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RRSP or Mortgage?

The question of RRSP or Mortgage is the question of Savings or Debt Payment. This series is from 2006, as you can tell by the dating numbers. There is also no mention of the TFSA or meagre interest rates. The low rates since 2009 have muddied the water in these discussions. Saving is no longer a savings account, and Debt is so cheap, that people get perplexed. Still a good question to start with, even today.

One of the questions I hear people talk about is if I can scrounge up an extra $1000 a year, which should I do:

  1. Pay down the mortgage (assuming you can make extra payments on your mortgage) and Pay off Debt
  2. Put Money in the RRSP or TFSA
  3. Both

This is a good question. I’d like to do something in a bit of detail, so over the next couple of days, let’s crunch the numbers and show what this might look like.

So, let’s lay down the ground rules, assuming the following:
1) A 25-year mortgage with 20 years remaining on it at 6.0%
2) A single income to the family of $84,000 per year (vanilla tax return as well, no fancy trusts)
3) An extra $1000 found somewhere each year
4) RRSP growth of 5% per year (very conservative)
5) Savings growth rate of 1%

We’ll crunch the numbers in the three scenarios and then determine the best course of action here.

The Series

  1. RRSP or Mortgage? The question remains: Savings or Debt?
  2. Put it in the Bank – maybe not the bank maybe this should read you invest it
  3. Refund to RRSP as well – Not sure why it was “as well” but putting your refund somewhere instead of blowing it on bottle rockets and moon pies is a good thing.
  4. Refund to the Mortgage as mentioned, it would be a good thing to put this found money into something useful.
  5. RRSP or TFSA is a new question to add to these stories.

Remember, a Mortgage is Debt, and Savings is TFSA, RRSP, RESP or Savings. Oh, and there is no such thing as good debt.

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