Playbooks / Risk
The order of debt repayment
The rule
Paying off a debt at eighteen percent is an eighteen percent return, guaranteed, tax free in most jurisdictions and available immediately. Almost nothing in a portfolio offers that.
The rule
Rank every debt by interest rate. Pay minimums on all of them. Put every spare dirham against the highest rate. When it is gone, move to the next.
It is arithmetically optimal and it is boring, which is why the alternative exists.
The alternative, and when it is right
The snowball method pays the smallest balance first regardless of rate, to produce a visible win and build momentum. It costs money in interest and it works for people who would otherwise give up.
If you have abandoned a repayment plan before, use the snowball. If you have not, use the rate order. Choosing the mathematically optimal plan you will not finish is worse than the slightly costlier one you will, which is the same argument the behaviour gap makes about portfolios.
Where the mortgage sits
Usually last, and often not at all.
A mortgage at four percent, secured, long dated, on an asset producing rent, is not the same animal as a credit card at eighteen. Clearing it early is a guaranteed four percent return, which is respectable and lower than most long horizon alternatives.
Three things argue for clearing it anyway, and none of them are arithmetic. It lowers break-even occupancy, so the property survives a longer vacancy. It reduces the equity destroyed by a price fall, since leverage cuts both ways. And it removes a fixed obligation from a life where residency may depend on employment.
Weigh those against the return you are giving up and decide deliberately. Most people should be somewhere between the extremes rather than at either.
What comes before all of it
The emergency reserve. Clearing debt with money you then have to re-borrow at a worse rate is not progress, and the moment you need cash is disproportionately likely to be the moment credit is withdrawn.
Fund the immediate layer first. Then attack the expensive debt. Then build the rest of the reserve alongside.
The one exception worth naming
Where an employer matches pension or savings contributions, take the match before anything else including expensive debt. A fifty percent match is an immediate fifty percent return and nothing on the debt ladder beats it.
The arithmetic
Where it breaks
- It compares a certain return against an expected one as though they are the same kind of number. Repaying debt is guaranteed; the investment alternative is a range, and the certainty is worth something the arithmetic does not show.
- Early settlement fees on fixed rate mortgages can be substantial and change the answer entirely, so check the actual charge before overpaying.
- In jurisdictions where mortgage interest is deductible the effective rate is lower than the headline, which moves the mortgage further down the list. In the UAE this does not apply to individuals.
- Clearing debt to zero while holding no cash reserve is the most common sequencing error and it usually ends in borrowing again at a worse rate.
- Some debt is cheap and long dated by design, and clearing it early can trade a valuable liability for an illiquid asset position.
- The snowball costs more in interest, and recommending it to someone who did not need it is a real cost rather than a harmless preference.
When to use it
Whenever there is spare money and more than one place it could go, which is most months. Also immediately after any windfall, before the decision gets made by inertia.
The Safe Withdrawal Rate does this arithmetic for you, in your currency, in about thirty seconds.
Open the calculatorSources
Last reviewed . Educational research, not personal advice. Disclosure standards.