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Paying off debt or investing: Which is the best option?

It cannot be said that there is the right answer to the question of whether it is better to pay off debt or invest. However, there are some factors that you should take into account if you ever come across this dilemma. To help you, we have compiled some of these factors, which you can find out about them below:

Comparing loan interest rates

First of all, a good start is to compare the current interest rates on the loans you have with the return on investments. Pay off high-interest-rate loans first, as failing to repay a loan can have serious consequences.

If you have low-interest rate loans, it is probably a good idea to make minimum payments and allocate more money to investments. But remember: paying a credit makes you have some safe return, even if minimal; Investing always carries a risk.

Consider the type of debt

Not all debt is equal. In fact, the type of debt you have can play a key role in the decision between paying off a loan as quickly as possible or investing in investments.

The IRS, for example, allows Schedule 1 tax taxpayers with contracts until 2011 to deduct interest on mortgage loans up to a maximum of 296 euros. That is, sometimes taking a long time to pay this type of debt can save you money.

The remaining credits are not deductible in Portugal (credit cards, car loans, and personal loans, among others), so it pays to be paid more quickly.

Consolidate debt to help save

By opting for consolidated credit, you can combine several debts into one. For those who are in debt, this solution can be used as a tool to reduce spending on loan installments.

By reducing this expense, you will increase the level of short-term savings, allowing you to rebalance your budget and better manage your debts. This aid thus allows for greater financial flexibility.

Although this type of credit can be granted to any type of person, it is intended for those who have several loans, which these days is not difficult to find. The provision of home loans, credit cards, car loans, or specialized loans to furnish the house are common expenses for several families. Combining these installments in a single credit allows greater financial slack for those who have banking problems.

find a balance

Some say that “virtue is at the center”, which in this case means investing and saving for retirement while paying off debts. As we have already mentioned in this article, the most common family budget is 50/30/20, allocating 20% ​​of your income to savings and debt payments.

For example, paying more than the minimum monthly loan payment while putting aside money to invest in a car of your choice can be a balanced option. This method ensures you don’t have to waste precious time-saving money for retirement while struggling to pay off an expensive, high-interest loan.

There are a considerable number of different budgeting methods that help you balance personal finances, taking into account investment and debt repayment. To do this, you can start by making a personal expenses map.

set goals

Financial goals should guide the decisions you make, so set goals. For some, being debt-free makes them “breathe” in relief, while others can’t sleep a wink at night without an emergency fund. It’s important to know exactly what your situation is and decide where the money will have the most impact. As they say: each case is different.

Final considerations

As you have noticed, it is not possible to say with certainty which is more important: whether to pay a debt or invest. Assess your financial situation to determine where your money will have the most impact. If the math doesn’t help you decide between one or the other, try doing both at the same time or focus on the financial goal that will bring you the most peace of mind.

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