How to Go Broke in Under a Year

Every day, we see people go from rags to riches and applaud. Well, some of us celebrate, and others go green with envy. But all in all, it is a remarkable feat to work your way up to a certain level of financial success. 

But what about the other side of the equation. What happens to someone to make them go from riches to rags? And under a year at that!

Today as I was doing my usual rounds on the net streets, I landed on an article by a business insider titled ‘These 10 billionaires have all gone broke….’ It goes on to narrate some really wild stories of what went wrong with each of them. 

From bad investment all the way to outright lousy money decisions. Some of these billionaires have gone on to regain their wealth status, but this still got me thinking. How could that happen? Can it happen to anyone? What could be done to prevent it? 

When we are building wealth, we put in place pretty stringent rules to follow that help us get to where we want to be. As soon as we have achieved some level of success, we tend to forget the well-established habits and sometimes start to focus on showing off. 

Suddenly you start to realise that you have outgrown your Toyota Corolla. You realise that you need a big machine to ‘hang with the big boys.’

Such actions can ultimately reverse all your hard work and cause the wealth you’ve built to vanish overnight. 

In that regard, Here are 5 ways you can go broke in under a year. 

Using Debt to Buy What You Can’t Afford.

What did you use your last loan for? Think back for a second and try to track every shilling of that money. Did you use it well? Or 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.’ 

In today's world, instant gratification (or ‘YOLO’ as the younger generation calls it) is promoted as the new normal. This is a phenomenon where you feel like you need to get everything you want when you want it.  

We even go as far as taking out debt to quench this thirst. But in the end, this works to the detriment of our financial well-being. For example, why do we sometimes feel the need to take out a loan to buy a new bigger, flashier vehicle to replace an older car that is working perfectly fine?  

Taking a debt to satisfy a FOMO need will not only affect your finances, but it can also possibly get you broke way faster than you think. 

Also read: 11 Worst Money Management Mistakes to Avoid

Not Thinking Long Term

Money can fool you - especially if it is new money. If you are not careful, it can give you the impression that it will be there forever. 

For example, let’s say you inherited a fortune from a family member and became a millionaire overnight. You might feel instantly rich and forget about things like budgeting, setting up an emergency fund, saving, and investing for your future. You are likely to feel like the money is there to stay and for you to spend. 

This can also happen even to the people who have created their wealth through their own sweat.  And this causes people to be underprepared, and eventually, they are prone to various risks that could make them go broke very quickly.

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 go as far as to commit their life’s savings to investments they know very little about. Sometimes, these impulse investments go terribly wrong, rendering them either broke or in debt pretty quickly. 

Therefore, if you do not want to be broke by the next new year, it is important to put great thought into where you are putting your money in the name of investments. Don’t be lured into bad investments by high return promises. 

Don’t get me wrong; I am not saying that you should stay away from investments to protect your money. After all, unless you get your money to work for you, you will probably not go far on your financial journey. However, before committing to an investment, ensure that you have done your research and all the facts right to avoid getting scammed or losing your money.  

Also, even with everything checking out, it is crucial to diversify. Do not put all your eggs in one basket. This way, even if things do go wrong, you will not be broke by the end of the year. 

Also read: Understanding Active and Passive Investment

Losing Your Only Stream of Income

This is a no-brainer. If you lose your only source of income, you will inevitably go broke in less than a year. If you only rely on employment as the only source of income (assuming that your household has only one breadwinner), it can be devastating to lose that job. 

Therefore, especially in this unpredictable economy, it is crucial to have more than one source of income.  It is smart to diversify where money sources to protect yourself in case something happens to one of those streams. People only have so much control over the success of their money sources. 

Grow a side hustle or two. Build a new skill on the side that you can sell in case you lose your job, or your industry loses relevancy overnight, and you are left hanging. 

Additionally, strive to create passive income streams. For example, if you are comfortable in front of a camera, why not build and monetize a youtube channel around a subject that you enjoy? You can read our previous article on a step-by-step guide on starting and monetizing a youtube channel. 

Also read: How to Generate Online Passive Income in Kenya

Striving to Keep-up Appearances: Investing in Material Things

When most people feel like they have made it, they feel the need to show off. Suddenly they feel the urge to move into a new popular neighborhood or buy new things like the latest iPhone to keep up with the trends.

They forget that it is much easier to spend money than to make it. Creating your first Million is not easy. You might need to sacrifice a lot along the way to raise your very first million successfully. However, it can take only a single transaction to spend it all. 

Hence, one of the easiest ways to go broke in under a year is to try and keep up with the Joneses. 

WRAPPING UP

No matter how small, every small financial decision you make positively or negatively contributes to your financial well-being. It can be something as simple as buying an extra cup of coffee in a day or something as big as taking a huge investment risk that eventually goes well and makes you a millionaire. 

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