While financial education tips always reinforce the need to invest, in most cases this is not possible. After all, it is already a great effort to keep the bills up to date and make the salary until the end of the month. This is when debt is no longer part of your financial life.
Considering all this, the question remains: invest or pay off debt? In this content, we outline points that will help you in choosing what to do according to the moment of your life. Good reading!
Why prioritize debt?
Obviously everyone wants to have their investments, either to form a financial reserve or to achieve certain goals, such as buying a property or a new car.
However, taking this step without first arranging finances and paying off debt is often a mistake. And there is a very logical explanation for this: Most debt, even if it is not yet overdue, has higher interest rates than the returns offered by investments available in the market.
Imagine an application with a yield of 1% per month. In a year, it is 12%, without discounting inflation. Most credit lines, however, charge higher interest rates than this. To take just one example, let’s imagine the credit card revolving: in March, these rates reached 299.5% per year.
What to consider when paying off debts?
You need to follow a strategy even when paying off your debts. First of all, list all outstanding debts, based on three criteria: arrears, amount and interest charged.
From this, prioritize the so-called “expensive debt”, not necessarily for the full amount, but according to interest. Open accounts have the potential to turn into priceless snowballs and should therefore be dealt with first whenever possible.
After identifying priorities, analyze your ability to pay and set aside a portion of the budget to pay off debt. If accounts are tight, cut back for relief from spending.
Apart from the possibility of renegotiating with the lender, consider also exchanging such expensive debts for cheaper ones. It works like this: Gather all the high interest accounts and see how much they add up. Look for a cheaper credit option, hire it and, with the money, pay off your debts. Thus, you will be left with only the outstanding loan installments.
When is the right time to invest?
With finances in place and no debt hassle, it is time to consider investment options. They can be simple at first, with only one way to set up a financial reserve, and gradually move forward to enable their assets to evolve.
It is important that the investment choice always considers your profile and your goals. If the desire is to buy a house, consider the consortia, for example. They allow the scheduled acquisition of real estate from the payment of monthly installments, which facilitates the organization of the budget.
As you have seen, when in doubt between investing or paying off debt, the second option should always be privileged. It allows debts not to accumulate and the budget to be organized, so that you can make profitable applications in the future.
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