Amortize or Invest: What's Better Financially?

When it comes to personal finance, one of the most common and challenging decisions is choosing between amortizing or investing. Both options have financial advantages, but which one is the best?

The answer depends on several factors, such as the interest rate on your loan, the return on investments, and your short and long-term financial objective. In this article, we'll explore the pros and cons of amortizing or investing, to help you make the smartest decision financially.

What is Amortize?

Amortize means reducing the balance of a debt through regular payments. In a loan, for example, you pay a portion of the amount due over time, including interest and principal, until the debt is paid off. Amortization can be done in different ways, such as:

Increasing amortization: Where the value of installments increases over time.
Fixed amortization: Where the amount of the installments is constant throughout the financing period, but the part allocated to interest decreases as the debt is paid off.

Advantages of Amortising Debt

Interest Reduction: The faster you amortize, the less interest you'll pay at the end of the loan. This is because interest is calculated on the outstanding balance. By amortizing a part of the debt, you decrease that balance and, consequently, the amount paid in interest.
Less Debt: By amortizing your debts, you reduce financial pressure and the stress caused by indebtedness. This also improves your long-term financial health.
Financial Security: Amortising can bring more peace of mind, especially if you have debts with high interest rates, such as credit cards or personal loans.

Disadvantages of Amortising Debt

Missed Opportunity: When you use your money to pay off debt, you may be missing the opportunity to invest that capital in something that brings higher returns, such as stocks, real estate funds, or other long-term investments.
Less Liquidity: By prioritizing amortization, you reduce the amount of money available for emergencies or new investment opportunities. In other words, you're left with less financial flexibility in the short term.

What Is Investing?

Investing is placing your money in assets that have the potential to generate returns higher than inflation or the yield of a traditional bank account.

The choice of investment type depends on your risk profile, your investment horizon, and your financial objectives. Among the most common investment options are:

Shares: Investments in companies, with the objective of benefiting from valuation and dividends.
Real Estate Funds (FIIs): Investments in real estate, providing passive income with rental and property valuation.
Fixed Income Securities: Such as CDBs and Treasury Direct, which offer fixed and more predictable returns.

Advantages of Investing

Potentially Higher Return: Investments can provide higher returns than paying interest on a debt, especially if you invest in assets that tend to appreciate over time, such as real estate or stocks.
Wealth Building: Investing allows you to create wealth over time, harnessing the power of compound interest and capital gains on assets.
Diversification: When investing, you can diversify your portfolio, reducing the risk of losses on any specific asset and providing a balanced portfolio.

Disadvantages of Investing

Risk of Loss: All investments involve risk. If you invest in volatile assets, such as stocks or cryptocurrencies, you may suffer financial losses. The return on investments is not guaranteed and may vary with market conditions.
Lower Security in the Short Term: When investing, the return is not always immediate. In the case of long-term investments, you may not see the fruits of your investment until years later, which can be challenging if you need liquidity now.
Need for Knowledge: Investing effectively requires knowledge and monitoring of the financial market. If you don't know how to choose the best assets, you may end up investing poorly or making impulsive choices.

How to Amortize or Invest: What to Consider?

The choice between amortizing or investing depends on a number of financial factors. Here are some important considerations you should take into account to make the right decision for your situation.

1. Debt Interest Rate

One of the most important variables when deciding between amortizing or investing is the interest rate on your debt. If you have debts with very high interest rates, such as a credit card or overdraft, it is recommended that you prioritize amortization.

Paying off these debts quickly may be more advantageous than investing, as the return on an investment will normally be lower than the interest rate charged for these types of debts.

High-interest debts: Amortising is generally smarter, as the interest paid on the debt is greater than the return on many investments.
Low or zero interest debts: If you have low-interest loans, it may be more advantageous to invest the money rather than amortize, since the return on investments may be higher than the interest you are paying.

2. Financial Objectives

Another important factor when deciding whether to amortize or invest is to consider your short and long-term financial objectives. If your immediate goal is to pay off a debt that is weighing on your budget, amortization may be the best choice.

However, if you're looking to build wealth over time, investing may be more appropriate.

Short-term objective (debt reduction): Amortize may be more appropriate if the debt is hindering your daily finances.
Long-term objective (wealth accumulation): Investing may be the best choice for those who are looking to increase their wealth in the long term.

3. Risk Profile

If you have a more conservative risk profile, debt amortization may be more attractive, as it offers financial security by eliminating long-term commitments.

On the other hand, if you have a more aggressive risk profile and are willing to face market fluctuations, investing may be more advantageous, offering the chance of higher returns.

Conservative profile: Amortising may be the best choice, as it eliminates risks and guarantees greater stability.
Bold profile: Investing offers the opportunity for greater gains, but involves risks that need to be managed.

4. Liquidity and Accessibility

Liquidity must also be considered when choosing between amortizing or investing. If you need quick access to money, investments may be more advantageous because, depending on the type of asset, you can sell them at any time.

On the other hand, amortizing debts improves your financial health and offers more control in the future, even if the capital is not immediately accessible.

Liquidity requirement: If you need immediate access to cash, liquid investments may be more advantageous.
Security and control: If the priority is financial security and the elimination of debts, amortizing may bring more benefits.