Pay Down Debt or Invest in RRSPs?

Loans Canada: The Country's Best Loan Comparison Platform

Pay Down Debt or Invest in RRSPs?

Written by Caitlin Wood

Pay Down Debt or Invest in RRSPs?

Categories

Budgeting Debt Debt Consolidation Debt Management Personal Finance Rrsps

There are numerous factors and concerns to consider when deciding between paying down debt and investing in RRSPs. For most people being debt free and planning for retirement are two of the most important financial milestones and more often than not, they require equal attention and concern. When two issues both carry such importance it can be extremely difficult to decide which should get the majority of your attention; should you focus on debt repayment? Or should you focus on saving for the future?

Typically, you’ll almost always be advised to focus on debt repayment. Becoming debt free is of course extremely important but should it be your number one priority? Not necessarily. It completely depends on your current situation, what type of debt you have and interest rates. You’ll need to consider all the pros and cons as it may make more sense for you to invest in your RRSPs or it may be a better choice to pay off your debts first.

Making Debt Repayment Your Priority

Lots of people like to focus on one financial issue or goal at a time, so if paying down you debts before you decide to invest in RRSPs is your goal, go for it. Excessive amounts of debt is never a good thing to have, more often than not debt can hold you back from achieving your financial goals. Focusing all your attention and money on debt repayment is a great way to restart your finances so you can then focus on other things like RRSP investments.

If you’re always worried about the amount of debt you have and feel as though it’s holding you back, you need to make debt repayment your top priority. Creating a plan and then working until you’re debt free will then allow you to focus all your attention on investing in your future. Eliminating the burden of debt is a great way to jump start your financial future, this way you can then focus on other things like investments and saving for the future.

Interest rates should always be taken into consideration, whether you want to invest or pay down debt. Having debt with an interest rate that is higher than the annual return on your RRSPs is not a great idea, it means you aren’t making any money off of your RRSP investment. If this is the case you should strongly consider focusing all you money and attention on debt repayment before you make any further investments

When to Focus on Investing in RRSPs

Simply put, you should make investing in RRSPs a priority when any other debt you might have is low-interest. If you have lots of high interest credit card debt or high interest loans those definitely need to be paid off first. If you have a low to moderate interest rate on your mortgage and maybe a line of credit or one credit card that isn’t maxed out then the return you’ll get from RRSPs is more often than not greater than the interest you’re paying on your other debts. For people with low to manageable amounts of debt, investing in RRSPs is a great way to get a head. RRSPs are also tax deductible; this means that you can use the tax refund from your RRSP contribution towards paying back any debt you might have.

It’s important to note that large amounts of credit card debt or other high interest debt should probably take priority over RRSP contributions. You can obviously contribute to your RRSPs and work towards paying off your debt but when there are high interest rates involved, it’s always a good idea to focus on debt repayment.

What are Your Priorities?

There are lots of factors that should affect your decision to invest or pay down debt. Depending on your financial situation you should be able to figure out which one is the best option, but don’t forget about your own priorities. If being debt free is your number one priority, you should hold out on RRSP investments until you’re comfortable with your financial situation. If planning for the future is extremely important than your RRSP contributions should reflect that.

Caitlin is one of Canada's leading personal finance writers. She is a graduate of Dawson College and Concordia University. She has been part of the Loans Canada team for over eight years. She believes that education and knowledge are the two most important factors in the creation of healthy financial habits. She also believes that openly discussing money and credit, and the responsibilities that come with them can lead to better decisions and a greater sense of financial security.

Click on the star to rate it!

How useful was this post?

Research & Compare

Canada's Loan Comparison Platform

Largest Lender Network In Canada

Save time and money with Loans Canada. Research and compare lenders before you apply. Share your experiences with Canada's top lenders.

Make Smarter Borrowing Decisions

Whether you have good credit or poor credit, building financial awareness is the best way to save. Find tips, guides and tools to make better financial decisions.

Industry Spotlight

What's happening with Canada's credit industry?

goPeer — Helping Consumers Achieve Financial Freedom by Connecting Canadians Looking For Financing With Canadians Looking to Invest

goPeer — Helping Consumers Achieve Financial Freedom by Connecting Canadians Looking For Financing With Canadians Looking to Invest

goPeer is Canada's first consumer peer to peer lending platform and connects creditworthy Canadians looking for a loan with everyday Canadians looking...

Read Post
Locator
Find The Best Rate
In Your Region
OR
Best Personal Loan Provider by Greedy Rates
Icon

Confidential & risk-free

All consultations and conversations with Loans Canada and its partners are confidential and risk-free. Speak with a trusted specialist today and see how we can help you achieve your financial goals faster. Loans Canada and its partners will never ask you for an upfront fee, deposit or insurance payments on a loan. Loans Canada is not a mortgage broker and does not arrange mortgage loans or any other type of financial service.

When you apply for a Loans Canada service, our website simply refers your request to qualified third party providers who can assist you with your search. Loans Canada may receive compensation from the offers shown on its website.

Only provide your information to trusted sources and be aware of online phishing scams and the risks associated with them, including identity theft and financial loss. Nothing on this website constitutes professional and/or financial advice.

Your data is protected and your connection is encrypted.

Loans Canada Services Are 100% Free. Disclaimer

Keep Track Of Your Credit Score

Subscribe with Credit Verify to monitor your credit rating and get your free credit score.