Is It Time to Pay off Your Debts or to Make an Investment?

Posted by on Thursday, October 11th, 2012 at 7:34pm.

You're worried about your retirement and want to take your best step forward to make sure that you can retire in comfort with the least financial stress possible. The question is whether you should be directing your money into investments or putting it towards paying off your debts. The answer is clear right now - take the money and put it towards your debt payments. Returns on investments are low right now unless you choose something that carries a high risk.

When you consider the high interest rate that you're paying on your credit card debt, or most other debts, you'll be further ahead putting your money towards paying them off. Currently safe investments like Guaranteed Investment Certificates and Canada Bonds are only paying out approximately 2% while the interest rate on your credit card may be as high as 30%.

Paying off your mortgage debt

The same applies to paying your mortgage debt off as quickly as possible. Every penny that you put into your home loan will help to reduce interest payments in the future by shortening the period of amortization. As well, you'll be building up equity in the meantime that will appreciate as time goes by. This appreciation won't be subject to tax if you're living in the home as your principal residence.

While others are scrambling to get their RRSPs during tax season, you may be better off taking the money and putting it towards your debt. Even though you'll be able to deduct the contributions you'll end up paying this tax when it's time to withdraw the RRSPs during your retirement. There are isolated cases, however, when an RRSP contribution would be a better decision than making a payment to one of your debts.

Debt and your retirement

TD Bank has recently conducted a survey that found that 44% of the respondents were planning on carrying their debt right through into retirement. This debt will cut into their savings in no time and the retiree will just have to watch in amazement as his nest egg disintegrates before his very eyes.

With all of the advertising being done for retirement investments it's hard to resist the temptation to buy them instead of taking your extra money to pay off your debt. In most cases you’ll be far better off paying off your debt than putting your money towards an investment. If you have any questions about this new money concept you can talk to your financial planner or an accountant. Sit down and have him show you the final numbers. This concept could actually be the make/ break point of your financial success or distress.

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