Skip to main content

Inside the Market People are vastly more interested in paying down debt than investing. Is this the right approach?

It looks like Canadians have come to a consensus in answering the perennial personal finance question of whether to pay down debt or invest.

Debt wins, by a kilometre. A recent survey by Manulife Bank asked 2,003 people this question: “If you were given an extra $1,000 a month, what would you be most likely to use it for?” Fifty-two per cent of survey participants said paying off debt or a mortgage, while 30 per cent picked saving. Travelling was the next most popular choice at 22 per cent, followed by investing at 16 per cent. Lesser choices included buying presents for family or themselves and home renovations. Total answers add up to more than 100 because participants were allowed to make two choices.

I have urged people to pay down their debts, and suggested they forgo RRSP or TFSA contributions temporarily to find the money. But I’m starting to wonder if people are so addled by their high debt loads that they’re losing their focus on the ever-important goal of investing for the future.

Story continues below advertisement

Debt repayment should always come ahead of investing if you owe money on a credit card (interest rates close to 20 per cent in many cases) or a loan or line of credit with an interest rate in the high digit range or more. There’s a good case for making debt a priority even for mortgages and home-equity lines of credit that have interest rates in the 2-per-cent to 5-per-cent range. While you might do better as an investor, debt repayment is a guaranteed return on your money.

The problem with prioritizing debt repayment and neglecting investing is that you lose the opportunity to build savings. While you’re fighting the good fight against your debts, you’re not putting money into stocks and bonds and benefiting from long-term compounding. You end up debt free, but with impoverished savings.

When your debts are paid off or under control, you might plan to re-route your debt repayment money into your investments. But will you actually follow through? Some people will end up taking on new debt, and others will find new demands for the money that used to go for debt repayments. It’s not hard to image a situation where the money that was going to go into RRSPs or TFSAs instead gets routed into a kitchen reno.

Here’s a suggestion if you somehow luck into an extra $1,000 per week – $450 to debt repayment and $450 to investments. The other $100 goes to a travel fund. You gotta live, right?

Report an error Editorial code of conduct
Comments

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • All comments will be reviewed by one or more moderators before being posted to the site. This should only take a few moments.
  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed. Commenters who repeatedly violate community guidelines may be suspended, causing them to temporarily lose their ability to engage with comments.

Read our community guidelines here

Discussion loading ...

Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.
Cannabis pro newsletter