So you filed your taxes on time and have a nice return coming your way. Now what? The age old question arises should I pay down my debt, invest in my retirement, or go wild and get those fancy camo car seats in the window at Northland Auto? Well the answer is a definite - it depends…
Consider these factors
• Type of debt. The higher the interest rate on the debt the more important it is to pay it down as quickly as possible. Remember that all debt is not created equal. So prioritize your debts, pay off high interest rate credit cards first, then move to lines of credits and finally your mortgage.
• Amount of debt. If you are carrying a large amount of high-interest debt, you’ll be paying a lot of interest. Your priority will probably be to pay down this debt. If you owe a smaller amount, or if most of your debt is low interest, like a mortgage then you will have more options. There are several mortgage vs RRSP calculators available. Take some time to play around with the numbers or go in and sit down with your financial planner, they’re weird they like this kind of stuff.
• Your age. The closer you are to retirement, the more important it is to ensure that you have saved enough to support yourself in your retirement. However if you have high interest rate debt you may still want to clear it up before putting more money into your RRSP. It is important to try and enter into retirement mortgage and debt free.
• Your tax bracket. If you are currently in a higher tax bracket, it may be more important for you to reduce the tax you are paying. Keep in mind that RRSP’s are tax deferral plans, not tax avoidance plans. Ideally you want to be withdrawing your RRSP’s when you are in a lower tax bracket, so when you are earning less money. If you think that you will be earning a higher income in retirement (this can happen if you have multiple pensions or if you are self-employed and plan on selling your business) then a tax free savings account might be a better option for you.
• Type of RRSP. There may be benefits to your RRSP that will encourage you to go this way. For example if you have a group RRSP that receives matching contributions from your employer you will want to maximize this contribution.
• Are you a nervous Nellie? Ask yourself what keeps you up at night. And be honest. If it is the idea of debt then pay down your mortgage. If it is the fear of not having enough for your golden years then invest in your retirement.
And remember its okay to have some fun. Just be aware of the true cost. So by all means set aside a bit each month for those seat covers, and enjoy.