RRSP vs. TFSA vs. mortgage vs. credit card debt

Three financial advisers discuss how Canadians can pay down debt, take care of their mortgage, and put money away for future emergencies.

For young families who have a limited amount of money to invest each year — and they are considering their RRSPs, paying down their mortgage, putting money aside that they can access for emergencies, and putting money into an RESP for their children — what would you advise?

Judith Cane responds:

The big thing for me is to make sure that they get rid of their bad debt — which I consider credit-card debt to be. I would still insist that they put some kind of savings plan together, whether it's an RRSP or whether it's just putting money into a savings account where you don't take the money out.

If all they have is $500 of extra money a month, then I would say you put $400 against what your debt is, and you put $100 a month into some kind of savings plan. The psychology of money — if you have someone who is putting money towards their debt, you do see their debt getting lower but the downward motion is not psychologically always great because you're seeing this sort of downward motion, even if it is your debt. It's always good to have some kind of upward motion at the same time.

It's always important to have an emergency fund. The amount depends on age and how much money you have and all that kind of stuff, what your expenses are, but I absolutely believe everybody needs an emergency fund.

I think that people are going credit-crazy with credit cards and lines of credit, and I think we need to go back to saving for things if we want to buy them. It's not wrong to want a big-screen TV, but I'm of the mind that you should save the money up first and then go in and buy the TV. TFSAs, I'm hoping, are going to spur on some sort of mentality, like our parents' mentality, where you didn't buy something unless you had the money for it. I'm kind of hoping with these tax-free savings accounts that people will actually do something with it — that's my hope.

Sandra Foster responds:

We want to do it all, and if you're trying to be a good financial citizen, you come to believe you should be doing it all. Life's not like that. You can't do it all — every family has to set priorities. 

The first thing I think is that you need to make sure that your family can keep your roof over their head, so to me that's having some money for emergencies, so you can put that into the TFSA up to $5,000. I don't know how much each individual family would need, but you can use the TFSA for your personal emergency amount. And then pay down the non-deductible debt with the highest interest rate. Get rid of those credit cards.

If you're in a high tax bracket, it makes sense to contribute to your RRSP, use some of that tax savings to pay down the non-deductible debt.

Don't get preoccupied trying to pay down your mortgage too quickly, says financial adviser Sandra Foster.
One thing I see people doing is trying to pay their mortgage off fast, and this is where people end up being house poor. It may be a really good idea to get rid of your mortgage debt and pay off your mortgage as fast as possible, but that's where I see people getting strapped the most. They seem to think they need to pay it off as fast as possible.  I don't believe in a 40-year mortgage but monthly, 25 years [is acceptable]. Make sure it's what you can afford to pay, buy less house if necessary.

One thing people don't know about, and don't use effectively is the Deduction at Source form. If you're contributing to your RRSP on a regular basis, say through a financial adviser, they can fill out this form and it can be filed with your employer. They can take the tax adjustment off your regular pay so you don't have to wait for the tax savings at the end of the year.


What you've done when you do that is you've given the government a loan, an interest-free loan for the better part of a year. Why don't you get your tax money back as you go along? It frees up a little bit of cash so you can pay down some of your debt or … put some money into an RESP so you get your tax savings right away. You shouldn't get a big tax savings at the end of the year. People like to see that big cheque but the less money you get back the better tax planning you've done.

John Kason responds:

How do I do it all with the same money? Mortgage rates are low, guaranteed investment rates are also low, so paying down debt is always potentially a good option. Debt reduction is always a priority. I always recommend more debt reduction than anything else. However, I think a person can potentially do more than one option by trying to be more effective with the limited money they have.

Paying down credit-card debt has to be a top priority in bringing one's finances in line, financial advisers suggest. ((Bill Sikes/Associated Press))
A young family, they make their RRSP contribution, you get a tax return. With that tax return, you can pay down debt or you can put it into the RESP. Paying down debt has to be a priority if they have a high debt servicing ratio. Any investing should not be thought until they've got their debt servicing under control. If you've got more payments than you can afford, you've got too much debt. If your only payment is a mortgage, then you've got some more flexibility versus if you've got a mortgage, a student loan and a car loan like the majority of young families. If you're with the majority of young families, probably you should use your extra money to reduce debt first — debt reduction being vehicle and credit-card loans first before even your mortgage — get rid of all your crap debt.

If you have excess amounts of debt, pay down debt.  It's a non-option because we're in a time when banks are lending less money. You don't want to be in a position when the banks are unwilling to lend you money in the future, i.e. renewing mortgages, etc.

If you have a well-funded government or a well-funded company pension, tax-free savings accounts in the long-term are going to have more application to people, more flexibility. That's probably a little bit against the grain of usual advice.

I'm not totally convinced of [big RRSP portfolios], because young professionals are having different expenses and different calls on their money — housing is more expensive, they're changing jobs more frequently than our predecessors, so the tax-free savings account provides us with a place where we can store or invest money, not get taxed on it and have no penalty when we withdraw it.

I really like these tax-free savings accounts. I think the application of these for long-term investors for people who continually fund them — these are going to be fantastic ways of either funding future RRSP contributions, funding lifestyle, funding RESPs and ultimately funding debt-reduction, because you have a source of income that's tax-free.