Which is better: less debt or more savings?

The most common recommendation is to always try to pay off all debts first and then start saving. The reason for this is that the interest rates charged on loans tend to be much higher than the rates paid on investments. But there are also other factors to consider.

Firstly, interest rates in Brazil are falling very strongly. Recent political turmoil may slow the pace of this fall, but low levels of inflation and economic activity indicate that the fall should continue.

In this scenario, interest paid on debt tends to fall and be “a little closer” to interest on investments.

There are of course some types of financing that will always have very high interest rates: overdraft and card debt, even with recent changes in revolving credit rules, remain exorbitant and should always be repaid as soon as possible.

Other than that, there may be exceptions.

 

Emergency Fund Creation

If you have cheaper debts like payroll loans and some types of personal loans, it is interesting to keep these loans and start setting up a small contingency reserve fund.

Using this money saved for debt relief would be the best option from a purely financial point of view. But there are at least two major advantages to maintaining this fund:

 

1. This fund can be used to write off future costly debts.

less debt

If any unforeseen events occur in the future, you will probably have to resort to a loan that can be made available quickly… and this is expensive as you will have to resort to overdraft or card.

Your reserve fund may be used to avoid this type of debt, if not in full, at least in part, by reducing your interest loss.

What if this unforeseen event never occurs? Well be happy! Consider that this fund created by you is a kind of insurance: you have, but pray that you do not need to use it.

 

2. Make a habit of saving

save money

Some people are born with the “gift” of saving. If you are not very lucky and born with the “gift” of spending, then the way to go is training until you can change your behavior.

Saving regularly, even a small amount, helps create a healthy habit for your personal finances. And in this case, this habit may actually be more important than writing off some short term debt.

 

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