28 Jun SHOULD YOU CASH IN RSP’s TO PAY OFF DEBT??!
One of the services I provide is FREE Financial Snapshots to let people find out how they are doing in the Money Game. I look for Red , Yellow and Green flags and focus on your Red flags…or Financial areas you need to address ASAP.
One of the interesting patterns I have observed from doing so many of these is how many people are carrying high Interest credit card debt…and while that itself isn’t much of a shock to me (Canadians are carrying an average of $3500+ in credit card debt according to Canada’s credit service, Transunion), what is a shock is that they can actually pay it off but don’t!
Another survey by a bankruptcy trustee company found that most Canadians carrying charges on their credit cards admitted that they do most of the time, will likely carry their existing debt for the next year and some…well they don’t believe they will ever pay it off.
Credit card companies now include that lovely section on your statement that shows how long it will take you to pay off your debt if you only pay the minimum amount. This reminds me of the Warnings and skull & crossbones that are on cigarette packages. Is it actually keeping anyone from smoking?
I don’t think so…and I don’t think the messages telling you it’s going to take you 5 years to pay off that new couch you just HAD to have is preventing anyone from going into high interest debt.
I looked up a debt calculator, punched in the average amount of debt ($3500), chose 19% interest (the low end for most cards) and said I’d pay off $100/month.
Shockingly, it would take 52 months to pay that debt off (over 4 years!!)...if you needed more bad news…that $3500 purchase would end up costing you $5100 with interest. I hope it was one Hell of a sale because you wound up paying an extra 50% of the original price in interest!!!
Recently, I did a Financial Snapshot with a prospect and this exact scenario came up except they had a little over $6000 in credit card debt and their interest rate was higher than 19%.
They were not saving anything on a monthly basis due to those situations that life tends to throw at us…recently new parents, she wasn’t working (and had her own business so no mat leave), he wasn’t due for a raise anytime soon and they had already tapped out family loan options.
At that rate, they were going to carry that $6000 for a very looooong time. And then things got really interesting…
Between the two of them, they had over $10,000 in RSP’s and a TFSA. They did not know the returns they were getting on this $. They also had no idea how much they were paying in fees for this to be ‘managed’ for them…and I use the term loosely.
I had them find out and on average, their investments were making around 2% and they didn’t get a straight answer on exactly how much they were paying in fees.
So let’s get this straight…$10,000 making maybe 2% if you’re lucky vs $6000 costing you 20%+. Hmmm…don’t have to be a math whiz to figure out that doesn’t make a whole lot of sense!
If it was me, I would cash in my RSP’s (or TFSA’s depending), perhaps pay a bit of tax (although the wife in this scenario isn’t working so she’ll get that tax back at the end of the year), and get the credit card debt as low as made sense depending on the amount I needed in my Savings for a rainy day.
I know I know, it’s nice to have some Savings, the Gov’t tells you to contribute to your RSP, and having even a small amount of Investments feels like progress.
And the reality is, having money in investments making you very low interest while paying crazy high rates on credit card debt is like working on your tan while you’re bleeding to death!!
I’m not a Financial Advisor and I don’t have any letters after my name on my business card…but I do find it interesting that in all the Financial Snapshots I do with people in this situation, almost none of them are being told that they should stop the bleeding instead of focusing on their tan, so to speak.
I have a theory as to why not…Advisors get paid for placing money in investments but not for advising you to pay off your high interest credit card debt. Nuff said.
Now let’s make one thing clear…if you cash in investments to pay off high interest debt and then turn around and rack up MORE debt buying additional stuff you can’t afford, you’ll really be screwed and that is NOT the intent here!
I fully understand that sometimes life happens and we rack up bad debt, but continuing the behaviour of getting in and out of debilitating debt or racking it up and keeping it is a really bad idea and not the point of this example. You need to make serious Spending Habit changes if this is you!
That’s exactly what I focus on in my Coaching programs – a person’s Money Mindset…and figure out ways to make subtle adjustments so your Mindset is working for you instead of against you.
It’s a complicated subject that I’ve Posted on before.
If I was carrying credit card debt from a tough stretch or a one-time blip in spending, I would utilize my investment money to pay it off…and then I would do EVERYthing I could to address any behaviours and Mindsets that were not working for me in the Money game.
If you’re interested in a FREE Financial Snapshot to find out how you’re doing in the Money game…contact me here.