Should You Invest or Pay Off Debt? Try a Balanced Approach
Q: I want to pay off my credit card bill this year but to do this I won’t have any money left over to start investing in an RRSP. Is this a good strategy?
A: While it always makes sense to pay off high-interest credit-card debt, there are advantages to taking a balanced approach. As an example, if your goal was to pay off a credit card bill of $3,500 (with an annual interest rate of 19 per cent) in one year, you would need to pay about $325 a month to do it.
Instead of using all of your available funds to pay off your debt, you could consider paying $200 a month on your credit card debt, which would allow you to contribute $125 a month to an RRSP. You could also ask your employer to reduce your monthly taxable income to reflect your RRSP contribution. This would add a little extra onto your paycheque, which you could use to further pay down your credit card debt.
This approach would allow you to pay off your credit card debt in approximately 17 months. The additional interest costs are relatively small and will likely be offset by the increase in the value of your RRSP.
The advantage to a balanced approach is that if you have an unexpected financial emergency, you will have the ability to manage the cost without sacrificing your goal of getting out of debt.
Another advantage is that many employers will match a certain percentage of the contributions their employees make to an RRSP as part of the benefits program they offer. This is too good a benefit to pass up.
Just like the tortoise and the hare, slow and steady is a great strategy to help you win your own financial race. Hopefully this gives you some food for thought as you decide whether to invest or pay off debt.
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