Contribute to your RRSP or Pay Off Consumer Debt

A question was put to me the other day is it better to contribute to your RRSP or to pay off your consumer debt. The benefits to RRSP contribution are clear: more money for yourself when you retire, tax-free growth in these investments, and the most immediate: a tax deduction. If I contribute $1000 immediately, I will get $350 (approximately) back at income tax time. All of these factor lead you to believe that you should contribute to your RRSP as much as possible (up to 18% of your salary I believe is the most up to date figure).

But what about consumer debt? What should you do if you owe $50,000 on personal loans (non investment and non-mortgage loans)? My philosophy is always to make small changes based on when you have extra money coming in. I personally have a lot of school debt, and although the interest rates are low now, it still burns me to have to pay so much out of each paycheque towards loans.

I believe that some debt is fine. If you are purchasing an asset that will leave you with positive cash flow (ie. a rental property, or a cottage or a loan to an RRSP, etc.) then that debt is fine and will take care of itself in the long term. But consumer debt (credit cards, don't pay for 18 months, etc.) should be paid immediately. When I retire I want to make sure that I have plenty of assets and no debt of any kind to show, giving me total freedom to do what I want.

I believe that people should contribute to their RRSPs and get rid of their debt whenever possible. For me, when I get a raise, I always up my RRSP contributions and also increase my debt repayments. Doing exclusively one or the other won't help as much. Only repaying your debts may make you feel slightly better, but getting money back at RRSP time or looking at your portfolio and smiling will encourage you to continue.