Retirement vs Debt Repayment

Background to this post: "A Registered Retirement Savings Plan or RRSP is an account that provides tax benefits for saving for retirement in Canada." This is similar to an IRA in America. In Canada, we have until the end of February to contribute to the previous year's RRSP and claim that amount on the previous year's taxes. For more information, read here.

It is that time of year again when the rush to invest in retirement and save on taxes is being pushed wherever you look, and I am ashamed to admit I got caught up in the excitement. I even feel a little guilty about what I am going to write about here. For more about RRSPs Canadian Capitalist and Nancy (from CC) have a wee summary on how we Canadians are actually doing with our RRSP investing (which partly feeds my guilt ;).

I have been trying very hard to get all our business books complete so I could make sure we had saved enough for taxes, and, if possible, invest in more RRSPs. I envisioned myself rushing in to my financial adviser and declaring confidently that I wanted to purchase thousands of dollars in RRSPs, thereby saving Mr W and I a substantial amount in taxes. I even almost made the call to the adviser this afternoon, until I decided to mull it over this evening, just to be sure it was the right thing to do.

Well, it isn't. The right thing at all. To buy any more RRSPs does not make sense for us. We owe too much debt for goodness sakes, and the income tax savings, while reasonable, do not outweigh the benefits of using any extra money to pay down our debt before the baby arrives in June.

Our goal is to lower our monthly debt payments as much as possible by June so that we can live on a leaner budget while I am not working. Currently, we are on track to lower our payments by $821/month. I estimate that we can take $4,000 which I was considering investing into an RRSP and pay off debt, thus reducing our monthly debt payments another $146, for a total of $967!

I can see that if we had different financial goals that we might make a different decision about investing for retirement vs debt repayment, but with the baby on its way, I think the responsible thing for us to do is to throw money at our debts as much as possible. That way we can develop a new "lean" budget, while at the same time, continuing to make debt snowball payments when we have the extra money.

4 Comments:

  1. Four Pillars said...
    Talk about a voice of reason.

    Great choice - saving taxes is all well and good but debt (especially excessive debt) can have a rather negative effect on any goodwill achieved by a bit of tax deferral...

    Mike
    Wooly Woman said...
    Thanks Mike, in putting it out there I was bracing for someone to see a hole in my logic (and it may happen yet) but I thought if anyone would see it, it might be you and/or Mr Cheap :)
    Canadian Capitalist said...
    Thanks for the link. I think you are making the right choice by paying down the debt. Note that even if you decide to pay down low-interest debt such as a mortgage, it is hardly a no-brainer that contributing to a RRSP instead is the better option.
    krystalatwork said...
    When I was getting myself out of debt, I hardly contributed to my RRSPs at all - I think I was at $25/bi-weekly. You're definitely doing the right thing, especially with a little one on the way. :)

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