High-income earners might want to consider putting some money toward their debt, while investing the rest, especially in cases in which they’re carrying multiple real estate properties with variable rate mortgages, one advisor recommends.megaflopp/iStockPhoto / Getty Images
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More Canadians are sitting on cash and weighing whether to pay down debt or invest their money in an environment of higher costs of living and higher interest rates.
According to Canadian Imperial Bank of Commerce’s recently published annual Financial Priorities poll, 61 per cent of Canadians are concerned about inflation while 28 per cent are concerned about rising interest rates. Forty-two per cent are also worried about their job security.
Thus, choosing between paying off debt and investing needs to be looked at on an individual basis and there’s no one-size-fits-all approach, says Ida Khajadourian, portfolio manager and investment advisor at Richardson Wealth Ltd. in Toronto.
She notes while some clients are worried about making ends meet and might want to stash away a few thousand dollars in an emergency fund, other clients may have had a good year – especially those holding U.S. equities, small caps or tech stocks.
“Certain positions outperformed incredibly well,” Ms. Khajadourian says. “As a result, many are now asking themselves, ‘Where do I deploy that cash?’”
Here are six strategies to consider:
1. Assess the financial situation
High-income earners might want to consider putting some money toward their debt, while investing the rest, especially in cases in which they’re carrying multiple real estate properties with variable rate mortgages, says Wes Ashton, co-founder and senior portfolio manager at Harbourfront Wealth Management Inc. in Vancouver.
For lower-income earners or those who may face layoffs, Ms. Khajadourian urges them to pay off as much debt as possible. “It makes sense to put money toward that debt,” she says.
2. Factor in personal preferences
“Many of us were brought up to fear debt,” says Patrick Caffrey, a financial advisor with LT Wealth Management Partners at Raymond James Ltd. in Vancouver.
Others are more comfortable owing money. Mr. Caffrey says if debt is keeping someone up at night, it needs to be addressed, even if the individual can afford to carry it.
“Personal feelings matter,” he says. “Mental stress impacts a lot of Canadians.”
3. Triage debt
If someone is carrying most of their debt on credit cards, that debt should be priority number one, Mr. Ashton says, as the interest rates on credit cards are radically higher than other loans. Or, for example, if a line of credit has a rate of eight per cent, it isn’t wise to invest those savings in a GIC that will pay four per cent interest.
However, if they have a mortgage with a rate of three to four per cent that’s not up for renewal, “it makes sense to invest that money,” rather than pay down the mortgage, he says.
In cases in which someone has significant balances on multiple credit cards, Mr. Ashton recommends they should “pay the small ones down first.” Paying off some debt in full will act as a catalyst to pay off more debt in the future.
4. Assess what you’re carrying
Ms. Khajadourian says some of her higher-net-worth clients utilized the low interest rates of the past several years to buy real estate, such as recreational properties or farmland. With rates now up significantly, they’re looking to make payments on those loans, often using the profits they’ve made on investments to make those payments.
“It’s prudent to reduce that debt now,” she says.
5. Weighing RRSP contributions
“RRSPs are most beneficial for high-income earners,” Mr. Caffrey says, noting that those contributions defer tax and help put those high-income earners in a lower tax bracket at retirement.
However, for those earning $50,000, for example, RRSPs are not especially beneficial, as their tax bracket at retirement will not be much different than the one they’re in now. For those individuals, investing in a tax-free savings account might be a good tax-free option, he says.
6. Using RRSP contributions strategically
With those individuals who have some money to invest, putting it in an RRSP can help lead to paying off debt as well, Mr. Ashton says. “Use your refund to either [reinvest] back into your RRSP [for a bigger tax break next year] or knock down that debt,” he says.
Ms. Khajadourian says it’s important to discuss the best approach with a financial advisor before embarking on any strategy. “They can try to balance these investments and [allocate them] where it makes sense.”
She adds paying off debt shouldn’t always be the focal point. “It’s just one aspect of the overall financial discussion. Be strategic.”
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