Thursday, December 07, 2006

Is my money going to the right places?

My focus lately has been entirely on paying down debt. A big portion of my extra paycheck went there, and as of now, any raises or windfalls are earmarked for my student and car loans.
Ive been wondering if I should be putting some money away now for my retirement. I will of course be repaying myself $20,000 over the next 15 years to pay back the loan I took as part of the new home buyers plan, but should I pay more now?

My original intention was to put all extra money towards my debts until they were paid off, and then apply that monthly amount towards my RRSP. My concern now is that every year I don't pay into my RRSP is a year lost forever. My car loan is at 8% & my student loan is 8.5% but is eligible for a tax credit. Its tough to assume that the market will give me a return better than that.

Based on my brief description, what do you think I should do?

27 Comments:

At 10:58 PM, Anonymous Canadian Capitalist said...

I wouldn't think twice about paying down the debt just because you are paying over 8% on both loans. IMO, you would be hard-pressed to get that kind of post-tax returns anywhere.

 
At 9:29 AM, Blogger Canadian Dream said...

I have to agree with CC on that one. You would be very hard pressed to make over 8% after fees in your RRSP. Stick to getting rid of that debt and then you can take your larger debt free cash flow to your RRSP's.

By the way, check the fine print on your home buyer's plan. I'm fairly certain you have to pay it back in 15 years, not 20. Also there really is no advantage to paying off the home buyer's plan back faster. All you do is lose a portion of your RRSP deduction for that year.

 
At 10:42 AM, Anonymous Canadian Capitalist said...

You can pay back your Home Buyer's Plan as fast as you want. The repayment of the loan *does not* constitute a RRSP contribution. You just elect to specify which part of the contribution is a loan repayment at tax time. I am pretty sure about this because I payed back my HBP loan in a few years.

 
At 11:28 AM, Blogger Canadian Dream said...

CC,

Yes, you’re correct that the loan repayment does not constitute a contribution. I was trying to get at the idea of what advantage would there be on specifying a larger portion of your RRSP for the year as a repayment? For example, if you have $1000/year required repayment, why would you make a $2000/year payment out your total contribution of $5000? You lose that extra $1000 deduction on your tax return.

I suppose the only way that paying it offer faster would be useful is if you expect to a crossover to a higher tax bracket in the near future. That way paying it back faster now could allow you more of a return on you top tax bracket later.

I hope that clears up what I was getting at.

 
At 4:17 PM, Anonymous another_twenty_something said...

Pay down those debts, no doubt. Even at 5-6% I would.

 
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At 4:11 PM, Anonymous every_penny_counts said...

Since you have the choice on where to put your money (invest vs. debt), I would pick debt.

My personal take is that at the moment you'd be buying your RRSP investments at a premium. If the market drops significantly, then I would reevaluate even if you still hold debt.

They say you can't time the market, but the way I see it, if you've got a good alternative to investing, you might as well explore it while the market is high.

I'm curious what others think of this strategy, as its the one that we're following at the moment.

 
At 10:04 PM, Blogger JPostal said...

I am in almost the EXACT same situation as you. I have decided to pay down my debt as quickly as possible before putting money away in a retirement fund or savings account. One exception to this rule is that any money generated through a home-based business that I started will be directed towards an investment of some sort.

Jon
beyoungandrich.blogspot.com

 
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