Advertisement
Canada markets open in 2 hours 28 minutes
  • S&P/TSX

    22,107.08
    +194.56 (+0.89%)
     
  • S&P 500

    5,248.49
    +44.91 (+0.86%)
     
  • DOW

    39,760.08
    +477.75 (+1.22%)
     
  • CAD/USD

    0.7355
    -0.0017 (-0.24%)
     
  • CRUDE OIL

    82.20
    +0.85 (+1.04%)
     
  • Bitcoin CAD

    96,283.36
    +947.03 (+0.99%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • GOLD FUTURES

    2,233.40
    +20.70 (+0.94%)
     
  • RUSSELL 2000

    2,114.35
    +44.19 (+2.13%)
     
  • 10-Yr Bond

    4.1960
    0.0000 (0.00%)
     
  • NASDAQ futures

    18,496.25
    -7.50 (-0.04%)
     
  • VOLATILITY

    13.00
    +0.22 (+1.72%)
     
  • FTSE

    7,956.72
    +24.74 (+0.31%)
     
  • NIKKEI 225

    40,168.07
    -594.66 (-1.46%)
     
  • CAD/EUR

    0.6813
    +0.0008 (+0.12%)
     

Debt repayment vs. RRSP contribution: What to do?

FBN’s Charles Payne, Divine Capital CEO Dani Hughes, Fulcrum Securities Chief Strategist Rob Morgan and Penn Financial Group founder Matt McCall on how to balance your portfolio to build your retirement savings.

Now that the holiday season is over, people’s thoughts are turning to RRSP season. Now is the time to start thinking about what contributions you’ll make, if any, for 2014. Making that decision more complicated is debt. When you have a little bit of disposable income, where should you put that cash: toward any outstanding amounts owing or your future savings?

That depends.

For starters, look at what kind of debt you’re dealing with and what interest rates you’re paying.

“One type of debt that really is an easy choice to pay off is high-interest, credit card debt,” says Kelly Gares, investment advisor at BlueShore Financial in B.C. “A lot of credit cards are carrying 19 per cent interest, and that’s a really high cost of carrying that debt. There’s no point having cash sitting in an investment account unless you’re earning 19 or 20 per cent on that investment. It’s really hard to justify leaving that high balance on the credit card debt.”

ADVERTISEMENT

Let’s say you have a line of credit with a much lower interest rate. That’s makes it a little harder to decide where to direct your hard-earned money.

“There’s still the psychological peace of mind of getting out from that debt,” notes Paul Shelestowsky, senior wealth advisor at Ontario’s Meridian Credit Union. “You could think ‘Yeah, I could make an RRSP contribution, but I’m losing sleep over this. If you can’t sleep at night, you’ve got to take that into account.”

The biggest debt Canadians have, of course, is their mortgage, and many find themselves torn over making a lump-sum payment on that or making an RRSP contribution. Some people opt to contribute to their RRSPs then use their rebate for a mortgage payment, but that doesn’t necessarily make the most sense when there are other sources of consumer debt.

“That’s a tough one, because there’s a lot of concern over how much debt Canadians have taken on with low interest rates, but low interest rates won’t be here forever and that interest cost and mortgage are going to be more of a burden in the future,” Gares says. “Reducing that principal balance now is a good idea, but savings are still important. You want to have a financial plan to make sure your savings are staying on target as well.”

There are times when making a contribution is a no-brainer.

One of them is if your company has a program where it matches your RRSP contributions.

“Putting in the minimum to get the employer’s contributions…is a must-do,” Shelestowsky says.

Another is when your income is high and the tax savings of a contribution make a big difference.

“If you’re only making $30,000 a year, then the RRSP contributions probably won’t have same impact as if you were making $80,000,” Shelestowsky says.

When dealing with the competing interests of debt and future savings, RRSP season makes for a good excuse to take a broad view of your overall financial situation.

“You don’t want to allow debt reduction to be only part of your financial strategy,” Gares notes. “Debt reduction and savings are both part of an overall strategy.

“A lot of people scramble around this time of year for a lump sum for their RRSP contribution, but a better strategy is to go month by month, to put yourself on a schedule where you’re paying a monthly amount into an RRSP automatically,” he adds. “Pay yourself first.”

Shelestowsky says one way to make automatic payments work is to start small, maybe $50 every pay cheque. Possibly that can be increased to $75 the next year.

Discussing RRSPs can trigger bigger conversations about a person’s debt management and long-term savings goals.

“There has to be a focus to get rid of that credit card debt,” Shelestowsky says. “That could even lead to another conversation—if there’s a lot of credit card and consumer debt, maybe a consolidation loan would help. How much money do you need to retire? You can talk about doing a budget for pre- and post-retirement. I’m a firm believer in getting debt repaid, but it has to be a balance.”