Picking priorities: Debt repayment vs. saving

When to live with debt and when not to

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Canadians are more likely to prioritize debt repayment over saving for long-term goals, a new Edward Jones commissioned survey has found.

When receiving money in a lump sum like a tax return, poll results show that nearly one-in-three Canadians planned to use this to pay down debt, while fewer than one-in-10 planned to use that money to save for retirement.

Prudent rationale, right? Not necessarily. Believe it or not, there are times when it actually makes sense to put off debt in favour of saving. This chart can help you decide whether to pay down debt or invest for the future. As always, be sure to check with a financial planner to make sure you’re following the path that’s best for you. 


Scenario Pay down debt Save for the future
You graduated with student debt less than 6 months ago ✓ Although interest does accumulate during this period, you don't have to make payments on your debt for the first 6 months after graduation. Save your money while you search for a job. You may need to relocate or buy a car to get to work
You graduated more than 6 months ago and do not qualify for student loan forgiveness ✓ Work multiple part-time jobs if you have to but definately start chipping away at this debt as it will grow over time
You have an outstanding balance on your credit card ✓ Guaranteed double-digit returns don't exist so you're better off paying off your credit card balance
You have a car loan ✓ It almost never pays to have a lean on depreciating asset
You have low, fixed rate mortgage ✓ If you have a reasonable size mortgage and can stomach it, pay only the minimum on your mortgage and invest the rest in a balanced portfolio. If you have a half-million dollar mortgage however, it may be wise to accelerate payments at least a little bit as rates will invariably rise
You want to be mortgage-free in 10 years time ✓ If your strategy is to pay down debt and then get serious about saving later in life, max out your mortgage pre-payment option every year
You have a line of credit ✓ These are best suited for emergency situations so it's best to pay them off fast
You have an RRSP loan ✓ Remember that juicy tax refund you got as a direct result of your taking out an RRSP loan? Time to make good on your promise and repay the loan

 
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One comment on “Picking priorities: Debt repayment vs. saving

  1. The only way to compare these decisions is to look at the interest rates. If cost of borrowing is less than rate of return on savings — then save! Otherwise pay down the debt.

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