It’s not uncommon to feel broke – I wish I had real statistics on this but I’m sure if you asked around your office or college you’d probably find lots (if not most) people saying that they’re broke. Everyone obviously likes to portray that they are doing well financially, but the reality is quite the opposite.
The first observation about this feeling of being broke is to differentiate between feeling broke and actually being broke! You could feel broke because of your stringent savings goals and budget but yet you’re not really broke because you do have money. But then again you may really be broke and down to your last rand or dollar. Here are some tips for dealing with this feeling and not allowing yourself to be overwhelmed by it.
Get a clear understanding
Before we can figure out what to do about the situation, it’s necessary to get a clear and honest understanding of your current financial situation. You need to understand why you’re feeling broke and whether the feeling is in fact valid.
Start off by listing all the money you have. This includes cash in your bank accounts, investments, retirement savings, stocks, unit trusts etc. It’s probably easiest to list it all in a spreadsheet so that you can total up all the figures.
After this, list all your major assets; things that you could sell if you were really desperate. Your house, car, precious metals, jewellery, etc. List these at the value you could sell them for, irrespective of any debt you may have.
Lastly, look at all debt you have. This may be a scary exercise but it’s a good time to be honest about your situation. List personal debts, credit cards, store cards, car financing, home loans, tax, etc. You may need to spend a bit of time going through your accounts or phoning the various institutions but it really is worth the time & effort to get a clear picture.
And now for the final interpretation of the figures:
Money & Investments + Value of Assets – Debt = Net Worth
This is possibly a simplistic view of calculating your net worth, but this should give you a fair idea of whether or not you’re broke.
Net Worth vs Cash Flow
It’s worth noting that you could have great Net Worth (and actually be quite wealthy) but at the same time be broke when it comes to month to month spending. Imagine having a million bucks in an investment but not being able to access it. Or another way of looking at it would be if you have a great retirement fund investment (which you cannot access yet) but you don’t earn enough money to pay off your debts and all the necessary monthly expenses. Not being able to make it through the month is stressful and will definitely give you that feeling of being broke!
It’s really important having a positive net worth but your month to month cash flow can make or break things! Have a look at this post for details on why cash flow matters! (In fact there are two posts in the series so best read both)
Calculate your Financial Health
Now it’s time to calculate your Financial Health! This is a super useful tool that looks at your overall financial habits and finances in general and will give you a clear indication of your financial health.
Understanding all the aspects that make up good financial health can help you identify the areas where you need to improve and thereby eliminate some of the stress. Things may not be as bad as you think they are, but you need some way to know.
Dealing with the feeling of being broke when it’s not really that bad
So you feel broke and stressed about money even though your financial situation isn’t that bad. What now?
After calculating your financial health you should have an idea of financial areas where you can improve. Consider each of the questions in the tool and think about what is currently making you feel stressed. Ask yourself why. This is a time for introspection and there must be something that is triggering your stress. Perhaps it’s just something you’ve never really thought about before.
I find the best way for myself is to have a 3 – 5 year plan along with some goals and I track these monthly. Whenever I feel stressed about finances or that things are out of control I simply reassess my plan and goals and see if I still on track or not.
Not knowing where you’re headed or what it is you want can be a scary thing but having a clear plan really helps!
Dealing with the feeling of really being broke!
But what if you really are broke? You have huge debts that you’re struggling with and you don’t know how you’ll make it from month to month. Well, in this case your stress sure is warranted but without action and a clear decision to sort things out you may feel stuck in the situation.
The worst thing you can do is to ignore the problem as finances seldom fix themselves (unless you win the lotto or some miracle happens).
If this is you, then it’s time to take action right now!
Understand why cash flow is important to you and what to do about it