Financial planning foundations
Managing and eliminating debt
4 min
Debt is the mirror image of investing: instead of earning a return, you pay one. High-interest debt can quietly undo everything your investments earn, so managing it is part of wealth management.
Not all debt is equal
- Toxic debt — credit-card revolving balances and overdraft (cheque especial) in Brazil carry some of the highest interest rates in the world, often well over 100% a year. Paying these off is the highest-return "investment" available to you: a guaranteed return equal to the interest you stop paying.
- Expensive debt — personal loans, store financing. Worth clearing aggressively.
- Cheaper, purposeful debt — a subsidized mortgage or a low-rate student loan can be reasonable, because the rate is low and the purpose builds value.
Two ways to pay it down
- Avalanche — attack the highest-interest debt first. Mathematically optimal; you pay the least total interest.
- Snowball — clear the smallest balance first for a quick psychological win, then roll that payment into the next. Less optimal on paper, but the motivation keeps many people going.
Pick whichever you will actually stick to.
The order of operations
A common sequence: (1) cover the minimums on everything, (2) build a small starter reserve, (3) crush toxic debt, (4) finish the full emergency reserve, (5) invest for goals. Clearing a 14%-a-month card beats any investment you will realistically find — so debt usually comes before serious investing.
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