Holding both debts and investments at the same time can feel like something of a conundrum.
When you have money tied up in investments and debts that you need to pay off, it might seem silly not to use the money you already have to pay off what you owe.
However, doing this is unlikely to be the smartest way to tackle your debts.
Yes, you might pay off the money you owe, but you also deplete the funds that you have to secure your future at the same time.
You could lose money if you cash out your investments to pay off your debts, and perhaps make it more likely that you will need to borrow money in the future.
In insolvency proceedings, there is protection for investment and retirement savings accounts.
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RRSPs, insurance policies, home equity and other investments follow different rules to allow people to keep some of their hard-earned savings, which will benefit them later in life.
Using these investments to pay off debts can leave them worse off, costing more than the amount of the debt itself.
For example, withdrawing money from an RRSP means paying withholding tax, which can increase the amount of money that you lose substantially.
If you keep that investment instead, it could grow over the years, thanks to the collecting interest.
By losing out on the potential interest, you are at a further disadvantage.
Of course, you might be wondering how you’re going to take care of your debt if you don’t use your investments to do it.
It’s likely that your debt has a higher interest rate than your savings or investments have, so it’s understandable if you’re concerned about getting rid of the debt as soon as possible.
However, there are various ways to deal with debts and avoid cashing in your investments to do so.
You can explore options ranging from debt management plans to bankruptcy and consumer proposals.
Instead of cashing in on your investments, you should consider the other debt relief options that are available to you.
They can save you money by reducing your debt and help you to start getting into a debt-free position.
Your debt could be reduced through consolidation, turning more than one debt into a single payment that is easier to manage.
Or you could explore the options of bankruptcy or filing a consumer proposal if you think that they might be right for your circumstances, particularly if you have a large amount of debt.
Cashing out your investments might seem like a good solution in the short-term.
However, long-term it’s likely going to mean that you are worse off.
If you want to protect your financial future, you should aim to keep your savings and investments.
They can be valuable in retirement or when you might need to use a large sum of money for another reason.
For advice on bankruptcy or consumer proposals, use Bankruptcy Canada to find a Licensed Insolvency Trustee.