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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
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