Managing Debt Wisely
It can be expensive to live in Canada. Very few people
have enough cash on hand to pay for major purchases,
like a car, a house or a university education. Yet these
can be necessary items.
To pay for them, people typically borrow from a bank
or other financial institution. Used this way, debt
is a valuable tool. But if you borrow too much or for
things you don’t really need, debt can work against
you.
The following information will help you manage your
debt wisely.
Good Debt
If you’re borrowing money to purchase something
that will be worth more in the future or to pay for
something that you really need, then debt is considered
good to have.
- Mortgages
— Borrowing to buy a home (taking out a mortgage)
qualifies as good debt in two ways: It’s a necessity
(everyone needs a place to live); and its value is
likely to go up over time.
- Student/education loans —
Upgrading your skills or education could help you
get a better job that pays more, especially if you
choose a high-demand field. Most universities and
colleges have career counselors on staff who can help
you explore the opportunities in particular fields.
Be sure to ask about any grants or bursaries for which
you might be eligible, because they will reduce the
amount of money you need to borrow.
- Registered
Retirement Savings Plan (RRSP) loans — To
maximize your RRSP, you may choose to borrow to top-up
your RRSP contribution. An RRSP is a special type
of banking or investment account designed to help
Canadians set aside funds for when they retire. Contributions
are tax-deductible and there is no tax charged on
the earnings within the plan until they’re
taken out.
- Home improvement loans —
Upgrading parts of your home or making repairs may
help your family live more comfortably and may also
increase your home’s value. Do your homework,
though, and ask yourself if your improvement will
really be helpful.
Other Debt
Debt can work against you if you borrow in order to
pay for something you don’t need or items that
are only going to lose value over time. Most of this
type of debt usually lands on your monthly credit card
bill.
Credit cards
are useful and important to have, but be careful not
to use them for impulse purchases or to buy more than
you can really afford. For example, you may need to
purchase a new TV, but is it worth paying interest on
it for the next year? A better option may be to save
up for luxury items and pay for them in full when you
purchase them. That way, you’ll avoid paying interest
altogether.
Now that you have a sense of the different types of
debt, look at your own situation. Which category do
your current debts belong to? If any of them are working
against you, paying them down as much as possible should
be one of your first priorities.
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for the general guidance and benefit of our clients.
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not intended to provide specific advice. See
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