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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 Wood, BA avatar on Loans Canada
Caitlin Wood, BA

Caitlin Wood is the Editor-in-Chief at Loans Canada and specializes in personal finance. She is a graduate of Dawson College and Concordia University and has been working in the personal finance industry for over eight years. Caitlin has covered various subjects such as debt, credit, and loans. Her work has been published on Zoocasa, GoDaddy, and deBanked. 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.

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