Pay down debt or invest?
Both choices, month by month, spending exactly the same money. Whichever one you take, a cleared debt frees up its payment.
Your spare money
What you have left after your bills and your current debt payments. This is the money the page is deciding what to do with.
A bonus, a tax refund, or savings you could put to work today.
$500 a month to debt, $0 invested. The results always compare all-debt and all-investing as well, whatever you set here.
Your debts
Credit card
Typical minimum: about 3% of the balance. Once this debt is gone, the payment is freed up and goes toward whatever is left, in every scenario.
Most Canadian credit cards charge around 20 to 23% a year on purchases, and more on cash advances.
If you invested instead
Before fees, and not guaranteed. Paying off a debt is.
TFSA growth is tax-free. An RRSP gives a refund now, assumed reinvested here, and is taxed on withdrawal. Non-registered growth is taxed as it happens.
The answer
Paying down debt first comes out ahead
$2,488 ahead after 10 years
Your debts cost more than your investments are expected to earn after tax.
| Choice | Net worth | Interest paid | Debt-free in |
|---|---|---|---|
| Pay down debt first | $93,870 | $418 | 9 mo |
| Invest first | $91,383 | $2,570 | 4 yr 3 mo |
Debt by debt
Clearing a debt is like earning its interest rate, guaranteed. Investing is expected to earn about 5.5% a year after fees and tax. That is the number each rate below is measured against.
- Credit card 21%Pay this first
Year by year
| Year | Pay down debt first | Invest first |
|---|---|---|
| 1 | $2,396 | $1,976 |
| 2 | $10,523 | $9,482 |
| 3 | $19,096 | $17,581 |
| 4 | $28,141 | $26,345 |
| 5 | $37,684 | $35,780 |
| 6 | $47,751 | $45,743 |
| 7 | $58,372 | $56,254 |
| 8 | $69,577 | $67,342 |
| 9 | $81,399 | $79,041 |
| 10 | $93,870 | $91,383 |