This was written before the dawn of the TFSA. The TFSA has become the de facto first saving mechanism for most Canadiens. The RRSP is still prominent for many folks, but should it be? My RRSP money is no longer as important, given my pension. Everyone needs to figure out which is the best savings vehicle for them.
After Mortgage worksheet calculators, the next question is which is more important to pay into your Retirement Fund (RRSP or 401k) or pay off your Mortgage (and debts)? Since the U.S. model has tax implications for paying off your Mortgage, and I do not wish to mention the Smith Manoeuvre for Canada, let’s concentrate on the Canadian model.
In many cases, this question is of no real value since many people can only afford to pay for their living expenses and do not have free money to pay for their retirement or speed up their debt payments. For those folks, the job is hard enough. Still, I encourage you to find savings somewhere and do something more with your found money than “party” with it.
Arguments For Paying Down Mortgage
Some of the reasons I have heard and espouse for paying down your Mortgage first would be:
- Carrying debt is dangerous. Removal of debt is the most important financial task you have.
- Once your mortgage is paid off, you can start saving for retirement, knowing that you will not have that expense in your golden years.
- Paying off your Mortgage is like investing in Real Estate, which is usually a good investment.
- I don’t view my house as an investment. I view it as an essential of life, as in shelter is somewhere you live, not where you invest.
- You are increasing your liquidity by having more credit available in case of emergencies.
Arguments For Retirement Money
The reasons to put money in your retirement funds are many as well:
- Retirement saving is like Golf, the sooner you start doing it the better you will be at it later. Money saved at age twenty has a much longer time to double than money invested at age 50.
- With current interest rates, you can invest your money and make more with it, than if you pay off your Mortgage (typical Mortgage rate is about 6% whereas the Stock Market’s normal rate of return is about 7%, so you are ahead in the game).
- You get tax money back for putting money in your RRSP, but you don’t if you put that same money into your mortgage. This is important since the major expense for most of us, is still taxes.
- Maybe you can get free banking with your mortgage ? I mean if you continue to carry debt, maybe your bank will waive your service fees.
This wasn’t even an option when I initially wrote this, but now it is. A TFSA might be a better choice for your savings, something to think about.
That would be telling. I’ll write some more about this tomorrow, but I am open to discussion, pointers to good articles, and any other comments folks might have about what the right choice for them was and is (remember at the end of this, it is a personal choice on your part).
- RRSP or Mortgage? The question remains: Savings or Debt?
- Put it in the Bank – maybe not the bank maybe this should read you invest it
- 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.
- Refund to the Mortgage as mentioned, it would be a good thing to put this found money into something useful.
- 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.