7 Devastating Effects of Financial Instability you Must Know 

A lot of things have the potential to slow down your financial growth and prevent you from reaching your financial goals. But the worst of them all is financial instability. 

Financial instability happens when you lose control of your finances, jeopardise your future and struggle to make ends meet in the present. When you are unstable, you struggle to provide basic needs for yourself, wallow in debts, and have to depend on others. Instability can cause you to liquidate your assets and prevent you from holding a job or generating income.

Financial Instability is caused by making wrong financial decisions over a long period of time. Decisions like taking a loan you can't afford, living beyond your means, or not diversifying your sources of income. When you treat your financial life as a house of cards, and one thing goes wrong (e.g. loss of income or new responsibilities), it will all come crashing down.

Financial instability can have devastating effects on your overall personal finances, so you must take steps to pick yourself up fast anytime you experience instability. 

But what are these effects? 

This article will explore seven such effects, how they happen, and what you can do to regain stability. Read on. 

Read Also: 7 Steps to Keep yourself Immune from Financial Instability in your 30s (and Beyond) 

You will Live Paycheque to Paycheque 

One of the biggest effects of financial instability is how it constrains how you spend money. It makes you unable to balance your income with your spending. 

You could be earning, say, Ksh80,000 per month, but because you have no control over your finances, you'll run through all that money and be in debt by the end month. The local butcher will owe your Ksh5k and the shopkeeper downstairs Ksh6k.

Living paycheque to paycheque is caused by spending without a budget or no care for tomorrow. It can prevent you from saving and investing in your future. This will prevent you from accomplishing your financial goals and meeting all your financial obligations. This lack of progress can haunt you later, especially in retirement.

What you Should Do

If you find yourself living paycheque to paycheque, here's what you can do to rectify that:

1. Learn to create a budget and stick to it
2. Avoid living beyond your means to please your peers
3. Automate your finances 
4. Learn to pay yourself first
5. Find ways to increase your source of income

Read Also: Money and Me: The Struggles of Living Paycheck to Paycheck

You will not be Self-reliant After Retirement

When you think about retirement, what comes to your mind? Traveling the world or peaceful vibes in your ranch? Whatever your dream is, it will cost money. To grant yourself the kind of retirement you deserve, you must be self-reliant. 

But financial instability can threaten that. It can prevent you from saving or creating investments that will generate income in your sunset years.

When you can't support yourself in retirement, you will be forced to turn to the government or your family. And that will come with its drawback. 

First, you will have no control over how much you receive. The grant you receive from the government is unreliable and can't help you pay all your bills. 

Second, you can’t depend on your kids; they have their own financial obligations and responsibilities, and even if they want to help you, they might be unable. Forcing you to survive on any scrubs they through your way.

What you Should Do

Being self-reliant and financially stable in retirement is one the biggest financial goal you need to prioritise, and here is how you can do that:

1. Invest in pension schemes that will guarantee you monthly income in retirement 
2. Don't make your children your retirement planning option. Find a balance between providing for them and securing their and your own future. 
3. Create a retirement saving account and ensure you contribute a portion of your monthly income.

Read Also: How to Plan for Retirement While in Your 30s

You Will Not be able to Educate your Children Properly 

As a parent, you understand the importance of giving your children the quality education they deserve. It is one of the best ways that you can prepare them to be self-sufficient adults who can provide for themselves and build a future. But when you constantly find yourself financially unstable, you might be unable to meet this duty.

First, your children will not be able to attend the best schools, which can affect the quality of education they receive, especially in the early years. Second, your children are likely to be sent home for fees frequently, which leads to them missing critical lessons and affecting their overall performance. Finally, they run the risk of dropping out altogether when you can no longer pay fees, and if they enroll in university, they’ll be forced to take out student loans.

What you Should do

Educating your kids is an obligation you can’t afford to fumble. Here’s what you can do to ensure that not even phases of financial instability can prevent you from meeting this obligation.

1. Create a saving plan and start saving for your children's education as soon as you can
2. Invest in education insurance 

Read Also: Step-By-Step Approach to Planning Your Child's Education

You will Put Yourself in Never Ending Debt Cycle

Financial instability can lead you to take on debts to pay pressing bills. But when you are already struggling to live within your means or underearning, paying back that loan might be challenging. Before you know it, you will find yourself taking more debts to pay an existing one. When that happens, you’ve put yourself in a debt cycle.

The type of debt you take has the potential to help you build equity, improve your finances, and increase your earnings. But it can also be the reason you drive yourself to instability and a never-ending debt cycle. It starts with understanding the difference between good and bad debt and then avoiding the latter, including credit cards, loan app debts, and consumer debts.

What you Should do

Getting out of financial instability when stuck in a debt cycle can be almost impossible. But if you don’t save yourself fast, you will likely fall victim to all the effects of lack of stability. Here are some things you can do to keep yourself out of a debt cycle:

1. Cut expenses instead of taking out a loan
2. Have emergency savings for every time you have an unexpected bill to settle
3. Pay off your high-interest loans first 
4. Consolidate your loans and talk to your creditors to restructure your debts

Read Also: Coping With Debt: How To Deal With Debt of Any Size

You Might Take on More Risks than Necessary

When experiencing financial instability, you might want to get out of that position as fast as possible. For instance, let’s say you have a debt due in four months. You know you have no way of paying it back, so you decide to take a risk. 

You look at a specific company's stock price and notice that the value has been going up for the last three months. So you decide to borrow from your retirement account and buy some of those stocks. The trend keeps up, but a few days before you can cash out to settle your debt, it all comes crashing down, and suddenly, you’ve lost over half of the value of your initial investment. You go ahead and panic sell, taking a massive loss.

If not careful, financial instability can raise your greed, make you take more risks than you can handle, and make you more susceptible to pyramid schemes. The end results will be more instability.

What you Should do

Before you tempt fate or shoot yourself in the foot in an attempt to save yourself by exaggerating your risk tolerance, here’s what you can do:

1. Hire a financial advisor to guide you on how you can get out of instability and invest wisely
2. Avoid get-rich-quick schemes 
3. Don’t let emotions and greed guide your financial decision making
4. Develop a plan, do thorough research and don’t invest blindly or try to time the markets

Read Also: What You Must Know About Taking Risks in Your 30s in Kenya

It Will Affect your Mental Health 

Financial instability can have a severe impact on your mental health. When you are struggling to make ends meet or provide basics need for your family, you can develop anxiety, chronic stress, and depression. 

They say money can’t buy happiness, but sadness and unhappiness become your friend when you don’t have the money to pay your bill. 

Financial instability can have you doubting your future. You may give up on your goals when you don't know what tomorrow will bring or how long the instability will last. And in the long run, this will only affect you more.

What you Should do

To get out of financial instability, you need to be in the right state of mind. That’s the only way you can make better decisions. Here are some things you should do:

1. Learn to forgive yourself 
2. Learn how to build a positive money mindset
3. Seek psychological help 
4. Connect and count on your loved ones 

Read Also: What Debt Does To Your Brain - Money Psychology

It will make you Less Productive 

One of the biggest obstacles you will face when you are financially unstable is the ability to concentrate or be more productive. 

For example, If you are wallowing in debt, you will find yourself always hiding from auctioneers and debt collectors. Or, if your kids have been sent home from school, you must take a hiatus from work to talk with the school administration. Both of these scenarios can prevent you from working at your utmost performance. This can affect how much you make or lead to your dismissal if you are employed—adding more problems to your plate.

But absenteeism is just one of the problems. Stress caused by financial instability can also make you more likely to make mistakes due to fatigue, affect how you collaborate with colleagues, and impair your decision-making ability. All of which can lead to your termination.

What you Should do

Unless you are productive at work and increasing your income, getting out of instability will be more difficult. Living your money stress at home is even more challenging, but here are some things you can do:

1. Get career counseling 
2. Let your employer know your situation and commitment to dealing with the problem.
3. Don’t take tasks or work assignments you can’t handle well
4. Be more accountable to yourself to ensure you meet deadlines 

Read Also: What is Financial Instability in Your 30s? (What Causes it?)

WRAPPING UP

If not dealt with quickly, financial instability can have long-term effects on your finances. It can hurt your plans to be financially independent or achieve financial security. This is why you must commit to getting out of such a situation fast before its effects snowball. 

Getting out of financial instability requires changing the habits that drove you to that path in the first place. Without dealing with the root cause, you will not learn from your mistake and will likely repeat it. 

Furthermore, before making any financial decision, always weigh the cons against the pro. Want to take a loan to pay your credit card debt? Think of how that will affect you and find another way to address your problem. Questioning your decisions will help you see the red flags ahead, and you will know how to avoid them.