Trying to decide whether to pay down debt or invest? This is a very individual decision depending on your situation.
Walton Financial Group has some suggestions as to how to approach your debt reduction and investment strategies
Choosing between paying off debt and investing needs to be looked at on an individual basis and there’s no one-size-fits-all approach, says the team at Walton Financial Group in Barrie, Ontario.
While some clients are worried about making ends meet and might want to stash away a few thousand dollars in an emergency fund, other clients may have had a good year –
Here are several strategies to consider:
1. Assess your financial situation
High-income earners might want to consider putting some money toward their debt, while investing the rest, especially in cases in which they’re carrying multiple real estate properties with variable-rate mortgages.
For lower-income earners or those who may face layoffs, it makes sense to pay off as much debt as possible.
2. Factor in personal preferences
Some people are fearful of debt while others are more comfortable owing money.
3. Triage your debt
If someone is carrying most of their debt on credit cards, that debt should be priority number one as the interest rates on credit cards are radically higher than other loans. Or, for example, if a line of credit has a rate of eight percent, it isn’t wise to invest those savings in a GIC that will pay four percent interest.
However, if you have a mortgage with a rate of three to four percent that’s not up for renewal, it makes sense to invest that money, rather than pay down the mortgage.
4. Weighing RRSP contributions
RRSPs are most beneficial for high-income earners suggests Walton noting that those contributions defer tax and help put those high-income earners in a lower tax bracket at retirement.
However, for those earning $50,000, for example, RRSPs are not especially beneficial, as their tax bracket at retirement will not be much different than the one they’re in now. For those individuals, investing in a tax-free savings account might be a good tax-free option.
5. Using RRSP contributions strategically
With those individuals who have some money to invest, putting it in an RRSP can help lead to paying off debt. Use your refund to either [reinvest] back into your RRSP [for a bigger tax break next year] or knock down that debt.
Brad Walton of Walton Financial Group says it’s important to discuss the best approach with a trusted financial advisor before embarking on any strategy.
Give Walton Financial Group a call to discuss your debt reduction and investment plans and make sure that you approach your planning strategically.
