Trying to think about your financial future while paying down past debt can be daunting. But doing both isn't impossible. You can do both — and for most Canadians, you probably should. The usual order: capture any employer retirement match first (it's essentially free money), pay down high-interest debt like credit cards next, then split whatever's left between lower-interest debt and retirement savings based on the numbers and your comfort with carrying debt.
Planning for your financial future can be overwhelming on a good day. It can be even more overwhelming when you're also working to pay down debt at the same time. This leads to Canadians asking themselves if they should save for retirement or pay off debt.
It's a tough question to answer. Do you pay off all your debt first? Do you focus on the future and double down on saving for retirement?
While there is no one-size-fits-all solution, there is a way that you can do both.
Here's what you need to know.
Should you pay off debt or save for retirement first?
There's no one-size-fits-all answer here, since the right move depends on your interest rates, your income, and how close you are to retirement. Still, a few simple guidelines can help you decide where each dollar is put to work most effectively. The goal is to make steady progress rather than to get every choice perfect.
Here's the order that works for most people:
Capture any employer match first. If your employer matches contributions to a group retirement plan, contribute enough to get the full match — it's essentially added money you'd otherwise leave behind.
Attack high-interest debt next. Credit card balances often charge around 20% in interest, and few investments reliably return that much, so paying those down is hard to beat.
Split the rest by the numbers. For everything in between, compare each debt's interest rate against the returns you might reasonably expect from retirement investing.
Higher-rate debt is usually worth clearing first, while lower-rate debt like student loans or a mortgage can make leaning toward retirement the stronger choice. Whatever you decide, always pay at least the minimum on every debt so you protect your credit and avoid extra charges.
Start with an emergency fund
Before you accelerate debt payoff or ramp up your savings, it helps to set aside a small cushion. An emergency fund covers the surprises that come up — a car repair, a medical bill, or a gap between pay cheques — without sending you back to credit cards. That way, one unexpected cost doesn't undo the progress you've made.
A few months of essential expenses is a common target, but you don't need to reach it all at once. Any amount helps, and even a modest balance can keep a small setback from turning into new debt.
Six steps to pay off debt and save for retirement
1. Look at your debts
There are so many different mindsets about saving and debt. The way each person views debt will vary, which is why there is no one right answer. Some people have the "pay yourself first" mindset — the idea that all debt isn't the same, and you can afford to carry some (vs. pay everything off before saving for retirement).
On the other end of the spectrum, you may view "all debt as bad." This is the idea that you should pay off all your debts before saving for anything, retirement included.
No matter which side of the debate you land on (and it's likely somewhere in the middle), the first thing you want to do is evaluate your debts. This will help you determine how much actually has to be paid down and what is the most pressing, based on each interest rate.
Some common debts you'll want to look at include:
Car loans
Student loans
Credit card debt
Lines of credit
Mortgages
2. Build a budget
Now that you know where your money needs to go, it’s time to budget. It's worth repeating that everyone's plan looks a little different. Your budget and retirement savings plans are going to look different than your friends, family, or colleagues would — that's totally okay.
Once you have your mandatory monthly expenses built into your budget (food, housing, phone, and internet, for example), you can divide some of the "leftover" money between paying down debt or saving for retirement.
Determining the split of that remaining money is where your mindset around debt comes into play. If you're uncomfortable putting aside a larger amount of money for retirement until your debt is paid down, put more towards debt. On the other hand, you can put more of that chunk of money towards retirement if you're okay carrying a little more debt longer.
When determining what debt to pay first, remember to review how much interest is on each of your debts. This will guide you on what to prioritize to pay down — you want to pay any debts that carry a high interest rate down first.
3. Set up a dedicated retirement account
Having a dedicated account for retirement makes it easier to save for retirement and pay down debt at the same time.
It's okay if you start with putting small amounts in a Registered Retirement Savings Plan (RRSP) in order to allocate more towards debt — even a few dollars put aside for retirement every pay cheque starts to add up. If you'd rather keep that money reachable while you're still paying down debt, a Tax-Free Savings Account (TFSA) is worth a look too: contributions can come back out tax-free if an emergency hits, which an RRSP can't offer.
But it's especially important to have those dollars you budget for retirement going into an entirely separate account for two major reasons:
Accounts specific for retirement savings offer you tax benefits in the long run
You won't be tempted to spend money you aren't seeing
You can also reallocate some of the money you're using to pay down debt to your retirement savings as the debt numbers go down. The $400 you're putting towards credit card debt every month, for example, can be reallocated towards retirement when that debt is lowered or paid off.
4. If your employer offers a GRRSP, get signed up
Your employer may offer a Group Retirement Savings Plan (GRRSP) as part of your total compensation. If this is the case, get signed up as soon as possible.
A GRRSP is very similar to an individual RRSP, but allows you to have money deducted directly from your pay cheque and put into your GRRSP. This money goes into investments you select.
Having the deposit taken directly from your pay cheque can help when you're trying to save, since you can't spend money that never reaches your chequing account. You can also receive tax benefits by directly contributing to your GRRSP.
5. Build on retirement savings as debt goes down
Did you know a GRRSP draws on your annual RRSP contribution room — a dollar limit the CRA updates every year? Any unused room from previous years also rolls over, so there's usually plenty of space to save.
This means you have a lot of room to save for retirement each year. As you pay down your debt, you can reallocate that money towards retirement savings and increase the amount that you contribute each pay cheque.
6. Make a plan that works for you
This is such an important part that it had to be emphasized again — make sure this is a plan that works for you.
For some, saving can seem daunting when you have outstanding debts. If this is you, start by focusing most of your attention on debt repayment and only a small amount on retirement. For others, future planning takes precedence. If you're on this side of things, you might be prioritizing certain debts and paying minimums while putting most of your money away in retirement (or other) savings.
If your plan isn't personalized for you, it may be harder to stick with it.