How to Break the Cycle of Micro-Debt Reliance
Micro-loans are small, easily accessible loans that often don’t require collateral. They are generally relatively short-term and tend to carry high-interest rates.
Over the last couple of years, the availability of these loans has increased significantly, with almost everybody in the country now being able to access micro-loans either via mobile apps or through microlenders present in the community. This increased availability of micro-lending has left a lot of people reliant on repeat borrowing.
This kind of cyclic borrowing, however, rarely solves the root problem you are facing – it merely postpones it to a later date, and at a fee to boot!
Micro-lending can often become a crutch for handling financial problems without addressing the actual issue.
“Laugh when you borrow and you’ll cry when you pay.”
So, why do we keep taking these loans even if we know they are costly?
The biggest reason most of us borrow is unplanned expenses. These can broadly be categorized into 2 categories:
i. Necessary and unavoidable unplanned expenses. These are unexpected expenses such as medical bills, the breakdown of your car, the sudden death of a loved one, etc.
ii. Unnecessary and avoidable unplanned expenses. These are expenses towards things we want, but don’t necessarily need. These are expenses such as entertainment, upgrading to the latest phone, for a vacation, etc.
Another common reason for borrowing is FOMO – the fear of missing out. We do not want to miss out on experiences or to be left behind on the latest trends and so we take on debt to keep up with our peers.
Sometimes, however, we end up borrowing simply because we do not keep account of how we are spending our money. In this case, you may end up finding that your money is over by the 15th of the month, yet you still have expenses to settle before your next pay at the end of the month.
So how can you kick your micro borrowing habit?
1. Go on a debt diet. A debt diet is where you try not to take any additional borrowing at all, as you work on paying off your existing loans. This is going to be extremely difficult, especially if your reliance on debt is now the only way you are making ends meet. Cutting yourself off from borrowing will require great sacrifice on your part, but true success requires sacrifice.
“True success requires sacrifice.”
2. Conduct an audit of your lifestyle. Are you living beyond your means? Are there habits that currently contribute to your financial problems that you should probably drop? Do you need to downsize your life (move to a cheaper house, use your car less often, buy fewer things)?
3. Relearn to be okay with spending only when you have money. Before you borrow money, as yourself, “is this debt necessary? Is it avoidable?” if it is unnecessary and/or avoidable, consider the possible benefits of NOT borrowing the money.
4. Get into the habit of saving money. Having savings will enable you to handle any unavoidable, unplanned expenses without having to borrow.
5. Get used to following a budget. Following a budget will help you ensure that you are always able to cover your regular expenses.
6. Ensure your budget is practical. When preparing your budget, make sure it includes the things you know you are likely to want e.g. entertainment, eating out, etc.
As you begin to wean yourself off of the borrowing cycle, create a financial plan for yourself that will give you freedom from financial dependence over time. This plan should include savings and investments so that you begin to BENEFIT from compound interest instead of continuing to be a victim of it through loans. Learn how to make investing decisions.
“Debt is the slavery of the free.”
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