Budgeting is the Key to Avoiding Toxic Loans

avoid toxic loansNothing in life is free or easy; generally you need to work hard for anything worthwhile. This old axiom is true in almost every respect when it comes to your personal finances and avoiding the pitfalls of micro loans or as they are often referred; pay day loans.

Learn the basics of budgeting, cost cutting and money management and you will be well on your way to living free from usurious costs of micro loans.

Understand Money
The first step in managing your personal finances is understanding the basics of money, including how much you earn and how best to use your income to meet your own goals in life. This should include understanding all the different monetary instruments available and how they can help you and even hurt your financial situation.

The first of these is understanding your bank account, choosing the right one to suit your needs with the least amount of fees and tracking your charges from the bank. Unfair bank charges should also be combated by actively tracking your charges and disputing any that you deem unfair. Also have a secondary plan to switch banks or accounts if your current account or institution is not living up to your expectations.

The most important aspect of money management is using a budget. A budget is the first step in understanding your own financial situation. By learning what money you earn and what expenses you have and when they occur you will start to understand how cash flows in and out of your bank account.

This is important so that you realize that you will need to budget income amounts over a week, two or even a month to cover payments that are due at times quite removed from when you receive money. This alone will help you avoid getting micro loans to bridge these gaps, but ultimately that take up to 24% of your loan amount in interest or fees. This 24% could be money in your pocket used for expenses.

A budget looks at your income and expenses but also prepares you for unexpected costs and even outlays money for family, travel and leisure. Most low income individuals have a hard time because impulse buying of items takes money out of a budget that was meant for your necessities of living. Instead, budget for those impulses. If you know you like a pint at least once a week, then budget for it, knowing that your impulse will be taken care of.

If you are living on a low income, one of the best ways to ensure you stick to your budget and avoid costly micro loans is to start actively cost cutting measures that can free up much needed cash flow. These cost-cutting measures should not be in your impulse buying areas, as unfortunately we all at some point like to reward ourselves with an impulse purchase. Just remember to keep them limited and plan for their expense.

Instead focus your cost-cutting on areas where there is community, social or government support. Save on your water costs by turning water off when you shave or brush your teeth, limit bathing to once a week and take short showers other days and replace all water faucets with water-efficient ones. Look at all other major expenses and research ways to cut these costs.

By actively managing your money on a daily and weekly basis, it will help you understand that your impulse to buy a second pint or that pair of shoes will cost you the 24% on a micro loan that will in turn cost 3 weeks’ worth of pints or your next pair of shoes.


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