Pay down debt vs tax-time savings? : Learn First

It’s worth learning more before deciding

BY TOBAN DE ROOY FINANCIAL PLANNER AT IG WEALTH MANAGEMENT

Many folks are heavily in debt right now – to credit cards, lines of credit and car loans, and on their mortgages and student loans. Should those of us who are carrying debt invest in RRSPs, TFSAs, and RESPs by March 1, or does it make more sense to just pay down debt?

Local experts weigh in.

Firstly, there is no substitute for professional legal, tax and/or financial planning advice that is tailored specifically to you.

This is a rather difficult answer to give in ‘generalities’ as it is not just a ‘this or that’ answer. From a purely numbers perspective you can say:

“Pay off your credit cards first, that will yield you a 19.99% rate of return, based on the interest savings.”

“Investing in a RESP for your kids will yield up to 20% in grants (up to certain limits).”

“Investing in RSPs will yield tax credits at the taxpayers Marginal Tax Rate (which could be significant).”

But this isn’t just about the ‘numbers’.

There is a greater need to consider  the entire financial picture and lifestyle or ‘life’ of the ‘client’/taxpayer. Everything from psychology and behavioural habits regarding money, spending and savings, to overall debt load, age of the clients, age of the kids, risk management, goals, investment assets, the list could/should go on ad nauseam.

When you start the question with ‘many folks are heavily in debt right now,’ the first qualifying questions would be: How did the ‘client’ come to amass this debt? Is it lifestyle or ‘life’? Are the Line of Credit and credit cards full because of spending habits? Inflation? Job loss? Injury? There can be a lot of potential causes.

However, for the most part, when there are large amounts of debt, it comes down to minimizing interest expenses, and changing habits.

The short answer is pay off high interest debt, save for your kid’s education, and proper risk management. But move the credit card debt to the line of credit, save the interest rate differential, and move any savings onto the line of credit – try to lessen the overall interest rate the taxpayer/client is paying on their revolving debt.

But, that is entirely my opinion.

And, like everyone else, my financial life and the advice/decisions that are made within, have their biases based on psychology, learned behaviours with money, life experience, education, values, and the goals of my family’s financial plan.

It simply comes down to our habits with money.

We can stack up great, detailed calculations and tell you exactly what choice you should make. But it would be based on a snapshot at a specific moment in time.

Our financial lives evolve in parallel with the rest of us, a financial plan should never have a ‘final’ stamp on it – always in draft, just like our lives, tomorrow isn’t written yet

To truly provide advice, the right advice, there are a lot of variables that need to be considered.

Our finances and money influence every single aspect of our lives.

Why would we not want to master it?

Really, what we need is greater financial literacy and advocacy. Financial planning for all!

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