When Paying Down Debt Is the Better Investment

One thing needs to be said clearly before any of this applies: if you’re struggling to cover food, rent, or other truly essential living costs, those come first, ahead of debt repayment and ahead of investing of any kind, employer matching included. Everything that follows assumes your essentials are covered and the real question is what to do with what’s left over.

Paying off high-interest debt works like a guaranteed investment, and often a better one than anything the market can offer. It doesn’t always feel that way, because investing can feel like watching a number grow, while paying off debt just feels like a number shrinking. But the effect on your net worth is the same either way.

The True Cost of Carrying Your Credit Card Debt

Here’s the simplest way to look at it: if you owe $1,000 on a credit card at 19.99% interest and carry that balance, you will pay roughly $200 in interest over a year. Pay the $1,000 off instead, and you avoid that cost entirely. There’s no risk and no waiting on the market: every dollar you put toward the balance owing stops interest from accumulating against you immediately.

Scale that up and the case only gets stronger. Clear a $5,000 balance at the same rate and you will avoid roughly $1,000 a year in interest, with the same guarantee attached. Even strong long-term investments rarely deliver returns like that consistently, year after year. So if you’re hoping a big market win might clear your debt faster than paying it down directly, the math consistently shows otherwise.

What If I Can Lower My Interest Rate?

The case for paying down high-interest debt first gets even stronger if you can lower that rate to begin with. Depending on your situation, consolidating your debts with a structured repayment plan like a Debt Management Program or a consumer proposal can reduce or even eliminate the interest you’re paying, so more of every dollar goes toward the balance instead of disappearing into interest charges every month.

When Working More Isn’t Working – Smarter Ways to Pay Off Debt

This is exactly the kind of thing one of our non-profit credit counsellors can help you sort out. In a free appointment, we look at your full picture, all your debts and what’s coming in, and tell you honestly whether a lower-interest option is realistic for you. Either way, you walk away with a clearer sense of your options.

The One Exception Worth Considering: Your Employer’s RRSP Match

Once your basics are covered, there’s one case where investing makes sense even while you’re carrying debt: an employer RRSP matching benefit. An employer that matches your contributions dollar for dollar up to a certain percentage of your salary is handing you an instant 100% return on your own money, before the market does anything at all. Nothing beats that, not even debt repayment. You may have heard people say that not taking advantage of an RRSP match is like leaving free money on on table, and there’s some truth to this. When this benefit is available, it’s almost always worth contributing enough to capture the full match while you keep paying down debt alongside it.

Should You Save for the Future, or Pay Off Debt First?

What About Borrowing to Invest?

Some Canadians go a step further and consider taking out a loan or drawing down their HELOC to invest. This is called leveraging. You may have heard about investing on margin and that is borrowing from your brokerage account to invest. Already carrying high-interest debt can make this feel like a faster way out of a hole that otherwise seems impossible to climb out of. But the math can work quickly against you. If you’re paying 8-10% interest on borrowed money and the market returns 7% that year, you’re behind before you’ve even started. Unlike the market, loan interest keeps accumulating whether your investments go up or down. If you’re already managing consumer debt, this approach adds an unnecessary, additional layer of risk on top of debt you’re trying to get out from under, and it amounts to a gamble that starts stacked against you.

Are There Disadvantages to Paying Off Debt?

Putting every spare dollar toward debt with nothing held back can create its own problems. It’s important to have an emergency fund: without one, an unexpected circumstance such as a needed car repair, a job loss, or a medical bill can send you right back to the credit card and erase the progress you’ve made. Most financial experts suggest eventually building toward three to six months of expenses in savings, but during an aggressive payoff period, even a smaller buffer of $1,000 to $2,000 can be enough to keep you off the credit card while you work toward that fuller cushion.

More Reasons Why Savings Is an Important Expense

It also helps to keep in mind that not all debt is equally urgent. The federal portion of student loans currently carries no interest at all (though a few provincial loans can still accrue interest), so a federal student loan doesn’t require the same urgency as a credit card sitting at 24.99%. Knowing which debts to tackle first is an important part of your debt repayment strategy and can save you hundreds if not thousands of dollars in interest over time.

Where to Find the Money to Save Each Month

Pay Down Debt or Invest? You Don’t Have to Figure This Out Alone

The right answer looks a little different for everyone. It depends on the type of debt you carry, your income, your benefits, and even how you’re feeling about your situation right now. If you’re overwhelmed and wondering what to do with your money – whether that’s increasing savings and building an emergency fund, repaying debts as quickly as possible, or yes, even investing responsibly for the future – if you’re carrying debt, talking it through with a neutral person who is on your side can help you see your full financial picture before you decide what to do next. At the Credit Counselling Society, our appointments are completely free, confidential, and unbiased. When it feels like debt is standing between you and your goals and you can’t get ahead, we’re here to help you figure out a balanced and realistic plan that works for you. You can contact us by phone, email, or chat.