Debt
Should You Pay Off Debt or Invest in Canada?
Paying off debt is a guaranteed return equal to its interest rate. How to compare that with saving or investing, which debts to pay first, and when doing both makes sense.
How do I decide between paying off debt and investing?
Compare the interest rate on the debt with what the money would earn after tax. Paying off a debt saves its interest rate with no risk; investments may earn more or less, and savings interest outside a TFSA or RRSP is taxable.
How much does each kind of debt cost compared with saving?
On $5,000 for one year, a typical card at 20.99% costs far more than today’s best savings rate we track (2.80%) or a 1-year GIC (3.75%) can earn.
| Debt ($5,000, one year) | Example rate | Interest it costs | Same money in savings earns |
|---|---|---|---|
| TopCredit card | 20.99% | $1,049 | $140 |
| Personal loan | 10.00% | $500 | $140 |
| Car loan | 7.00% | $350 | $140 |
| Mortgage | 4.50% | $225 | $140 |
In what order should I tackle things?
1) A small emergency fund so a surprise bill doesn’t go on a card. 2) Any employer RRSP or pension match, which is an immediate return. 3) Credit card and other high-interest debt. 4) Then split between lower-rate debt and investing.
Should I pay down my mortgage or invest?
It depends on your mortgage rate, your tax situation and how comfortable you are with risk. With TFSA or RRSP room, long-term investing may earn more than a mid-single-digit mortgage rate, but with no guarantee; prepaying is a sure saving.
Check your prepayment limits first: most mortgages allow a set amount each year without penalty.
Can I do both?
Yes. Many people pay down high-interest debt aggressively while making small regular contributions to a TFSA or RRSP, which keeps the habit going. Just make sure the card balance is falling every month.
Keep reading
DebtHow to Pay Off Credit Card Debt in CanadaFive ways to pay off credit card debt in Canada, with the math: paying $400 a month on $7,500 across three cards clears it in 1 yr 11 mo; the minimum only would take 24 yrs 10 mo.
BankingHow Much Should Your Emergency Fund Be in Canada?How big an emergency fund should be (3 to 6 months of expenses), where to keep it, and how much interest it can earn: 2.8% at the best online savings account we track versus 0.48% at the big banks on average.- LoansDebt Consolidation Loans in CanadaHow combining debts into one loan works, when it saves money, and the traps that can leave you deeper in debt.
- DebtHow to Pay for the Holidays Without Credit Card Debt in CanadaSet a holiday budget, spread the cost, and if it ends up on your credit card, what it costs to pay off: $1,500 at 20.99% is interest-free if paid in full, but costs $175.95 over 12 months and $1,802.67 on minimum payments.
Official sources and further reading
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