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It depends on your debts and your financial discipline.
Who pays his debts gets richer, the saying goes. This is true, especially when you have a tight budget. Before making a decision, ask yourself the following two questions :
- What are my debts?
- What is the interest rate that I pay for each debt?
You have understood : there is less good debt than others! For example, if you have credit card balances outstanding, especially those of credit cards from department stores, pay them as soon as possible. This is ” bad debt “. We talk about annual interest rates are often prohibitive, of nearly 20%. Attacking you then your lines of credit, even if the rate is lower.
By contrast, there is “good debt”, in : student loan, mortgage, debt to start a business. They allow you to take advantage of it in the future. You can, if you have the means, continue to repay it while contributing to your RRSP. You must, however, respect your budget and have cash for emergencies.
Of course, if you are unable to sleep because all of your monthly payments represent a pretty sum, saving can wait. However, if a large part of your debts are loans fixed repay in full or on an expedited basis could result in penalties. In this case, take your evil in patience and contribute to your RRSP at least the equivalent of those penalties…
Another way to decide is to compare the interest you pay on your loans and what you realize on your investments. For example, if a car loan costs 7% and that your investments within your RRSP displayed an average annual yield of 5% for three years, you can consider paying your auto loan in full or in an accelerated manner. This logic applies to all of your loans.
You can also automatically transfer to your RRSP a small amount (25 $, 50 $, 100 $) at each payroll, regardless of your decision. It is without pain, finally.
You just win the lotto, inherit, get a juicy bonus from your employer? It may be fiscally beneficial to contribute to your RRSP if you have unused contribution room) before you repay your debts. If it is a very large amount, pay off all your debts (to hell with the penalty!) AND contribute to your RRSP.
Except in cases of force majeure, avoid making withdrawals from your RRSP to pay debt. The amounts withdrawn will be taxed at the source at the maximum rate and will be added to your taxable income, and you lose the contribution room equivalents.
If the rate of your mortgage line of credit is similar to the average annual yield of your investments, you can consolidate all your loans. But it will not take on more debt afterwards and avoid to stretch the debt over too many years (discipline!).
As with any project, a retirement, it has to be planned!