Microloans Part 2 – How Should Microloans Be Treated in My Overall Financial Plan?

Yesterday, in Part 1 of this series, we explored a general overview of what microloans/microcredit is and how you, as a normal human being, can get involved in them. If you missed Part 1, click on the link below to read up!

Microloans Part 1 – What Are Microloans and How I Invest in Them?

So, you now know what microloans are, where you can access them, and what the risk are. You are ready to invest.

However, the question then becomes, how do these loans fit in to my overall financial plan?

More specifically, are they donations? Are they play money? Are they fixed income investments? Are they equity? How do they fit in to my overall asset allocation?

Whew…those are a lot of questions! Let’s take things one question at a time before my head starts to spin!

Are microloans fixed-income investments?

Investopedia defines a fixed income investment as follows:

An investment that provides a return in the form of fixed periodic payments and the eventual return of principal at maturity. Unlike a variable-income security, where payments change based on some underlying measure such as short-term interest rates, the payments of a fixed-income security are known in advance. Investopedia.com – Fixed Income Securities

So, according to the definition above, microloans are fixed-income investments.

However, the real question is if they are the type of fixed income investments that we would want to include in our overall asset allocation.

According to Part 3 (see link below) of our previous Investment Strategy Series, the only 3 types of fixed income investments that belong in our long term portfolio are 1) cash, 2) inflated protected bonds, and 3) short term index bond funds.

Investment Strategy – Defining Your Specific Mix of Fixed Income Securities

Since microloans fall in to none of these categories, they cannot be grouped in to our fixed income asset allocation.

Are microloans equity investments?

No – they are fixed-income investment, as evidenced by the definition above. They are just not the type we need to build our long term portfolio.

Are microloans donations?

Absolutely not (at least not technically). Microloans are not donations because the money you loan out is promised to be repaid, with interest added.

Additionally, as we saw in Part 1, micrloans are fairly reliable, displaying a 97% repayment rate.

Because of this, it is not definitely not a donation, by definition.

Are microloans play money?

As we have seen in previous posts, play money is a category for funds which we commit to use to either help us learn, enjoy life, and feel rich, and don’t expect to ever get back.

While it could be argued loaning small amounts of money to the poor can make you feel rich, I do not feel comfortable grouping microloans in to this category. For my purposes, I generally reserve this category for any funds I use to invest in individual stocks.

So, how do microloans fit in to my financial plan?

After doing some thinking, I believe that I will integrate microloans in to my “Making a Difference” life value that I discovered in Part 2 (can be accessed at link below) of creating a Purpose Focused Financial Plan.

Determine and Take Action on Your Life Values

Currently, this year’s goal for my “Making a Difference” life value is to donate 5% of my income to charity.

However, I think it would fit incredibly well to add a goal in here to partcipate in a microloan of $500 to help people in poverty in Latin America.

Yes, I think that works! I just updated Part 2 to include that. This was a cool exercise!

How about you all?

How do you treat microloans (if you invest in them) in your overall financial plan? Do they count as donations? Do they count towards your retirement?

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