The discovery of Financial Education moves a lot with people. We received a lot of emails and comments thanking you for the tips and even regretting not knowing how to handle money any longer. In addition to suggestions on controlling debt or saving money , people are becoming increasingly interested in learning how to invest their money . Sometimes, even though they still have some debts to pay, they already start saving part of their salary to put in savings or for other investments. What some do not know, however, is that debt repayment should be a priority in 99.9% of cases.
The purpose of this article is to make it clear why we should pay off debts before we start investing . Therefore, it is essential to know what an “expensive debt” is, prioritize the payment of these debts and only then worry about investments.
What is an expensive debt?
Some think that the most expensive debts they have are those with higher or even higher repayments. However they are wrong. The most expensive are debts with higher interest rates. Generally the most expensive debts are credit card liabilities (10% am), overdraft (8% am), personal credit (4% am) or vehicle financing (2% am).
The Aim Wise Bank makes interest rates available for the main types of credit, both for individuals and companies, organized from smallest to largest. You can find the best rates for overdraft, personal credit, motor vehicle acquisition and asset acquisition.
Why prioritize the most expensive debts?
The interest rate determines the speed of debt growth. The higher the rate, the faster the value of installments and the outstanding balance increases. Even if you have bigger debt, the priority should be to “kill” the higher interest rates.
I gave some examples in the previous topic of debts that are usually more expensive. However, my suggestion is that you arrange all debts from largest to smallest and start paying in that order until they are all settled.
Why can’t I invest and pay off debt at the same time?
The vast majority of investments (especially low-risk ones) have a much lower yield than the interest rates charged on debt. To give you an idea, while we pay 10% per month to credit card companies, the savings account yields less than 0.6% monthly . As we can hardly get higher income than debt, it is easy to see that debt should be a priority.
There are, of course, a few exceptions, such as low-income mortgage loans at 4 percent per annum , or leased vehicle installments, where the anticipation of installments is scarcely a significant discount.
Pay off debts first and only then start investing . Nothing prevents you from starting investment studies, looking for opportunities and evaluating the ones that best fit your profile. In fact, you have an obligation to worry about your financial health . After all, it is not because you are still paying off debts that you should not worry about investments.
Finally, I recommend reading the article “Control Your Debts,” which provides a very interesting guide on how to manage debt and keep it under control. Ah, leave a comment and share with us your opinion. It is very important to feed the discussion and help other people.