Invest or Pay Debts: How to Prioritize During Times of Rising Interest Rates
In a scenario of rising interest rates, many face a crucial question for financial health: is it better to invest or pay off debts? This decision depends on several factors, such as the type of debt, the interest rates involved, your financial profile, and your long-term goals. In this article, we will explore how to prioritize your finances during times of economic tightness.
INFORMATION
1. Understand the Current Situation
Before making any decision, it is crucial to understand the impact of rising interest rates on the economy and your debts. With high interest rates, the cost of financing and credit increases, making debt more expensive. On the other hand, fixed income investments tend to offer more attractive returns.
Therefore, evaluate:
The interest rates applied to your debts.
The expected returns on potential investments.
Your ability to maintain a balanced budget while juggling both priorities.
2. Prioritize Paying Off High-Interest Debts
In general, it is more advantageous to pay off debts with interest rates higher than the return on safe investments. For example, if you have credit card debt with interest of 12% per month (approximately 285% per year), paying this debt is financially more sensible than investing in a Treasury Direct bond that offers 12% per year.
Recommended strategy:
List all your debts, including amounts and interest rates.
Start with the debts with the highest interest, prioritizing the minimum payment on the others.
Avoid taking on new debts until you reduce existing ones.
3. Build an Emergency Fund
Even though paying off debt is important, don't neglect the need for an emergency fund. Having an emergency fund prevents you from having to resort to expensive credit in unforeseen situations.
How to do:
Save at least 3 to 6 months of your essential expenses.
Use highly liquid investments, such as an interest-bearing account or Treasury Selic.
4. When Investing May Be the Best Choice
If your debts have low interest rates or are under control, investing can be a smart alternative, especially in times of high interest rates. Fixed income securities, such as Tesouro Direto or CDBs, tend to have attractive returns and can help build wealth in the long term.
Consider investing if:
You already have an emergency fund.
The rates of return are higher than the interest rates on your debts.
You have a clear strategy for managing both priorities.
5. Combine Debt Payments and Investments
In some cases, a balanced approach is the most effective. Dividing your resources between paying off debts and investing allows you to advance on two fronts simultaneously.
Practical example:
Set aside 70% of your extra income to pay off high-interest debts.
Allocate 30% to short or medium term investments.
This division can be adjusted as your financial situation evolves.
6. Take care of financial education
Regardless of your choice, increasing your knowledge about personal finances is essential to avoid financial pitfalls in the future. Search for information about:
Budget control.
Long-term planning.
Financial products aligned with your objectives.
Conclusion
In times of high interest rates, deciding whether to invest or pay off debt requires careful analysis. Prioritize paying off high-interest debt, build an emergency fund and take advantage of investment opportunities as your financial situation allows. With planning and discipline, it is possible to balance these two priorities and ensure more solid financial health in the long term.