Which is smarter? Saving or paying off your debts?

It’s not uncommon for people to have student debt even after years’ of graduation. The cost of a University degree is getting steeper. Tuition have tripled from 1990 to 2017, and students in Ontario are paying the most. Average fees are expected to climb to $7,437 in 2016-2017.

It’s not a surprise many still carry the burden of student debt. But when it comes to deciding
between paying off debt or saving, people seem to struggle with the decision. You will hear many people tell you that investing in an RRSP or a TFSA would be a good idea. But that is only partially true. It is only when the interest rate on your student debt is lower than the investment return you are getting on your investments would investing make more sense.

Let me give you an example: let’s assume you have an extra $500 you can use either to invest in your TFSA or use it to pay down your debt. The TFSA is currently earning 1.75% in investment returns and the interest on the debt is 4.35%. The $500 in your TFSA will give you $87.50 in interest income at the end of the year, but the interest on the debt will cost $217.50. So there is actually a net loss of $130 if you chose to invest instead of paying down the debt.

The conclusion is: if the interest rate on your debts are higher than the investment return you are able to get from your savings, you will be much better off paying down your debts first.

TFSA vs. pay down debt

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