been told hard credit checks are bad). I don’t disagree, you don’t want to constantly hit your credit with a check, but it’s an effective method to see where your debt is located. At that point, you can follow up with the company and find out the exact details.
When I first met my wife, it wasn’t that she didn’t have the money, but she just didn’t see the importance of opening mail and therefore didn’t pay a ton of small medical bills. Being the crazy OCD person that I am, I spent a day calling every doctor’s office in a 30-mile radius to see who she owed money to. It was $15 here or $45 there, but it added up to about $500.
The moral of the story, listing all these items out when you are broke can be an eye-opener, and really show you what type of life changes you need to make.
Remember the first topic, no matter how long or daunting this list is, you know you can’t change this overnight so there is no need to panic or get stressed out about making the situation go away quickly.
Once your final list is done, figure out a monthly number to begin paying it off. I don’t recommend using your car payment or mortgage/rent into this formula, but all your other debt can be.
Example – I owe $650 to Visa, $329 to the local hospital, $2,650 in back taxes, and $900 to my parents for a small personal loan. Tally your total debt up and figure out a payment plan. That is the amount you pay each month on bills to get the debt back to zero.
In this example, I used 24-months or two years as my goal. When I divide out all the debt I have, I figured out that I need $188.71 per month to get out of debt.
| Planning out your Debt |
| Debt | Amount | Payment |
| Credit Cards | $650 | $27.08 |
| Medical Bill | $329 | $13.71 |
| Taxes | $2,650 | $110.42 |
| Personal Loan | $900 | $37.50 |
| TOTAL | $4,259 | $188.71 |
Trust me, I know what you may be thinking. How do you come up with more money, when you are broke already? That’s the fun part that I’ll get to next. Remember, when you are broke, it isn’t as easy as just cutting expenses and trying to save money, you have to find a way to still pay off old debt as well, or you will never get out of the situation.
Create A Budget:
By far, the most important habit to adopt when you are broke is creating a detailed budget. This tracks every single dollar in and every dollar out on a monthly basis. Chances are, if you find yourself in this spot, you don’t have a budget, or this wouldn’t have happened to you.
I don’t mean that to be rude, but just want to drive home how important a monthly budget is. The good news? It’s never too late to start a budget. As savings conscious as I am, I didn’t start creating a budget until I had kids three years ago and was wondering what happened to all my money. All parents will understand this feeling.
My first recommendation for starting a budget is to break it up into fixed and variable costs. A fixed cost is a mortgage payment, rent payment, car payment, or cell phone bill that is always the same each month (or within a few dollars). You may also budget your electric, gas, and/or water bill so it always remains the same as well.
The biggest lesson I’ve learned in budgeting; just because it’s a fixed cost doesn’t mean you get to forget about it. It’s easy to look at a cell phone bill that is $92.50 a month and think that it doesn’t matter because you must have the cell phone and the bill stays the same. The key to any good budget is tracking everything!
I’m so detailed in my budget, I’ll take a Target receipt and break out groceries, things for my wife, things for me, and things for my kids. I know, I’m crazy, but when you are broke, the more details, the better.
What I then do for my budget is create a planned column, and an actual column followed by a variance. This helps me track how much extra or less I spent compared to the plan. The figure below shows more details.
Example – I planned to spend $2,553.71 for a month, but I spent $2,644.00. That means I was $90.29 over my anticipated budget. Remember, being over budget isn’t always bad if you’re paying off debt. In my example, I paid a few extra dollars toward my bad debt as well.
| Budget |
| Item | Planned | Actual | Variance |
| Car Payment | $420 | $420 | – |
| Rent | $1,050 | $1,050 | – |
| Cell Phone | $95 | $95 | – |
| Electric Bill | $120 | $128 | $(8) |
| Groceries | $400 | $475 | $(75) |
| Eating Out | $150 | $175 | $(25) |
| Clothing | $75 | $50 | $25 |
| Gasoline | $125 | $131 | $(6) |
| Debt Payments | $118.71 | $120 | $(1.29) |
| TOTALS | $2,553.71 | $2,644.00 | $(90.29) |
The above example is a perfect and easy way to get started tracking your money. However, you can also get far more detailed when budgeting your money. When you are broke, the more details you track, the better (you may be sick of reading that, but it’s so true).
You can also use a budget to balance your spending and income, which is likely the most important thing when you are broke. In the next example below, I added my income per month as well to my expenses.
When you make the income positive and the expenses negative, you’ll end up with your net savings for the month. In the example below for a specific month, I had $410 leftover, but I originally planned to have $446.29 saved.
| Budget with Income |
| Item | Planned | Actual | Variance |
| Paycheck #1 | $1,500 | $1,459 | $(41) |
| Paycheck #2 | $1,500 | $1,595 | $95 |
| Car Payment | $(420) | $(420) | – |
| Rent | $(1,050) | $(1,050) | – |
| Cell Phone | $(95) | $(95) | – |
| Electric Bill | $(120) | $(128) | $(8) |
| Groceries | $(400) | $(475) | $(75) |
| Eating Out | $(150) | $(175) | $(25) |
| Clothing | $(75) | $(50) | $25 |
| Gasoline | $(125) | $(131) | $(6) |
| Debt Payment | $(118.71) | $(120) | $(1.29) |
| TOTALS | $446.29 | $410.00 | $(36.29) |
Again, a budget is the most important thing when you are broke. A simple excel sheet works great, but there are also free applications available that you can use as well.
If you want to go the old school route, just write it down on a piece of paper and use a calculator to figure it all out. All options are effective, but all options will also only work as well as the amount of effort you put into it.
Budgets help everyone stay on track, but when you are broke, they can help even more to try and get out of debt.
30-Day Cleanse:
The title is a bit dramatic, but after creating a budget, the next big step when you are broke is a 30-day cleanse. What exactly does that mean? Exactly what it sounds like, cleansing or completely detoxing yourself of unnecessary spending.
This will be different for everyone. Maybe you are a person that eats out a lot, or someone that likes to buy a lot of clothing. For me, I find myself spending a lot of money on tools that aren’t always a necessity.
Bottom line, when you look at your budget, you need to figure out how to cut every line item where the actual spend is over the planned amount. When you are broke you not only need to even out incoming money to outgoing money, but you also need to make sure you are saving something to build up a nest.
You’ve listened to me preach that the road to recovery is not quick, so why only 30-days? I’m saying the biggest cut should be the first month, following the creation of your budget. Don’t go without food, water, heat, or any necessities for life, but stick to the bare minimums for one month.
For one, that should help kick start some cash flow and you can at least get a little bit of money in your pocket. Secondly, it will give you a solid baseline for moving forward. You may find out in that first month of really cracking down that you were able to save $500, on top of a few payments for past debt. That will tell you that you have a little bit of room to increase the budget the following month.
No one can live locked in their house eating ramen noodles and canned tuna, and I would never recommend that. However, one month of completely taking control of your finances is sometimes what it takes to get the ship back on course.
Road to Recovery:
I don’t want to compare this process to re-gaining sobriety or anything as serious as that, but when you are broke, it’s nearly the same process. You have realized the situation you are in can’t change overnight, you have created a long-term plan to help alleviate the situation, you have created a monthly budget to keep in line, and you have to make it through the first month of purchasing only the necessities.
None of those steps will be fun or easy, but when you are broke, they are imperative habits to follow. The last step is the road to recovery. What that means is continuing to make the right decisions for more than just the first month. You must continue creating the monthly budget, working to pay off any old debt, and bringing in more money than you are spending.
They say it takes 18 to 254 days to break a habit. As difficult as these changes can be, it’s likely that the habits above will take at least six months to become natural, maybe even longer. But remember that feeling of sadness and embarrassment from when you are broke, and focus on the feeling of accomplishment and pride from when you followed the steps above to get your finances back in line.
No one deserves to be broke, and no one has to be broke, you just need some guidance to make sure you keep everything in check.
