The golden rule of money management is; “live within your financial means”. All financial troubles are borne from breaking this rule. Living within your means simply means ensuring your monthly expenses do not exceed your monthly income. Why is this so important? Because the moment your expenses exceed your income it means you must find ways to cover the shortfall. And unless you have an inheritance that you are also living off this typically means borrowing money to cover some of your expenses.
A debt trap is when you find yourself caught in a cycle of never-ending debt. The problem is simply manifested by living beyond one’s means. It starts small, with you borrowing just to cover a small expense with the intention to pay it off at month end. But of course, most of us have fixed monthly incomes and if you could not afford to spare, say, P500 this month then how will you afford to pay it off next month?
The moment you find yourself having to borrow money to cover some of your living expenses understand that you are starting to dig yourself into a hole that most struggle to ever get out of. Borrowing money for survival will likely lead to you falling into a debt trap. Here are some of the signs that you are falling into a debt trap.
-
Borrowing because of easy access but have no repayment plan
Getting a loan or buying on credit nowadays is easier than ever before. From quick, micro loans to credit cards to store credit facilities the fast world of credit provides easy access to credit. Because of how easy and convenient it is to get debt, little thought is given to acquiring it.
“If it’s so easy to get it and if the credit provider determines I qualify to get credit, then it must be harmless and I should be able to pay it off”, we tell ourselves. And so the cycle starts. We recklessly get into debt with no consideration of whether we can afford it and no real plan of how we intend to pay it off amidst all other expenses we have.
-
Borrowing to cover regular monthly expenses
As already mentioned, this is usually what leads most into debt – borrowing to cover a shortfall brought about by expenses that exceed your income. Of course, this usually starts off as a temporary ‘just for this month’ thing. What was supposed to be temporary usually ends up being a way of life because i) “it was so easy last time as I managed to pay back the money as I had intended”, or ii) you never manage to get back on track from the first debt taken and the situation snowballs out of control.
-
Struggling to pay (or can only afford minimum) monthly debt repayments
You are likely here because you didn’t have much to spare to begin with therefore it would not be surprising that paying off the debt is not a breeze. The moment you find yourself either only barely able to make the minimum monthly repayments on your debt or struggling to even cover the minimum repayments then it warrants pausing and coming up with a plan to manage the debt and most importantly ensure you avoid taking on any more debt.
-
Borrowing to pay another debt
You know the saying, “Robbing Peter to pay Paul”. This happens when you find yourself in the above situation where you cannot afford to make your debt repayments and the ‘solution’ you come up with is to borrow money from somewhere to help you make the repayment. Now you not only owe Paul but Peter too. How is next month going to go? This is simply the best way to fast track your money problems because this strategy only serves to compound your financial challenges, not help the situation.
-
Borrowing based on future income
This usually happens when one is expecting an increase in income or a lump sum payment in the form of a bonus, 13th cheque, motshelo payment, etc. What happens is, because one is expecting money in the future they borrow today with the intention to use the future income to settle the debt. Although this is not the worst of all the signs already highlighted this is risky because if for whatever reason the expected income does not come to fruition then you will find yourself financially stranded. What if your employer is not able to pay a bonus or 13th cheque like they normally do? What if the payout from your motshelo does not happen? If anything goes wrong and you don’t receive the expected income, then you may find yourself left with a debt that you cannot to repay on your regular income.
Getting out of a debt takes a lot more effort and discipline than resisting the trap. Look out for these signs and if you can relate to even just one of them please pause, evaluate your situation and before rushing to “solve’ your problem with debt how about you relook your expenses and find where you can cut back and/or find expenses that you can postpone to a later date. Though you will be making a sacrifice now, it will afford you peace of mind and a better financial future in the long run.