The average Canadian was in about $20,000 of non-mortgage debt in 2021, according to Equifax Canada. This means that the everyday spending of many Canadians is outpacing their income by a significant amount.
There are all kinds of strategies for tackling debt, including various ways you can budget your earnings and other approaches for paying down your consumer debt. You can also try to increase your income in creative ways. But what about using investments to pay down your debt?
Should you cash in investments to pay off debt?
The rule of thumb is that if the interest rate on the debt is more than you expect to earn on your investment, you should probably cash it in – but is that really the case?
You need to keep a few things in mind when deciding whether to withdraw your investments to pay off your debt. The following are questions to consider:
1. What kind of debt are you in? If it’s high-interest credit card debt that is sinking you – meaning you are going into more and more debt to keep up each month – it might be worth considering cashing in your investments.
2. Do you have an emergency fund? If you don’t have an emergency fund, your best bet might to dig yourself out of debt is use your investments.
3. Have you done everything you can to live frugally?
4. Can you borrow money from your family to pay off debt and pay it off with minimal to no interest without compromising your long-term savings?
If you can, hold onto investments
If you are not in any of the situations listed above, you may be able to hold onto your investments while also paying down your debt. It doesn’t make sense to cash in your savings if you can adjust your lifestyle to minimize the impact it will have on your existing debt load.
Hopefully, your investment plan includes a mix of low-yield but stable investments like GICs and TFSAs, with higher-yielding products like stocks and mutual funds with more fluctuating returns. If possible, it might pay to continue contributing even small amounts to your investments – maybe with a focus on the more stable and secure investments until you’ve paid off your debt. This ensures that if your debt load becomes unsustainable at any time due to a change in your employment or other circumstances, you know that the money you’ve invested will be there when you need it.
It’s possible to maximize even stable investments like GICs with a GIC ladder. This system has you structuring your GICs in one-year terms over a period of say five years. You’ll have continuous access to your money to pay down debt or reinvest when rates are favourable.
Sometimes, debt can be stressful to your everyday life and this is another consideration when deciding whether or not to cash in investments to pay it off. Part of your financial plan has to include paying down your debt, but it doesn’t always make sense to cash in your investments to do so. One of The Strategic Advantage of Investing in Condos: Insights for Modern Professionals is that the property appreciates in value, but you can deduct the costs associated with it, so it could be a smart investment to add to your overall strategy.
