How to Use a Balanced Approach to Pay Off Debt & Invest in RRSPs
When faced with the choice of paying down high interest debt or investing in an RRSP, a balanced strategy allows you to do both. The long-term costs of owing money on your credit card mean that it always makes sense to pay off high-interest credit card debt. Making regular contributions to an RRSP also has long-term consequences; but the consequences are positive with money you earn rather than spend. With a balanced approach, you can effectively pay down debt while still saving and investing in RRSPs.
The Scenario
Let’s use an example: if your goal is 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. After a careful look at your budget, you realize that by cutting back a bit in a few areas, you can manage monthly payments of $325.
Split Your Payments – Paying Down Debt vs Saving & Investing
Instead of using the whole $325 to pay off your credit card, you could pay $200 a month on your credit card debt, and use the remaining $125 a month to invest in your RRSP. While this approach would pay off your credit card debt in about 17 months, rather than 12, the additional interest costs are relatively small and will likely be offset by the increase in the value of your RRSP.
Top Up Your Pay Cheque with the Tax Savings
To add a little extra to your paycheques, you could ask your employer to reduce your monthly taxable income to reflect your RRSP contribution. The additional funds could then top up your credit card payments, bringing you closer to your goal of paying the $3,500 off in a year.
Take Advantage of RRSP Top-Up Benefits at Work
As part of their benefits package, many employers will match a certain percentage of the contributions their employees make to an RRSP. Splitting your payments between paying down debt and saving for the future allows you to take advantage of such a program, which is much too good a benefit to pass up!
An Added Bonus: Savings for Emergencies
Furthermore, any income tax refund you receive can either be used to pay down the credit card debt with an additional payment, can be reinvested into the RRSP, or it can be set aside in a separate savings account to use in an emergency.
The advantage to a balanced approach is that if you have an unexpected financial emergency, you will have the ability to manage without sacrificing your goal of getting out of debt.
Paying Down Debt and Saving for the Future – Win Your Financial Race!
Just like the tortoise and the hare, slow and steady is a great balanced strategy that allows you to reach your goal of paying down or getting out of debt and saving and investing in your RRSP.
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