In Canada, the average debt to income ratio is around 178%.
What that means is for every dollar that a Canadian earns, that person will typically owe approximately $1.78.
The thing about debt is that it’s not an unusual thing to have; most people will owe some money.
But, debt can become a problem when a lot of it builds up, and you cannot afford to keep up with your repayments.
If you’re looking at ways to keep your debt under control and get it paid off quicker, you’ve likely come across various options that could suit your needs.
One way to pay off your debts smarter and put aside some money for your retirement is by opting for a balanced approach and investing in RRSPs.
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What is an RRSP?
In case you didn’t know, an RRSP stands for Registered Retirement Savings Plan and shares many features with the 401(k) plans in the United States.
Simply put, an RRSP is a way for both employees and the self-employed to save and grow money for their retirement.
There are two tax advantages to having an RRSP.
First of all, all contribution deductions will save people taxes.
For example, let’s say you are on a 40% tax rate.
For every $100 that you contribute, you will save $40 in taxes.
The second tax advantage is RRSPs are exempt from capital gains, dividend and income taxes.
Canadians are encouraged to save for their retirement using an RRSP instead of relying on the state-funded pension plan.
How to use a balanced approach
Many Canadians will have credit card debts.
The most significant disadvantage to such debts is the money you owe gets compounded due to the interest charged.
If you only ever make the minimum repayments, it could potentially take decades to repay the balance.
A balanced approach to paying off credit cards and other debts while investing in your RRSP makes financial sense.
That’s because you can offset the tax savings against clearing down your debts faster.
Plus, the other distinct advantage is you start building up a savings pot for your financial future.
After all, once you reach retirement age, it’s unlikely you’ll still want to work for a living.
Your employer may even match your RRSP contributions.
If that’s a benefit available to you, it makes sense to take advantage of that so you can boost your RRSP fund even more.
So, how does it all work?
In a nutshell, you use the tax savings from contributing to your RRSP to pay off your debts.
Going by the earlier example of the 40% tax rate, if you only contributed $100 to your RRSP, you can use the $40 tax saving towards debt payments.
Need help dealing with your debts?
There’s no denying that the balanced approach to paying off debts and investing in your RRSP makes financial sense.
If you’re struggling to make sense of your debts and want to seek further ways to cut down how much you owe, contact us today.
Our team of friendly professionals can advise you on the best methods of reducing your debts and help to find you a solution that fits in with a balanced approach to RRSP investing.
Contact us today for a no-risk, no-obligation chat on (877) 879-4770.
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