OTTAWA (CU)_Canadian households are currently under pressure, amid a record high inflation, the ongoing housing crisis and the economic downturn brought about by the pandemic. Figures published by Statistics Canada show that an average household in the country currently owes $1.77 for every dollar earned. Against this backdrop, experts are warning Canadians of the potential misery they may face during this RRSP season.
Registered retirement savings plans bring big commissions for the industry and marketing campaigns across the industry are in overdrive, trying to convince Canadians to make their contributions before the 1 March deadline. However, some industry experts are of the view that debt-burden consumers should consider taking a pass on their contributions. According to Statistics Canada, mortgage debt takes up the largest portion of household debt, and even once that is put aside, Canadians still owe more than $24,000 per capita in non-mortgage debt. This includes credit card balances, on which interest rates often exceed 20 per cent, as well as student and consumer loans, where interest rates are over 10 per cent.
The reason why RRSPs appeal to Canadians despite mounting household debt is the fact that they provide an opportunity to shelter investments from being taxed until they are withdrawn, which is often in retirement. However, this may not be as beneficial for most Canadians who are burdened with mortgages, credit card bills and other forms of debt. There is no doubt that a dollar invested in paying down high-interest debt always trumps a dollar invested in the market. This is owing to the fact that no investment can guarantee a return of 10 per cent like settling debts at a rate of 10 per cent.
Therefore, if you are torn between making your RRSP contributions and paying down debt, experts recommend tabulating your debt and determining determine the dollar amount of interest compounding each year. Here, it is necessary to keep in mind that a guaranteed investment certificate (GIC) is the only guaranteed, comparable returns on an investment, which pays just about one per cent. If not, consumers are advised to ask a licensed debt councillor, since there may be instances where it make sense to do both, if your debt is under control, although this may depend on an individual’s circumstances.
