In the new year, many people may consider pitting money into a Tax Free Savings Account (TFSA). TFSAs are great, but if you’re in debt, it may be better to pay down some of your debt.
Credit Card Debt vs. TFSA
If you’re paying 18% in interest on your credit cards, and only 1% in your TFSA, it’s quite clear that paying down debt is the way to go. When I suggest this, I know that people may be worried that they won’t have enough money in their emergency fund. That’s a legitimate concern and I understand the importance of an emergency fund, but try paying off your credit card earlier and then aggressively build up your TFSA.
Mortgage vs. TFSA Savings
Although the math won’t be as extreme as when comparing the TFSA return to credit card debt, the math still works in favour of paying down the mortgage. If you have an account earning you 1% while having debt that costs you 4% (let’s just say), you are going backwards. Putting the TFSA money towards the debt is the equivalent of earning 4% on the money instead of 1%.
Final Thoughts
I run into so many people that are not investing their TFSAs. If you are going to keep TFSA money in low interest savings, you may be better off using the money towards debt than keeping it in the TFSA.
If you have credit card debt at high interest costs, then no matter what you invest in, you should consider the merits of paying down credit card debt instead of investing in TFSAs. Every situation is different and your situation might need a different solution than what I’ve suggested. It’s best to seek help or do your research before making these financial decisions.
