Beating the debt cycle
11 steps I used to get out of massive debt
During an Insiders4Good East Africa Fellows Microsoft event, I sat in the audience and listened keenly as the participants pitched their ideas.
4 out of the 10 participants had the same idea; a money-lending app that would give access to credit to the rural poor, especially women who had been sidelined by mainstream finance institutions. 2 of these participants were from Tanzania and 2 from Rwanda. They’d give their customers small accessible loans at a certain rate per month, which would allow them to fund their businesses. This sounded right, in that it’s always a good idea to take a loan to start a business. These Fellows would probably succeed in business as they had benchmarked against the likes of Branch, Tala and the other 50+ unregulated money apps in Kenya.
As I sat there listening to these Fellows enthusiastically pitching their ideas with their well-rehearsed pitches, I couldn’t help but think of my grandmother in the village who for a long time has always wanted to start a chicken rearing business. She’s a rural woman, a perfect fit for their customer description.
I raised my hand and expressed my displeasure in their business model. It was horrific to think that their key selling point was that with these money-lending apps, they’d be alleviating poverty. That they were empowering rural women. This was cruel because they’d not explain to my grandmother that their interest rates were monthly. If their interest rate is 7% p.m which makes it 84% per year, what’s the probability that my grandmothers chicken business will grow at above 84% so that she makes profit plus service the loans? My guess is zero possibility. They also kept referring to their customers as ‘entrepreneurs’ which is not the same as owning a small business. As my friend Geoffrey aptly said,
People confuse entrepreneurship with being a small business owner. Some of these businesses can only buy you bread. If it can’t scale, it’s not entrepreneurship.
Their loans would only create an illusion of progress to the uneducated masses for a short while, and sometimes for long. They were banking on their clientele’s ignorance, as most financial institutions do. And they knew it. I was angry, but I communicated in a calm and collected manner because it’s always important to choose the logical response as opposed to the emotional one.
Their responses to my comment were along the ‘we don’t have numbers at the moment, but I can assure you we’re here to help through access to funds’ line. I left the event feeling played; especially since at the time, I was battling the fangs of debt from the money lending apps. I had earlier made a realization that what they don’t tell you is if the interest rate is capped at 7% per month, that’s 84% per annum. Sounds obvious, but a lot of people are wired to think in the short term. It’s a bloodsucking business but the founders of these apps are celebrated the world over in the name of ‘alleviating poverty.’
The point to this story isn’t that these Fellows are terrible people, the point is, finance institutions bank on our ignorance. It’s your responsibility to empower yourself with financial literacy skills so that you can guard yourself against these institutions. Ask them these questions even when your voice shakes, because one way to be better with money is to ask questions. Our government has failed us by not regulating these apps, which means for now, you have to look out for yourself.
Oh, I remember asking them if they offer any skills needed to run a business, like accounting, so that these women’s chances of success increase and they said no. Probably makes sense because they’re not in the business of coaching and all, but then it still angered me when I brought the case study back home. Plainly, it’s exploitation.
Fast forward to early 2019. A friend invited me for a tech event that was geared towards encouraging parents to enrol their kids for coding classes as in this day and age it’s as basic as reading, writing and basic arithmetic.
One of the sessions at the event was on online privacy. The panellist who was handling this topic identified himself as an ethical hacker, went ahead to show us how the money lending apps collect our data and just how much access to our privacy they have. He asked for several volunteers from the audience who had previously used a money-lending app or who were currently using one. When the volunteers gave their phone numbers, the ethical hacker did what I could only imagine happened in movies. He displayed all call logs and messages, including private messages, on the projector screen. The room went silent, you could feel the tense breathing, with some people covering their mouths in shock. The tension only subsided when one of the men commented that it’s important to pray that your significant other doesn’t work for those shylocks. I left the event even more convinced that these businesses were morally not right.
Last week an article from Bloomberg was shared in one of the finance groups I belong to. The article is about how tech startups are flooding the Kenyan market offering high-interest loans but particularly told the story of Tala. Here’s an excerpt that struck me;
“The application process required users to permit data such as text messages, location data, contacts, and call logs to be downloaded so the app could generate a credit score. In her TED Talk, Siroya said it could even take into account whether someone spoke often to their friends or if their location data showed they went to work regularly. The user agreement specified that the company retained ownership of the data, whether or not the loan was approved.”
This plus the fact that these apps are unregulated and offer loans at blood-sucking interest rates should inspire you to start working towards breaking away from your debt cycle. These guys literally own you, which goes to show that if you’re in debt, you’re not a free person.
It’s also important to note that these apps are playing a long-term game by designing the app to keep you trapped in debt. One of the people interviewed by Bloomberg said “It’s like bait. The more you take, the more they give.”
One of the apps I used to borrow from often sent me a message to remind me that the more I borrowed, the lesser my interest rate. Since I was still playing the dangerous and short term game with my finances, I believed them. I laugh at myself when I remember that I once bragged to my aunt that I had hit a $270 loan limit with one of the apps. I was bragging because she was only at $ 50. She envied me. It’s funny, in the way sad things are sometimes funny.
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To get out of debt, I used a few hacks.
1. Made it visual
I owed a total of $1,173.61 to both the apps and friends.
I started with paying in small bits and pieces.
On a printing paper, I drew a staircase with 234 steps, with each step representing $5. I put this up on the wall next to my bed. I would mark each step with a pink highlighter every time I paid and gave myself a pat on the back.
Writing it down shows you how deep in the mud you are, but it also shows you how you get out. Focus on the fact that you have the power to get out. Use the energy previously reserved for anxiety for positivity and celebrating your small wins
2. Made a list and started from the smallest debt
I made a list on excel of every debt I had and started paying back starting with the small ones. Crossing out all these small ones gives you the motivation to keep going.
You could also start with the one with the highest interest rate to avoid losing more money in interest fees.
“People who make a specific plan for when and where they will perform a new habit are more likely to follow through. Many people think they lack motivation when what they lack is clarity.” -James Clear
3. Any extra money I made went straight into debt payment
At the time, I was working as a brain coach. I took up extra training sessions which brought in extra money at the end of the month. This went straight into debt payment.
With time, seeing how much progress I was making, it became fun!
4. I still paid 10% to myself first at the end of every month
Yes, I prioritized getting out of debt, but ‘paying yourself first’ is the first rule of curing a lean purse learnt from the book The Richest Man in Babylon. I wasn’t gonna pay the apps before I paid myself.
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5. Created an Excel document labelled ‘My Financial Responsibilities’
I owned my mess!
This doc contained a list of all the people and apps I owed arranged chronologically from the smallest.
It also had other sheets such as ‘Personal Needs’ where I’d write down anything I desired or intended to buy. This habit gave me time to rethink through my purchases to make sure I didn’t lose my main focus which was getting out of debt.
This responsibility of owning my mess was hard which later taught me why people who are good with money don’t understand if you’re not. It also gives me the confidence to outrightly tell people that I can’t let their lack of planning disrupt mine when they randomly ask for money.
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6. As soon as I was done with one app, I deleted it
I followed this with emailing them to ask them to get me off their system. I figured that it would take a lot of energy to get them to onboard me again which would prevent me from relapsing. This trick is about customizing your environment for financial success.
7. Stopped shopping
I got really good at differentiating between needs and wants and trained my inner voice to stop confusing one for the other-trust me, that is a real problem! I adopted minimalism and did one year no new shoes and clothes challenge-this, I will write about in a different piece.
8. Talked about my fears and progress with my friend
I tend to overthink stuff and create scenarios that never happen, so having a friend who anchored my thoughts through logic helped.
9. I cancelled all plans to upgrade my house
I thought I needed a new mattress, carpet, tv, couch, etc. I could live without all these, but I could not live with panic attacks caused by calls from debt collectors.
People who live far below their means enjoy a freedom that people busy upgrading their lifestyles can’t fathom. -Naval Ravikant
10. Planned my fun so I had something to look forward to
Life is for the living. Even when you’re in debt, you’ve got to live a little. Getting out of debt is hard, the idea is to make constant significant progress which doesn’t mean that you imprison yourself from anything fun.
With my girlfriends, we’d put aside $2 each per week which we would spend on a shared fun activity every two months. I had something fun to look forward to. You can choose to go extreme on your debt payment by cancelling all luxuries, but I’d advise you against it as it’s not sustainable.
11. I used the annual interest rate as a scare!
“Tala’s are typically 180% annualized; on some apps, they’re even higher. About 2.5 million Kenyans — 1 in 10 adults — have defaulted on a digital loan.” Bloomberg
I wasn’t going to sit around and keep watching myself losing my hard-earned money.
Can you start investing before you get out of debt? Investing while you’re still stuck in the mobile loans cycle is a zero-sum game. You can’t beat the 84+ % p.a interest rates. Unless you’ve heard of such an investment, in which case please call me now! Worse still, don’t take a mobile loan to invest.
Opportunity cost while trapped in this kind of debt is too high. Sleepless nights, headaches, anxiety due to the calls from debt collectors and the most important being what you could have invested in using the money that you’re paying in interest.
The one privilege that has been bestowed upon me since I started this series is that people are sharing their financial stories with me, I’d be happy to share more and learn from your getting out of debt hacks. Halla firstname.lastname@example.org