Many people have experienced the despair of being completely broke — of feeling like an identity thief would take one look and give your ID back. But being broke isn’t the real problem — staying broke is.
The steps you take when you realize that you’re completely broke will determine how long you remain in that condition. Here's what to do when you are broke so that you can prevent your temporary situation from becoming a condition of chronic poverty.
1. Identify the Problem
There are two things that can lead to becoming broke. First, you may not have enough income. This often comes on suddenly due to job loss, illness, or injury.
Or second, you may be spending too much. This often happens more slowly. You charge a few things to get by. Then you charge more next month because you have to use some of this month’s money to pay the credit card bill for last month’s expenses. It slowly snowballs into an unmanageable situation. You become broke even though you’re working.
The cause of your financial hardship may also be a combination of these two factors. You can be spending more than you can afford, and then have a reduction in income. Perhaps the reduction in income would have been manageable if you weren’t overspending, but here you are, broke.
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2. Avoid the Blame Game
It’s easy to point at events as the culprit. Boss sucked, had to quit. Some jerk ran into my car and I couldn’t get to work, so my company fired me. Not my fault. Needed that big-screen TV. And so on.
All of this serves no purpose. You’re the only solution. No one else. Yes, you can get help. And if appropriate, you should. But the sooner you recognize that you are solely responsible for putting an end to this condition, the faster that will happen. That’s why this step needs to happen up-front.
3. Get a Clear Picture
Your starting point on the climb out of this hellhole is to get a clear picture of where you are. It’s tough to make a map out if you don’t know where you’re starting from.
Being broke often comes with having a mountain of debt, though it doesn’t always. Either way, the starting point is to lay out exactly where you stand, whom you owe, payments terms and amounts, sources of income, no matter how small. You need to put down every last detail in writing. It doesn’t matter if it’s on paper or it’s electronic, it just needs to be where you can see it all at once.
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4. Bring Spending to Near Zero
While income may take time to change, you can change spending habits immediately. Bring spending down to as close to zero as practical. Keep in mind that “as close as practical” does not mean “as close as possible.” It wouldn’t make sense, for example, to skip necessary medical expenses and allow a medical condition to become worse. The least expensive option in the long term may not be the lowest cost option in the short term.
Be careful in giving up absolute necessities, but be ruthless in giving up nonessential expenses.
Soda and ice cream are not necessities. Nor is Netflix. You probably don’t need to buy clothes. If you must, then go to the thrift store. This is no time for vanity.
But “must” should be for a job interview or something equivalent. And even then, only buy new clothes if don’t own and can’t borrow anything appropriate. Don’t spend money on anything that isn’t truly necessary. Walk wherever you can. Bike wherever you can’t walk. Consolidate trips. Every penny counts.
5. Seek Help as Appropriate
Sometimes being broke is more than you can deal with. That’s okay. Seek help if necessary. There are lots of resources available, depending on your specific needs. But you need to find them — they aren’t likely to find you.
There may be local resources, as well as resources you can reach by phone or online. Your local library is a great place to start to find out what may be available. You can also look up federal programs on the U.S. government's website. Social programs exist because they need to. Stuff happens. A food bank can be a lifesaver. Make use of what you need to.
Communicating with bill collectors isn’t fun. Nothing about being broke is fun. But the objective is to get through the situation as quickly as possible, with as little damage as possible.
If bill collectors are calling, talk to them. Be honest about your situation. Tell them what you can do and when you can do it, then stick to that commitment. If you absolutely can’t stick to what you promised, then pick up the phone. Tell them what happened and what your new plan is.
7. Build a Bridge With Income
Long-term fixes to being broke often involve significant changes. This may include reduced living expenses or a higher-paying job — or both. Some of the big changes will take time. But you can still influence your income in the short-term. Consider getting a second job — or a first one if you don’t have a job already.
Sometimes a better job is the solution. But be careful about giving up security when things are tight. A second job can be a good option until you’re going in a positive direction. You are the one who knows your situation best, so make a well-thought-out decision, weighting the pros and the cons.
Also look at what possessions you can sell. Many people can raise a surprising amount of money fairly quickly by selling things that they’ll never miss.
8. Monitor and Adjust
Once you’re on a path out, it’s important to monitor your progress and adjust as necessary. Take advantage of opportunities to get ahead more quickly. Plan very carefully before resuming any discretionary expenses.
What to Do Once You Are No Longer Broke
Life’s toughest lessons often provide the most growth, but they’re not something we want to do twice. Even once you’re out of the hole, it’s not yet time to rest. Interruptions to income can happen in the future. Unforeseen expenses can and will occur. They’re unforeseen in that we don’t know when they’ll happen or how much they’ll cost us, but we do know that they will definitely come.
The solution is to embrace financial literacy. You may still fall on hard times — financial literacy is not an answer to all of life’s ills. But financially literate people tend to be prepared for the majority of what life may throw their way. Their likelihood of becoming broke is far lower than someone without these skills.
There are a lot of resources available. Learn how to budget and how to plan for unforeseen events. Your next story could be one of how your preparation averted disaster. That’s a better story to be able to tell.