Debt vs RRSP

[wimbly11]

So here's our current situation. I'm looking for some advice.

We recently consolidated our debt onto a low interest rate line of credit, which we are so happy with! We have been putting every extra penny onto the LOC to pay it off. However, with me back to work and having to pay for daycare it is realistically going to take about two years to pay it off fully.

My finance does not have a pension at work and no retirement plan. I have a pension, however, there is a good chance I will be leaving my job within the next year to pursue a stay a home opportunity to I can be home with the children, meaning I will also have no pension and not retirement plan.

I feel like we should start our RRSP's even putting $100 a month into them to get them going. Finance is 42, I am 32. I feel we need to get this ball rolling. He thinks we should wait until the LOC is fully paid off before we start contributing because we will be taking money away from paying down our debt.

What would you do? Would love to hear some outside opinions!

[MortgageQueen]

I think talking to a financial advisor is your best bet. I think both saving and paying debt are important, but it can be easy to defer saving indefinitely to pay debt. . . as debt can be a part of everyday life.
The experts say, pay yourself first. . which category I think retirement savings would fall into. That said, I would still actively pay down debt, maybe just split the difference?

[Natalka]

Pay off your debt.

[lecale]

Well we are in line for a global recession and for the bottom to fall out of the housing market I don't know how gung-ho I would feel about investing my money right now...

...vs. the return you get chiseling away at a high interest debt.

I think the safest investment you can make with your money right now is to pay off debt, because it is a sure thing.

[annedougherty]

Debt.

Sent from my MotoG3 using Tapatalk

[Shwa Girl]

*puts on Gail Vaz Oxlade thinking cap*
- don't leave the job until the LOC is paid - fiance is correct
- work extra hours to pay off LOC early
- decide now, how much of the home based business income will go toward RRSP
*takes off thinking cap*

[Cake]

I think starting on your RRSP (even small time) is important.
Chances are you will always have some sort of debt and another excuse to defer.

Like Mortgage Queen said Pay yourself first and get started... even small time.

[macw1960]

I would pay off the debt first and not buy anything else unless you have the cash for it. It is a wonderful feeling to be debt free...have been for awhile and loving it.

[beckie.c]

Each person's situation is unique. Since we don't have access to a line of credit, I contribute to a TFSA every paycheck for emergencies. Otherwise, we would have to put those on credit cards. We also contribute about 2% of our take home pay to DH's RRSP (my employer contributes to my Pension and RRSP on my behalf so its already taken off my cheque.)

To be honest, like Lecale said the ROI is not great. I am gaining a bit of interest each month on our accounts but its definitely not enough to cover the interest each month on my student loan. I keep contributing because I'm the mindset that savings = bill we pay to our future self.

Good luck on your debt repayment! We are aiming for debt free by the end of 2016 on my student loans and vehicle loan. Then we will only have our mortgage, so I'm looking forward that relief as well

[brunt]

I would tend to say "pay off debt", but it depends on your circumstances. I like RRSP's and TFSA's, but most people do not realize that they are not necessarily the right thing to do in all situations.

If you have a relatively high paying job currently, then making a contribution to your RRSP and taking it back out in your first year of working at home may make sense. This is due to the fact that you would get a deduction in your high tax year, and take the income in a (probably) low tax year. This is a form of income averaging, and is frequently used whenever someone is going to have some high income years followed by low income years.

If you don't currently pay much in taxes, then RRSP contributions make no sense whatsoever. You will pay taxes on your contributions when you withdraw in future, and if there is any chance whatsoever that you will be paying a higher tax rate in future than now, then contributing to RRSP's will actually cost you money. This is something that the financial institutions won't tell you.

Worse still, all withdrawals from RRSP's are treated as regular income. Therefore, if you have investments that will be paying dividends or capital gains, when you take these back out of the RRSP later on, there will be about twice as much tax payable on the dividends or capital gains than if you had simply put them in a regular investment account that is outside of an RRSP.

To emphasize once more, RRSP's only make sense if your tax rate in your contributing year is expected to be higher than the tax rate in your withdrawal year. If this is not true, then it does not pay to contribute to an RRSP. In this situation, you would be better off contributing to a TFSA instead.

That having been said, investing makes more sense than paying down debt if and only if your after tax return on the investments exceeds the after tax costs of paying the debt. Chances are pretty good that your LOC has a higher interest rate than you can expect to receive in investments, especially after tax.

To muddy the waters a little more, there is a question of sleep - and this varies from person to person. I sleep better with no debt and no investments than I do with debt and with investments. So for me, paying off debt is of prime importance. You may not worry so much about it, but most should worry about debt than they do.

One last point. Just because one does not make contributions to an RRSP does not mean that they should not save for retirement. For instance, let's just say that Joe Sixpack makes an amount of money so that you never has to pay income taxes. He should still be saving for his retirement, however he gets no tax deferment for making RRSP contributions, and having followed my advice, he does not make any. However, he should still be saving in a regular investment account for his retirement so that he will pay little in taxes for the dividends and capital gains from his investments (remember withdrawals from RRSP's are treated as regular income and taxed at about twice the rate of taxes on dividends and capital gains). Even better, he could contribute to a TFSA and pay no taxes at all on his dividends and capital gains.

So in short, it depends on your tax rate now, your tax rate in future, and how well you can sleep with debt.

[wimbly11]

Thanks for the advice everyone. We haven't made a decision yet as to which path to choose. I want our debt gone, but the future scares me with no plan put in place yet. Sigh....feeling like I do not want to "Adult" this week lol

[MortgageQueen]

Well said Brunt. I think the majority of people on this forum would be inclined or prefer to pay off debt. That's why we're here, right?

However. . . in my job I see a lot of "chronic" NON-savers. They spend too much and always have debt. One can fool oneself into thinking one's debt is at a manageable level BUT what about your savings? Most "intend" to pay down their debt first, then get on with saving. . .except it just never seems to happen and the years roll by.

So. . . you just have to take a good honest look at yourself and decide if you are like the people mentioned above?. . or self disciplined enough to pay debt, than start saving.

We aren't all "Brunts" bless his heart!

[Frugalbigmama]

I think saving something from every pay cheque is important. I "make" my teen put minimum 10% (I always round up for him lol) into a "Future" savings account. Then I try and put at least $50 (some pays $100) into planned savings. He will appreciate it down the road. If he starts now I am hoping it becomes habit and really want him to plan before he spends. Right now he is having fun and blowing his money on food and clothing which is part of being a teen and finally having disposable $. He did spend $165 the other day just from his regular account at the music store so at least his planned spending is untouched and it means he has less pizza money

[MortgageQueen]

Awesome Frugalbigmama! Love to hear great parenting stories!

[wimbly11]

I'm still struggling with which direction we are going to go. Perhaps we need to sit down and talk to someone about our finances and see what our options are.