I have a bit of extra money that I would like to invest, however I am still carrying some debt. Should I be putting my money into an RRSP, a TFSA or should I just focus on paying off my debt?
Gillian D. emailed us at expert@sweetspot.ca, and RBC financial expert Laurie Anne Davies, answered;
It’s wise to consider your options on how to make extra money work best for you. A financial plan is key, because it will not only allow you to make the most of your financial situation, it will provide you with peace of mind, knowing that your investments are on track to achieve your goals, whatever they may be.
Financial planning cannot be taken with a cookie cutter approach and a lot of variables come into play in order to provide the advice that is right for each individual's personal situation. For example:
- If someone has credit card debt and is thinking of opening a TFSA, given credit cards charge high interest, it might be best to pay off the debt.
- If they have a mortgage and are thinking about a TFSA, since a mortgage provides equity and usually is a lower interest rate, a TFSA might be the right choice.
Reducing debt: Generally the best strategy is to start reducing high-interest debt (such as credit card), then focus on lower-interest debt (like a mortgage).
Start by thinking about your priorities and what you want to achieve, then a professional who understands your short and long term goals can help.
- Are you saving for a specific purpose? (For example, a house, child's education or retirement)
- What kind of performance do you expect from your investments?
- What type of risk is suitable for your personal situation?
Next, start to think about your time horizon.
- When do you want to realize the benefits of your investments?
- How long will it be before you need to draw on your invested capital or access your investment earning?
This is where professional advice can be valuable. A professional can help you build, manage and maintain your portfolio and determine the most appropriate investment account to meet your needs, whether that is a RRSP or TFSA or something else.
As head of retirement strategies at RBC, Lee Anne Davies leads the strategic direction, development and implementation of Your Future By Design, RBC’s distinctive approach to helping clients create a blueprint for a successful lifestyle and financial plan for retirement.
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