Sarah Twomey | Desjardins Group
Financially speaking in 2015, you were feeling pretty good about yourself. The taxes were filed on time and you received a sizable refund -- again! And like every year, you reinvested it: some into the RRSP, some in the TFSA and the balance into an RESP account. As a bonus, your debt is practically paid off and you fast-tracked your mortgage payments. Give yourself a round of applause because you are a financial champion!
Sure you are -- in your dreams!
But the truth is that like most Canadians, you're probably carrying a lot of credit card and mortgage debt. And like the last few tax seasons, you likely will owe the taxman a king's ransom. Feeling less smug now, aren't you? The fact is that as boomers get closer to retirement age, many are still loaded down by debt. This is an issue because in retirement, their income will be greatly reduced and paying down the debt will be increasingly more difficult. Of course, the goal is to pay it off first. Our financial experts suggest that while you're still working, it's important to look at your financial situation seriously and start making the necessary adjustments now.
Never too late to set up good financial habits
According to Statistics Canada's "Retiring with debt" publication, over half of retirees are still paying off some form of debt. It can be in the form of loans, credit cards and lines of credit. The good news is that these retirees owe less than Canadian workers aged 55 and up. Their median debt is $19,000, as compared to $40,000 for workers. The idea is to develop good financial habits during your working life to ensure that you have plenty of savings and few liabilities at retirement.
Understanding your liabilities and paying them off
There are two types of liabilities: one increases your assets like a mortgage and the other reduces your assets like a credit card. Credit in and of itself isn't the problem, so long as it's managed well.
To know exactly where you stand, make a list of what you owe:
- Bank and store credit cards tend to have the highest interest rates, so you should focus on paying these off first
- Lines of credit
- Car loan
- Investment loans
- Student loans
Once you've paid off the one with the highest interest rate, consider trying paying off your mortgage next. You can reduce the amortization period for your mortgage by increasing your payment amounts, payment frequency (e.g. weekly rather than monthly) or by making a prepayment. As an added protection, consider credit insurance and term life insurance. In case of illness, disability or death, these types of insurance will protect your family by paying off your debts and securing your assets.