Debt, interest, and building wealth

The essential idea

Debt brings purchasing power forward: money is used now and repaid later. It can finance a useful asset, but creates a fixed obligation that reduces monthly room. The total cost, term, and risk matter more than the instalment alone.

Compounding can work against a borrower. Annual rate, fees, insurance, and penalties determine effective cost. Variable rates add uncertainty. Comparing repayment with investing must recognise that avoided interest is known while market returns are uncertain.

An example to make it concrete

Illustrative example: a €5,000 balance at 12% annually generates roughly €600 of interest over a year if the balance does not change, before fees and contract details. A €100 payment may not reduce principal by €100 because some can cover interest.

What to watch

• List balance, effective rate, instalment, and term for every debt.
• Address arrears and high costs while retaining minimum liquidity.
• Avoid borrowing to pursue uncertain returns.
• Check early-repayment terms and possible charges.

Put debt before uncertain returns

List each debt by effective cost, term, and consequence of missed payments while preserving minimum liquidity. When comparing repayment with investing, do not equate known interest savings with an uncertain market return.

Next step

Continue to the next article in the path and apply the concept to one concrete portfolio decision.