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Pay down debt before you invest has been a common sense financial strategy for a long time. But these days, the pay down debt or invest debate isn’t as clear cut as it used to be.
Ever since people started borrowing money centuries ago, they also started worrying about being in debt. For most people, being debt free and in control of your income is good for the mind, the soul and the wallet. However, what has changed these days are ultra-low interest rates and a robust capital market where one has the potential to make more money investing than paying down debt.
There are many reasons why paying down debt first makes sense. It delivers a risk-free, after-tax return. This is especially true when you consider costly, high-interest credit card debt. The more you put towards paying off debt, the more you save in interest costs and that can equal more money in your pocket.
It can also have a profound emotional impact and may lead to poor psychological health.
Paying off credit card debt first makes the most sense, because rates are often high and so are the health consequences. But when it comes to mortgage debt, the question becomes harder to answer. With some people paying below three-per-cent fixed and variable rates these days, the cost of carrying this type of debt is far lower than it has been in the past.
In other words, if your debt is affordable, putting extra cash towards an investment with the potential for a higher return may be the better option, especially if you have contribution room available in a tax-preferred investment account such as a Registered Retirement Savings Plan or Tax-Free Savings Account.
With today’s low rates, the choice isn’t as obvious as it used to be, so talk to your professional advisor who has a good overall understanding of your financial situation and can help you make the decision that’s right for you.
Jeff Somers, BA, RRC, CFP, works at Investors Group in Charlottetown. This column is written and published by IG Wealth Management as a general source of information only. It is not intended as a solicitation to buy or sell specific investments or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Wealth Management Consultant.