Should I Be Paying Off My Mortgage or Putting Money into My RRSP?

One of the most common questions asked to financial advisors is something along the lines of “should I be paying off my mortgage, or putting money into my RRSP?”  If that’s a question that keeps you up at night, then the answer is almost certainly, “Yes.”  

Putting the comedy aside for a moment, the answer would be “both.”  Let me explain.

If you don’t wonder about this question, then you probably fall into one of two camps.  On one side we have the get-out-of-debt-at-all-cost group.  They hate debt, and unless every available dollar is going to debt reduction, they aren’t happy.  So long as their financial plan supports this line of action, we generally will be supportive.

Then there’s the “get-rich-as-fast-as-possible” crowd.  They simply want to know how to grow their net worth – and if debt is part of that answer, so be it.  The truth is, for most Canadians, the fact that RRSP dollars will save tax today at a rate that is higher than they will have to pay tax when they retire, means the RRSP is mathematically a better solution than paying down debt.

The reality is however that a good chunk of us fall somewhere in between these two groups.  We don’t like debt, but we also want and need to grow our net worth.  We understand that the RRSP is the right answer mathematically, but somehow it doesn’t “feel” like the best solution.

That’s when we recommend doing both.  Allocate additional available dollars to your RRSP, and with the tax refund, pay down debt.  Voila.  It turns out this doesn’t have to be an either/or question after all.   Sleep soundly.

-Bill