We are in the height of RRSP season. The final date to contribute to RRSP for this year is on February 29, 2016. However, if your focus is paying down debt aggressively, you may feel like it’s not a priority to contribute to RRSP. For some, it may even feel like directing your money away from your debt may be keeping you from reaching your goal.
Know this though: the best way to create a sound financial future is to address both sides of your balance sheet. Too much debt is financially damaging, but too little savings can actually create more debt down the road.
If you are trying to sort out this balance between paying debt and saving, you’re not alone, according to a recent RBC Financial Independence in Retirement poll.
Highlights of the poll show that:
- 54 percent of respondents indicated that saving for retirement is their priority
- 42 percent placed paying down debt on top of their list
- Three quarters of Canadians find the greatest challenge is balancing saving for retirement and paying down debt.
I don’t have enough money for both
“While you are wise to attack high-interest debt first, contributing to your RRSP is easier than you might think. It’s not so much about quantity, it’s about setting up the habit and getting going. You may not think a small contribution is worthwhile, but it is,” says Jeff Schwartz, executive director at the Consolidated Credit Counseling Services of Canada.
“Start by looking at your budget. Are there a few areas in which you can generate even a little extra cash- either monthly or as a lump sum right now? Every little bit counts.”
Get the cycle going
Let’s say that you have earmarked a certain amount of money every month to go towards paying down your debts, with an eye to getting them to disappear as soon as possible.
Over the coming year, what if you scaled that amount slightly and allocated some of that towards your RRSP? Not only are you getting that RRSP to grow, you are eligible for a tax credit for your contribution- which may result in a tax refund, depending on your situation.
What if you took that tax refund and applied it to your debt? Fast forward to one year from now: you’ve got the beginnings of a tidy nest egg and you’ve whittled away at your debt. Can you say win-win?
Don’t wait until the last minute
Human nature dictates that you wait until the last minute for everything. This holds particularly true when it comes to RRSP contributions.
If you wait until the deadline, you might be scrambling to scrounge up cash. If you plan ahead for the year to come and include automatic monthly RRSP contributions-either through your employer or through your bank, it becomes part of your monthly budgeting. When it is part of your financial routine, you’re more likely able to stick to the plan.
As the debt dissolves
Over time, if you keep at your debt diligently, it is going to disappear. Once that happens, keep making your monthly payments, but instead of paying the credit card company, pay yourself with larger RRSP contributions.
Do you need help attacking your debt and building up some savings at the same time? We can help! Call one of our trained credit counsellors or check out our free online debt analysis tool to get started.