Deadline looms: pay off debt or contribute to RRSPs?

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VANCOUVER (NEWS1130) – Fewer of you are contributing to RRSPs as investment levels drop to levels last seen in the 1970s.

News1130 spoke with one advisor who suggests it might be a good idea if you use that money to pay off debt instead.

“We really want people to strive to live within their means,” says Jeff Schwartz, Executive Director of Consolidated Credit Counselling Services of Canada. “Especially the younger generation where they have the ‘I see it, I like it, I buy it’ sense of entitlement. It really gets in the way of saving.”

“The first thing we talk about is putting yourself on a budget. Budget can be an ugly word for some people but, more than anything else, it’s just a snapshot of what your finances look like today,” explains Schwartz. “Once you put that together and start to track where you’re spending your money, some alternatives may come up, allowing you to spend less. You’ll have more available for saving and/or paying down debt.”

For those who insist they will pay off debt with the money left at month end, Schwartz points out that rarely happens.

“You know and I know there is never anything left over at the end of the month,” Schwartz says. “So why not include it as an expense line in your budget, much like you’d do for your car payment or your rent or house payment. Include a line for savings and/or debt repayment. Whatever is left over at the end of the month from there you can spend on things you really want.”

But getting past the pattern of instant gratification can be a tough pattern to break for some people.

“There’s no question about it. Over the last 20 years, it has been engrained in their minds that if someone tells them they need a particular product then they must need that particular product and then they’re going to buy it. If you look beyond 20 years ago, we used to save at the rate of 20 per cent. Now it’s probably less than a quarter of that,” he adds. “What’s happening is where we were saving before, we’re going out and buying these things. Trying to shift that attitude, shift that behaviour is a challenge for us.”

Sometimes it only happens after there’s been a financial crisis leaving people no choice but to change their ways. Schwartz would like to see people approach a  trusted advisor or credit counsellor before that happens. As the February 29 RRSP deadline approaches, they may be able to help you crunch the numbers.

“One of the things we are telling people, especially if they have a lot of credit card debt, is that you are going to get a better rate of return by paying off that debt than you would by contributing to an RRSP. In a perfect world I’d like to tell people to do both but, reality is, we want to make our money work as efficiently as possible for ourselves,” believes Schwartz. “If you look at the numbers, especially given today’s rates  of return, they’re probably lending you the money at a higher rate than you’re going to get from investing with them.”

If that is the case, you’ll be better off paying down the debt first and then thinking about saving and investing.

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