After speaking to my mother, and consulting my handy dandy copy of Wealthy Barber (Uhmm….Maren? I still have your copy if you’re looking for it…) I’ve realized that there are WAY too many options to what I should be doing with my money.
Do you all feel this way, particularly around the crunch time which is RSP season? Or as I like to call it…the ARRRRR(matey)SP season?
Here’s a simple dilemma – Do I take my refund of…let’s say $1,000 and pay off some debt that is accumulating interest, or do I maximize my RRSP contributions by borrowing $1,500 and slapping it all into an RRSP so then I get no cash in hand, but a whole lot in the RRSP.
The Wealthy Barber looks at how it’s smarter to put money into an RRSP NOW rather than later as cumulative interest is your friend. If I wait a year, I’ve probably wasted tons of money. So there’s the pro on that scale. The message: Put into an RRSP now!
However, you have to admit that the more immediate urgency of paying off immediate debt looks pretty tempting also. The message: Get rid of that crawling interest! Live a debt free (well, almost debt free for those who are paying friendship tax to my parents for allowing me to be your friend) life!
Let’s also swing over to another thought process which I never really took much interest in until yesterday while talking to Mom – paying down the principle (principal?) on your mortgage.
If you have mortgage, you have to admit that it’s probably the largest pot of money you ever will borrow and the interest is sky-high when you think about it. The rates are not, but the interest you are paying is. Uh, when I say the interest rate is not high, I am talking to the people outside of the early 80s.
So, common sense would dictate that if you have a chance to put money down on your principle, you should! Everyone’s mortgage is different – mine indicates that I am allowed to put money down on the principle as long as it doesn’t break 20% annually. I don’t think there is any fear in reaching 20% of my mortgage anytime soon!
It would be interesting to try and figure out which is better:
A) Putting ‘x’ amount of dollars into an RRSP with…let’s say 10% interest.
Or
B) Putting the same ‘x amount of dollars onto the principle of your mortgage which is at 4%.
Man, I need a financial guru to crunch those numbers. Off the top of my head, I would assume it’s better to put the cash into the RRSP because it has the higher interest. But it doesn’t take into account the sheer vastness of interest being generated by the interest.
So, the question I pose to all of you is this – what’s your favourite money saving tip that you adhere to? I am going to bank my bet on RSPs as they are shoved down our throat every year. That’s not a bad thing, but has anyone favoured alternative methods to saving, like paying down your mortgage? Is it the better route?
Let’s talk about the almighty dollar here.
By the way, the new Nine Inch Nails DVD – Beside You In Time is out today. Pick it up. Matt and I went to see the With Teeth tour a few years back in Montreal and it blew my mind. Literally. I have a bump now in behind my head.
16 replies on “Tax Time”
I vote for the RRSP!
From a former Banker…..invest some….but PAY off DEBT…and dam quick if you can ….THEN SAVE to INVEST once that is done then borrow to invest…
If you are really really truly into reducing tax dollars…..Self employed business will agument tax saving quite nicely….under buisness operation you must be TRYING to make money it does not read that you have to MAKE money every year….hence…a business tax loss ( occasionally ) will help your tax position immensely…
Gary, I enjoy your sage words. I had a feeling that this was the route to go. I just needed to hear it from someone else other than my own head.
I think I shall take the tax return and run with it to the debts I have to pay off. Don Corleone will be pleased!
As for the self-employed business, I couldn’t agree with you more. I used to be my own contractor and the tax savings were surreal! Granted, I didn’t have a pension or anything, but hey, I was young. 😉
for me anyway, putting money into RRSP’s means I can take a tax deduction and therefore get some money back to use to pay down debt, so I agree with the invest some, but also pay off debt theory.
Granted I don’t have a mortgage at this point….so maybe I would lean more heavily towards paying that down if I did…who can say? 😉
Hey Palmer, if you can get an RSP at 10% that’s awesome and I say go for it! BUT, I haven’t seen rates like that! Anyway, if you’re owing in taxes, buy up RSPs so that you break even or get money back. However, if you don’t owe then use your money to pay back your debt as you only get a portion of an RSP back when the entire portion can go to your mortgage.
I was thinking I should be reviewing my whole, “pay off the mortgage as fast as possible” plan, if there was a way to get my money to appreciate at 10%.
Anyone know a normal RRSP interest rate?
That NIN concert was awesome, but I am not a fan of the latest NIN I am hearing on the radio.
My appeal for NIN has decreased proportional to Trent’s increasing age. (or maybe he needed the drugs, who knows)
After reading Ryan’s Blog I was inspired to run out and purchase some RSP’s… Once I got to the bank I was advised against it. Why? She could not advise me to invest in RSP’s when I had unpaid debt. Her reasoning… I am paying prime + 1% interest on my student loans and she could not offer me a saving option with a higher interest rate.
Bottom line, while my money would be working for me in RSP I would be losing in a way because I would still be paying more in interest on my loan…
So what it this magical RSP you have with 10% interest…
Thanks Sammy, good to know
No real magic. Mutual funds could potentially bring that much interest to you. It looks like mutual funds are the way to go.
Interesting points brought up. I especially like how the banker totally denied Sammy which is probably what she should have done! That’s a good banker for you right there. Looking out for your best interests.
with all your recommendations I have decided to take the $1000 that I will get back and pay off some debt. PLUS, I’m thinking of taking the money I put into RRSPs to begin with (the 10% of my salary) and just devoting it to my loans at this point. They aren’t huge so give it six months time, they’ll be paid off. Beauty. Then I can ask these questions again. 😉
Since for various reasons I had a significant chunk of change to invest and taking everything into consideration I decided to put 1/2 on my student loans and 1/2 into RSP’s. It was a win win situation for me.
Wait a second…that goes against everything you just told us. You said that it’s smarter to pay down your debt which has a higher interest rate!
Absolutely!!! BUT, with RSP’s the earlier you start the better…
I will probably be paying some form of debt for the rest of my life. This shouldn’t stop me from investing in my future.
Plus… there is always the off chance that I will catch some 10% interest.
I’m absolutely in agreement with that. You’re likely going to have some kind of debt for the rest of your life…why kill yourself trying to pay it off at the expense of saving for your future?
That’s not to say you shouldn’t be paying it down, just be balanced about it 🙂
Man, here Mike and I thought we were on the right track to pay down our debt last night thanks to his sister’s comments and now she pulls the carpet from underneath us. Now it’s all about BALANCE!
There is Debt and there is investment Debt…. Debt is credit card expenses…. investment debt is mortgage, business investment, some of this could be tax deductible….OK show of hands….how many people who get tax refunds ( for any reason ) use that money to pay down credit card or student loan debts… start a monthly payroll or account deduction for an RSP now
I believe the way to go is use your tax credit to put down on any outstanding debt. Connie and I also contribute monthly to our own RRSP’s which takes the sting out of buying them at the end of the year. We’ve been doing this for a decade and it works fine for us.