Posted in When the snow covers the ground and temperatures dip to the lows they have hit this week, most branch bankers turn their focus to shoving RSPs down your throat, whether appropriate or not. I will save the debate over RSPs vs TFSAs vs debt reduction for another day. However, this could be your golden opporunity to start saving some money in interest payments. Let's look at an example.
Like many people, John had been trying to get around to doing RSP contributions for a while. But after an unexpected medical situation forced him to take time off work, he has been saddled with a $5,000 credit card balance that he simply can't seem to pay down. With a $150/mo minimum payment at 21% interest, he feels he can't afford a continuous savings plan as suggested by his bank or a loan to use up some of his past contribution room. However, if John were to borrow $15,000 from his bank and invest the funds directly with them, he would end up with a loan interest rate as low as prime (which is currently 3%). By taking the loan amortized over 5 years, you would end up with a payment of $269/mo. Based on the level of his income ($60,000/year), he can anticipate a tax refund of $4,680. This money should then be used to pay off the credit card bill.
So at the end of 5 years, what has John accomplished? If he had done nothing, John would have ended up paying off the credit card, but would have paid $2917 in interest (assuming $150/month payments) and would have nothing to show for it.
Had he gone the route of the RSP loan, although he would have made an additional $7140 in payments over the 5 year period, he would have only paid $1,164 in interest AND would have a $15,000 investment (plus whatever interest/capital gains he would have made on his investment).
Certainly food for thought next time you hear someone say they can't afford to start saving for retirement if they are carrying debts.
