How to go broke in under a year.

I think it’s interesting how someone’s habits change from when they’re building wealth to when they have it.

When we are first starting to build our wealth, we set up some very strict guidelines to abide by that help us get to where we want to be. As soon as we start to experience success, we often forget about our established habits and begin to concentrate more on showing off our accomplishments.

And while showing off your hard work isn’t necessarily a bad thing, like most things in the world, an excess of everything is not good. 

Remember, it’s a lot easier to lose or spend money than it is to gain or make it. 

Even if it's certainly not something you’re looking to accomplish, going broke is possible if improper financial decisions aren’t avoided. Take a look at these 5 money mistakes that could have you end up in a financial disaster if you don’t steer clear. 

1. Striving to Keep-up Appearances

Spending money on materialistic things – usually, the things most people never need – Is one of the quickest ways to go broke. Whether it’s designer clothes, flashy cars, or anything in between. When people feel like they’ve ‘made it,’ they get the sense they have to show everyone about it. Which often goes against how they got to where they are in the first place.

You frequently hear about famous people or professional athletes going bankrupt. When people start earning money, they become irrational and spend all of it, usually on things that are unimportant. It's crucial to establish good spending habits early on because of this.

When spending, it's important to consider your own financial situation. Your neighbor may be sporting the most up-to-date luxury vehicle and pricey jewelry, yet their budget may differ significantly from yours for a variety of reasons. That’s why it’s crucial to live within your means because investing in expensive products that won't maintain much value over time, such as showy automobiles and fancy clothing, could put you in a world of debt.

Another problem with maintaining appearances and pursuing more materialistic goals is that people frequently prioritize quantity above quality. Having a closet full of fast fashion products that will need to be replaced after a few wears will result in an unneeded ongoing expense.

Try investing in higher quality clothing items that will last longer rather than concentrating on purchasing lots of outfits. Even though higher-quality things may initially cost more, they will last longer than cheaper alternatives, saving you more money overall.

2. Taking out loans to buy things you can't afford.

Do you remember what you did with your last loan? Consider for a moment tracking every shilling of that money. Did you make good use of it? Was the loan used for instant gratification?

Psychology defines instant gratification as: 

‘the temptation, and resulting tendency, to forego a future benefit in order to obtain a less rewarding but more immediate benefit.’

Instant gratification (or 'YOLO,' as the younger generation refers to it) is promoted as the new normal in today's world. This is a condition in which you feel like you need to get everything you want when you want it. 

We even go so far as to incur debt in order to quench this thirst. But in the long run, this hurts our ability to make ends meet. For instance, why do we occasionally feel the need to get a loan to replace an older automobile that is running just fine with a newer, bigger, flashier one?

Taking on debt to satisfy a FOMO need will not only have an impact on your finances, but it may also lead to you going broke much sooner than you think.. 

3. Not Thinking About Your Future Self

One of the most common mistakes people make is not thinking about their future selves.

I'm not talking about how much you're going to spend on retirement, or college, or a new car. I'm talking about how much money you're going to need in order to be able to pay back your debts and still have some left over.

If you don't think about that, then you'll end up spending more than necessary on things like gas and groceries and clothing, because it's hard to estimate how much money you'll need until it's too late.

I believe 100% that everyone should do what makes them happy. Otherwise, life is not really worth it. But again, it’s a balancing act. Spending everything today and having nothing for tomorrow doesn’t make sense, and neither does having nothing now while saving everything for tomorrow.

Good financial health is a balancing act of living a happy lifestyle today while looking out for your future self. You want to do things that your future self will look back on and thank you for.

4. Pyramid schemes and multi-level marketing businesses

Multi-level marketing (MLM) involves selling products directly to customers, usually family and friends, through either your home or online. In essence, you turn into a "contractor" and salesperson for the MLM company, investing in the goods in the hopes of making money through sales or through commissions from bringing in new customers for the MLM company.

Before joining an MLM, be mindful to do your research because some MLMs are legal while others are unlawful pyramid schemes. Some programs that are marketed as MLMs are actually pyramid schemes. A pyramid scheme is an illegal, fraudulent plan that relies on continually recruiting new members, instead of depending on retail sales, to make money.

According to the New York State Attorney General's Office, "Pyramid schemes are doomed to fail because their success depends on the ability to recruit more and more investors,"

“If the MLM is not a pyramid scheme, it will pay you based on your sales to retail customers, without having to recruit new distributors,” states Federal Trade Commission Consumer Information. 

While some multilevel marketing businesses may be legal, they still might not be worth the investment. There are plenty of factors to consider like start-up and promotional costs and other business-related expenses. In some cases, an MLM program may be a source of supplemental income. Unfortunately, however, a lot of MLM participants don't make a profit. In order to maintain profit, you’d need to continually sell and that can be a challenging feat. In fact, most MLM participants usually don’t see much profit and actually experience losses. Before signing up for an MLM program, be sure to do your homework so you can avoid becoming yet another casualty of fraudsters.

5. Making Impulse Investment Decisions

There is no faster way to lose money than to put it in a bad investment. There are many of those around lately—the kind of investments that promise to make you money as soon as you place your money in. 

Many people would even risk their entire life savings on investments that they are ill-informed about. Sometimes these impulsive investments turn out to be disastrous, leaving them suddenly bankrupt or in debt.

Therefore, it is crucial to carefully consider where you are investing your money if you do not want to be penniless by the start of the next year. Don't let promises of big returns fool you into making unwise investments.

Don’t get me wrong; I am not saying that you should stay away from investments to protect your money. After all, if you don't learn how to make your money work for you, you will probably not go far on your financial journey. To avoid being scammed or losing your money, make sure you have done your research and have all the facts straight before making an investment. Even though everything appears to be in order, diversification is still important. Avoid putting all of your eggs in one basket. By doing this, even if something goes wrong, you won't run out of money before the year is over.

WRAPPING UP

Every little financial choice you make, good or bad, affects your financial well-being, no matter how minor. It can be as small as purchasing an additional cup of coffee each day or as significant as taking a significant investment risk that ultimately succeeds and makes you a millionaire.

That being said, no one wants to go broke. However, many people are, unknowingly, actively working themselves to the broke aisle. This article is in no way encouraging you to go broke but shows you some of the areas that might be propelling you to that demise.

Need help with creating a comprehensive financial plan for your future? Explore KK Financial Solutions wealth management solutions. 

As your financial coach, I will guide you through the path you want to achieve. I'm not here to judge where you are, I'm here to get you to where you want to be. We'll talk, I'll get to know you, your goals, and your risk appetite, and then design a specific investment portfolio to make sure it's within your comfort. Now that's awesome customer service!