Smarter Ways to Do Things
Traditionally, and for good reason, the best advice is to always pay down debt because the interest rate to borrow money is higher than what you can earn in a savings account. However, there’s more to it than meets the eye, and logical numbers aside, we need to outsmart our bad money habits at times.
In Darren’s case, there are advantages to taking a balanced approach, rather than paying all the debt off first and then starting to save. Not only will his employer contribute to his RRSP, the other thing to consider is how would he manage a financial emergency over the next 4 years if all of his extra money is used to pay off his loan?
At some point, the unexpected will happen, so planning for the worst and hoping for the best is always better than scrambling to catch up when the unexpected does finally happen. After all the hard work it takes to pay down debt, no one wants to be forced to take out a loan or use a credit card to cover an emergency expense. Having some cash readily available is the one true trick for getting out of debt.
It boils down to making well-planned choices with the money that’s available. What would Darren’s payments be if he paid his student loan off over 5 years instead of about 4? This would get him debt free 2 years sooner than if he continued with the payments he was making now. But, is that all he’d gain?
If doubling the monthly payment pays the student loan off in about 4 years, only topping it up by another half as much would extend the repayment time to a little over 5 years. This is longer than if he doubled his payment, but it’s still less than the 7 years he has left now. By only topping up by half as much, there’s money left over to start an RRSP. That’s the huge benefit of a balanced approach.