If you haven’t already, it’s important to start a Registered Retirement Savings Plan (RRSP), and the best time to start is now!
An RRSP is an account where you can put money aside for retirement, with the option to invest that money and watch it grow.
Maybe you’re thinking, “I’m in debt! What does that have to do with me?”
Well, guess what! You can still start an RRSP, even with existing debt.
Hayley Smyth, Personal Banking Manager with Cambrian Credit Union, has a few pointers for how to navigate RRSPs while managing debt repayments.
Here are a few things you can do:
Just grit your teeth and do it!
“Always have a budget. Start with your required liabilities: your mortgage, loans, minimum credit card payments, bills that have to be paid monthly,” says Hayley. “Then, list your regular expenses like groceries. From there, decide where you want the remaining funds to go.”
Know how much money you have, where it needs to go, and where you want it to go. Knowing how much you have extra per month and where your priorities lie will help you figure out what to do with your extra funds.
When choosing the amounts to go between RRSP contributions and debt payments, the kind of debt you have matters. Understanding the kinds of debt will help you figure out what to prioritize.
Installment loans, like student loans, car loans, or mortgages, have a set payment and expected end date and usually have lower interest rates. Revolving debts, such as credit cards or lines of credit, have no end date and often a higher interest rate.
When you contribute to an RRSP, that money is not usually meant for spending right away—it’s for retirement.
“RRSPs aren’t meant to be touched often,” says Hayley, “If the funds are in a variable savings account, you can pull them anytime, but with RRSPs you’ll pay taxes to take money out.”
So, if you have big upcoming expenses, like buying a car or going on vacation, then contributing more to a variable savings account than to an RRSP would make sense for now.
But, at the same time, don’t let looming expenses keep you from making RRSP contributions! Always have a plan for your RRSP, whether you’re contributing more now or later.
Note: An exception is when buying your first home. You can withdraw funds from an RRSP to help pay for a house without being taxed. Read more about that here.
Hayley suggests looking at what your tax return would be with or without RRSP contributions. RRSPs don’t always create a large tax refund, especially if you are already contributing to pensions. Although it is a good idea to plan ahead with contributing to an RRSP, a small tax refund might not justify locking away funds.
Read more about how RRSPs work with taxes here.
“Once your debt is paid off, you need to re-budget your finances,” says Hayley. “Know your gross income, your net income, and your expenditures.”
When a debt is finally eliminated:
This keeps your financial plan moving forward instead of stalling once the debt is gone.
“The biggest mistake people make is to assume they know everything about their finances,” says Hayley. “My sister is a scientist, so she knows everything about science. I know everything about personal mortgages. Everyone has their own area of expertise.”
Tip: Don’t rely on Google. Ask professionals for help!
Cambrian’s Personal Banking Advisors, like Hayley, and Wealth Advisors can guide members through budgeting, debts, savings options, and retirement planning.
The first step could be booking a meeting. Don’t be shy!
We would be happy to discuss your unique situation with you.
Our goal is to make complex topics like this one, simple.
