Advertisement
Ask an Expert: First consideration is how much that debt is costing you
Q. I am single and set to retire next year. I also have a $55,000 inheritance coming to me shortly. Should I take this money and pay off my outstanding debt, which is about $50,000? Or put the money into a Tax-Free Savings Account (TFSA), which I haven’t started to contribute to yet? I will have a modest income in retirement that will be enough to get by on but not much more than that. I also have only about $30,000 in savings. What’s the best course of action for me?
— Daniela in Halifax
A: That’s a great question Daniela. So let me make some assumptions. Assuming that the $50,000 is personal consumer debt at interest rates of about 20% or higher (which is what is charged on many department store credit cards), I suggest paying off that debt. In one year, you would save $10,000 in interest at 20%. That alone could increase your monthly cash flow by $833. You could then turn around and use that monthly saving to contribute to your TFSA.
If, however, the $50,000 has a lower interest rate (mortgage, line of credit or loan) then you want to look closer at the interest rate you are paying on the debt versus the interest/investment return you could be earning once invested. For instance, if you are paying 5% interest on your $50,000 debt, but then invest it for a return of just 2%, it would be better for you to pay off the debt that’s at 5%.
However, if you were paying 2% interest on the debt and could invest it and get 5%, in investment returns it would be better to invest it. Of course, it doesn’t have to be an all-or-nothing strategy. You could use part of the inheritance money towards the debt and part of it to put into your TFSA. Just make sure that you have adequate cash flow in retirement so you don’t create additional debt.
MORE ABOUT ASK A MONEY COACH:
Share this article Share on Facebook Share on Twitter Share on Linkedin Share on Reddit Share on Email
Canadians with no children or siblings must consider estate planning alternatives. Here’s why trust companies can be a good...
The federal government’s capital gains inclusion rate increase has yet to become law. There’s a slight chance it may...
Canadians have reporting requirements for foreign assets, income and tax paid. Here’s how to claim each of these on...
A Certified Financial Planner provides perspective on the TFSA vs. RRSP question for a couple in their late 50s...
In retirement, some income is not subject to withholding tax, and you may potentially owe tax after filing each...
Some strategies are time-sensitive, while others can help you start the new year on the right foot.
Sometimes, it’s not action, but inaction, that can hurt you financially. Here are examples of when selling may be...
Wondering whether your estate planner knows the latest tax laws? Do you need a tax lawyer too? Discover three...
Do Canadians need to consolidate RRSP accounts before converting to RRIFs? Find out this and more.
Here’s a primer for Canadians on choosing between employment and self-employment for a new work arrangement.