There are many ways to get a windfall. You could land a big promotion at work paying a lot more than you could have imagined, you may inherit a lucrative asset or cash, win a lottery, land a business deal or a lifetime, or even get approved for a substantial personal loan.
Unlike all the aforementioned potential sources of a windfall, getting a big loan is the most difficult to navigate because loan money is technically not your money. It is money you will have to repay - typically with costs administration expenses and interest.
Borrowed money has the potential to change your life in several ways, which we will discuss here. But it is often wasted through common pitfalls that we will discuss in this article.
As explained above, borrowed money comes with administration expenses and interest rates. It is advisable to only take a loan for a specific need and plan. One of the biggest mistakes that borrowers often make is to apply for a loan simply because they are eligible.
However, taking a loan without having a pre-planned use of the money is one of the easiest ways to waste loan money. If the borrowed money was to stay in your current account, it would be wasted away through unnecessary expenses and interest rates. Moreover, it would greatly lose value through inflation which keeps rising throughout the loan’s repayment terms.
It is noteworthy that most unplanned loans do not even stay in the account for long but are spent imprudently in some of the other ways discussed in this article.
Starting a business or making an investment is a great way of creating wealth. It is a common joke in Kenyan social circles that nobody ever becomes rich from a salary - although it is not exactly a statement of fact.
Despite the many benefits of entrepreneurship - including running a business or investing - the benefits only become apparent if you have some level of expertise in the area you invest your money. The need for research and consulting experts becomes even more important when the capital is from loan money.
Some investments are pretty straightforward and getting information is straightforward. For example, buying government bonds is a rather standard process that requires just some small level of research. However, even in these straightforward investments, some duplicitous agents and conmen may take advantage of you if you are completely green.
In other businesses, say running a nightclub or investing in the matatu industry, require not just research on how the enterprise works - but also some experienced hands to help you run the business, failure to which, it becomes very easy to waste away your loan money.
As human beings, we are prone to emotional spending and if managed, there is no problem with it. However, if left untamed it is one of the easiest ways to waste loan money.
For people who have access to substantial personal loans, it can be tempting to think “I am rich” when you see that fat bank balance. With such thoughts, emotional spending can easily destabilize your financial situation. In those moments, you will remember a day when you were so broke you had to eat githeri for a week - and emotional spending may prompt you to turn to eat buffet for an entire week.
For other people, emotional spending is spending crazy amounts of the loan money on unplanned expenses - a mega fridge here, a trip to Diani there, and before you know it, the repayments are due and your bank balance is back to its dusty, neglected settings.
One of the fastest ways of wasting any money, specifically loan money, is through financing addictions. An addiction is a psychological disorder that gives you the compulsion to engage in certain behavior.
The most common addictions include drugs and gambling - and they are huge impediments to financial discipline. With drugs, your mental and physical health is compromised and your ability to make apt financial decisions is heavily compromised. We have read stories in national newspapers of people who sold their ancestral land and the first stop was at the bar. In one case, the man had an elaborate plan to start a business from the money raised - but ended up getting robbed of the entire amount - after getting inebriated.
There are more subtle and less talked about addictions - such as compulsive shopping. This is a form of addiction where you only get fulfilled after shopping. Regardless of the intensity, it does not mean that if you are battling an addiction, you should never take a loan. If you are self-aware, seek medical help - especially if the addiction is acute. At the same time, if you are taking a loan for a specific purpose - put in place measures for your own accountability. For instance, if you are buying land, you can make arrangements for a direct transfer of the loan money for the purchase of the property.
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A common joke among university students receiving their educational loans has been that the first step you take is to reduce the loan to a manageable level.
This phrase involves the misuse of the larger loan amount until there is little enough to prompt careful spending. For most students, this behaviour is often a stepping stone in the financial literacy journey.
However, for people who have advanced in life with more responsibilities, it can be greatly detrimental to take this approach when dealing with loan money.
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Loan a friend to lose a friend. This idiom has been around for centuries and rings true for most people who have loaned money to friends and family. There is a reason lending institutions hire debt collectors. The bottom line is that lending loaned money is a great financial mistake.
Loan money is expensive and lending it as a soft loan means you are paying interest for money that is not being utilized. It also raises the risk of your money not being repaid - meaning you will repay for money that you never used.
In boxing, it is often said that you have a great plan until you get punched in the mouth. This concept loosely applies to personal loans.
Most people have great plans about the intended use of the loan money. However, those who waste away loan money often go off the rails the moment they start to procrastinate about the intended and planned money.
For instance, you took a Ksh1 million loan to buy a parcel of land, but after the money hits the account, you decide first to buy a Ksh200,000 old car as you work to top up the plot money at a future date.
As human beings, we are naturally inclined to think about what others think about us. Various psychologists have defined the need to belong as an essential human need. However, the extent we go to demonstrate social power or status varies and if it becomes an obsession - it can be a great risk to financial freedom.
Thus, borrowing money to make powerful statements about your social status can be a quick way to empty your loan deposit account. There will always be someone with a bigger car, a bigger television, a more sophisticated fridge, and a better house than yours.
While you can work hard to build yourself what you consider to be the biggest or the grandest home - it would be a mistake to make such indulgent expenditures from loan money.