Advantages of paying down debt
By paying off your debt more quickly, there’ll be less interest to pay and the repayment period will be shorter.
Advantages of saving for retirement
It’s no secret: the earlier you start to save, the more time your money will have to grow. What’s more, by contributing to a registered retirement savings plan (RRSP), you’ll reduce your taxable earnings and may be entitled to a tax refund.
Your current situation
These are the factors you need to take into account:
- Type of debt: Credit card, car loan, student loan, mortgage, etc.
- Your age and the age at which you want to retire
- Savings incentives such as employer contributions, tax deductions, etc.
- Your ability to cover any unexpected costs (emergency fund equivalent to three months’ salary)
How to choose
Compare the interest rate on your debt with the potential rate of return on your savings.
- If the interest you’re paying on your debt is significantly higher than the expected return on your savings, it would be more advantageous to pay down your debts.
- If you have a loan with a low interest rate, however, the long-term return on your RRSP, combined with the possible tax refund, may mean that saving is a better option for you. If you get a tax refund, why not use that to make a prepayment on your debt?
As you can see, there’s more than one answer to this question. It all depends on your priorities, your income, your age and the type of debt you have. By taking the time to compare what your debt is costing you with what your savings might earn, you’ll get a clearer picture of your situation.