Personal Finance Choices - Paying Off debts Versus Retirement Saving

Personal Finance Choices – Some Good Advice

Personal Finance Choices – Paying Off debts Versus Retirement Saving

Personal finance choices are not always that simple. Obviously, we all want to be doing what will pay off the most in the long run. When it comes to paying off debts versus retirement saving, you might think that you’d be better off paying off your debts as quickly as possible.

Well, when it has to do with things like credit card debt and certain hire-purchase agreements, you’d be absolutely correct thinking these should be paid off as quickly as possible. Not paying off these debts as they become due is a recipe for getting into financial trouble. These are debts where interest rates are calculated on a compound basis. The rate of interest can be very high so if you do not pay the full monthly balance off by the due date, the increase in debt soon becomes exponential. In fact, you should know that the compound interest on Canadian credit cards is calculated on a daily basis! 

Here’s an example of how much you will have to pay in the long run if you have a credit card debt of $5,000 :

Amount owed on credit card 5,000 $
Interest rate 18.5 %
Monthly payments 85 $
Make next payment next month
Months needed to pay off the debt 156
Total interest paid (in addition to the amount owed) 8,188 $

So as you can see, those who chose to make minimum payments on credit card debt, or who miss a payment for a hire-purchase with very punitive clauses, can quickly find themselves in an endless debt situation that just keeps growing. This is definitely not where you want to be. You may also want to read this informative article: The Negative impact of Compound Interest.

Good Finance Decisions – What Else Should You Focus On?

When it comes to other types of loans, such as a mortgage for example, should you also be paying down your mortgage as quickly as possible and then, once your property is fully paid for, think about saving for retirement? 

Personal Finance Choices - Save for Retirement or Pay Down Mortgage Faster

Personal Finance Choices – Save for Retirement or Pay Down Mortgage Faster

Ideally, you would want to do both. But it’s more likely that prior to signing your mortgage agreement you will have to decide whether you will make smaller mortgage payments so you can put some money into an RRSP on a monthly basis, or just pay off your mortgage more quickly and save for retirement once your home is paid off. The question, more precisely, is this:  is there a right choice?

The answer to this question is, as you may have guessed, it depends!  A number of factors that will influence the choice, such as, for example: 

  • your mortgage interest rate vs the interest you earn on your RRSP
  • the amount you’ve accumulated to date in your RRSP
  • the remaining term on your mortgage, and
  • your personal priorities

Here is another article published January 6th, 2016, on our Via Capitale Blog which provides good insight as to the best choices to make when it comes to Paying Down Your Mortgage or Contributing to Your RRSP. Your financial advisor is also an invaluable source to go to. If you don’t have a good financial advisor, I will be happy to introduce you to a few trusted sources. 

Thank you for stopping by. I hope you’ve found this article interesting and useful and would love to get your feedback! 

I’m here to answer all your real-estate related questions, whether they concern the sale or your property, purchase of a new property for yourself or as an investment, or the lease of your property. Don’t hesitate to contact me by phone, via the information request on this website, or via email. It will be my pleasure to serve you!

I also invite you to browse through my other blog articles where you will find information that may be useful to you or someone you know.

~ Marie Paule Lancup, B.Sc., REALTOR®

Category: personal finance

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- 2016-01-06
I work with experienced Sellers and Buyers, First-time Buyers, Non-residents who are investing or relocating, and Investors. Everyone has unique requirements and this is one of the many things what makes my work so interesting! *** Real Estate law and financing of real estate projects has changed significantly in the past few years. You need to be well-informed to make the right decisions and to avoid any potential pitfalls that could end up being very costly, both on an emotional and financial level! I keep abreast of the latest developments in this complex market, and have access to the best experts in related fields. I guide you through all the steps, so you can sell or purchase with complete peace of mind. Happy clients have always been my biggest reward! *** Contact me directly if you're considering selling now or in the future, or if you’re thinking of buying a new property for yourself or as an investment, and discover how to make your Real Estate project happen! Or refer a friend – we’re very generous with people who refer us! I look forward to hearing from you! - Marie Paule Lancup, BSc