Loan money will not automatically restore your financial health. After all, aside from the fact that it’s simply borrowed money, you still have the same biases and spending habits, and mistakes that led you to debt. Even if you find money lenders who will offer you the best deals and payment terms, there is a big chance that you will still find yourself financially struggling unless you change your situation.
Due to the common misconception that a loan is the solution to financial woes, people still find it hard to go back to a good financial standing even after getting the money they borrowed. Not before long, the loan becomes another unmanageable obligation. Here are some reasons why people have difficulty in paying off their loans:
1. Lack of Self-Awareness
It all starts with knowing yourself. Cliche as it may sound, without assessing your current situation, you will just blindly go in the same direction you have gone before. Identify your expense triggers by making a list of all your expenses for a month. Do you automatically go online shopping for every inconvenience you experience during the day? Or do you fall prey to double-digit sales and marketing promos? Uninstall these online shopping mobile applications on your phone and observe what will happen. Reduce the temptation to spend by making it harder to do so. You can try to avoid online purchases by removing access to online banking.
Once you have identified what makes you likely to spend or to overspend, come up with a plan on how to curb it or at least how to turn it into mindful spending. This will require more than just willpower, as you will lapse into this habit If you find yourself overworked and stressed out. Create new habits by exploring other ways you can manage stress. Perhaps you can go out for a run instead of checking out items in your online shopping cart. Or if you are competitive, you can start a saving game with your friends and put together your savings in one pot. Whoever saves the most at the end of the month gets to win the pot money.
2. Failure to consider monthly loan payments.
When you get the loan proceeds, it will feel like a heavy burden has been lifted from your shoulders. Savor this feeling. You deserve it after months of anxiety caused by financial woes. However, do not fall into the trap of thinking that you have already solved all your financial problems. The reprieve you receive will turn into another bill by next month.
It would be wise to apportion a part of the loan proceeds for the first installment. This way, you can ensure that you will not default on it, as you would not want to destroy your reputation and damage your credit score by not planning.
3. Forgetting about other recurring expenses
Since you found yourself in a situation where you need to borrow to pay for your bills and basic needs, you are probably paying for things on a regular basis. So make an audit of all your recurring expenses, from those with fixed amounts like rent and other loan payments to those with varying amounts like electricity bills and food expenses.
The bottom line is that you need to have a budget where you can see where your money goes and where your deficit lies, if any. This will ground you and keep you from believing in the illusion that a windfall of money has now made all your problems go away.
4. No plan on where the loan proceeds will go.
It’s easy to get overwhelmed when you are suddenly given a lump sum of money, especially if it has been quite some time since you have had some in your wallet. Before you get too excited, remember that the loan proceeds are not for eating out or buying the latest phone. Better yet, plan before you get the money.
Write down the list of things you need to pay and rank them based on which is most urgent. You can also evaluate which of these payables will make an impact on your current situation. Perhaps paying your student loans in full will remove a chunk of recurring monthly expenses. If you have credit cards, you can also opt to pay your credit card balance in full. Credit card debt usually has a high interest. If you have been paying only the smallest amount, you are unwittingly increasing your credit card debt.
5. No stable source of income
As adults, we are expected to pay for our basic needs. Rent is often the biggest expense. Food comes next. Of course, internet connection and phone subscriptions are also non-negotiables in today’s world. Then comes other expenses like money for eating out, funds for online shopping, and a budget for going on trips with friends. These are expenses in a normal lifestyle, and it is not sustainable if one does not have a stable source of income.
On top of all that, it’s also possible for one can have a job that doesn’t have a livable wage.Consider these facts when identify your expenses and your income. if there is an imbalance, you should be motivated to seek better job opportunities or to apply for part-time jobs to increase your income.
6. Unrealistic expectations
An approved loan application can sometimes feel like someone waived a magic wand and you now have the funds to finance all your wants. If you do not plan and come up with a comprehensive budget, it will be easy to fall into the trap of thinking that way.
Let’s say your total amount of recurring expenses is SGD 5,000 and your monthly salary is only SGD 2,500. You borrowed SGD 2,500 from a money lender so you can pay all your bills for the month. Do not expect to finally get that elusive peace of mind. Usually, there will be an additional expense you did not foresee or changes in the amounts you need to pay.
7. Not accounting for inflation and the rise in the cost of living
A key factor in our current financial situation is the steady rise of inflation. With it, the price of things we need also rises. Some even say that Singapore is one of the most expensive cities to live in.
In recent years, living below one’s means has become a kind of game that everyone must play in order to avoid financial distress. After the pandemic, the price of food has skyrocketed. One must find creative ways to survive.
If you live near the city center and you are renting, your rent is probably higher than the rent of people who live farther than the city center. If you are used to eating in restaurants in malls, perhaps it’s time to explore the delectable cuisine of hawker centers.
8. Not preparing for emergencies
An emergency can easily make your finances go haywire. If you lose your job and the monthly income that comes with it, it would be hard to survive if you do not have savings. If you get into an accident or get sick and must get hospitalized, the hospital bill can either use up all your savings, or put you in a situation where you have no choice but to borrow money. Hence, it is wise to save up while you still have a regular income.
Set aside money for an emergency fund. Most people save up for the equivalent amount of their income for 3 months to 5 months. You will need this to help you get back on your feet after something unexpected happens.
Paying off debt requires being honest with yourself and getting out of your comfort zone
Loan proceeds are not free money. Getting your loan application approved is not a sign to book a flight to your dream vacation destination. Instead , you have to evaluate your financial habits and come up with a plan on how you can get more disciplined. Of course, scrimping on things cannot keep the expenses at bay. You will still have to pay for your shelter, food, and basic necessities.
Maybe it’s time to explore higher or additional income streams, maybe even both. Do not be afraid to try out new and financially wiser ways of living, and challenge yourself to do better this time.