When you should NOT invest in an RRSP

Eva Wong, Borrowell

By Eva Wong, co-founder, Borrowell

As the March 1 deadline looms for contributions  to a Registered Retirement Savings Plan (RRSP) this year, many Canadians will be thinking about how much they should contribute to their retirement savings.

Perhaps surprisingly, for many, that number should be zero.

That’s because 30 to 40% of Canadians carry a balance on their credit cards, where many of them are paying 19.9% interest and even more.

To pay 19.9% interest on money that is borrowed, and invest money in an RRSP where it would only earn a return of 6 or 7%, doesn’t make sense.

Let’s say someone had $5,000 to either pay down their credit card or invest in their RRSP, and they chose to put that money into an RRSP. They would pay $995 in credit card interest and earn only $300 in return on their investment, assuming a 6% return

There may be situations where if they had the discipline to use their tax refund to pay off some of the balance on their credit card, it could work out evenly — but that assumes a high enough income to get a significant tax refund and the discipline to use the tax refund to pay off debt.

Paying down debt is a guaranteed return

The other reason it’s a good idea to tackle high-interest debt like credit-card balances is because that return is guaranteed: it’s like a guaranteed 19.9% return, compared to the uncertainty around the return of most investments. If someone called you with an investment opportunity that guaranteed a 20% return on investment with zero risk, you would take that bet every day!

So the hottest investment tip this season is to pay off your credit-card balance.

As always, it’s best to consult with a professional who understands your unique personal situation, but for most people, paying off credit card debt is a better choice than investing in an RRSP.

Eva Wong is co-founder and COO of Borrowell, a fintech lender that offers fast, fair, and friendly personal loans, and provides Equifax credit scores for free. With a background in management consulting and business development, she has worked at Maple Leaf Foods, Oliver Wyman and a number of not-for-profit organizations. Eva has degrees from Queen’s School of Business and Harvard University. She enjoys food blogs and baking projects with her two kids.





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