Gordon Powers

More than a quarter of Canadians (29 per cent) say their top priority this year is to pare back their consumer credit, up from a low of 20 per cent heading into 2008, according to a recent Manulife study.

The next most-important priority — paying down the mortgage — was chosen by 14 per cent, identical to a year ago, but up from 11 per cent the prior year.

Thirteen per cent chose saving for retirement as their third-ranked concern, up from 11 per cent a year ago.

So, which is it? If you have outstanding debt and a bit of cash, do you use that money to invest for the future, or do you direct it toward reducing what you owe?

If you're talking about double-digit credit card debt, the answer is easy: Pay off the balance any way you can. The after-tax value of any savings vehicle you can find is likely to be lower than the after-tax value of reducing your debt.

But what should you do about paying down a lower-rate mortgage? Even with today's relatively low interest rates, it's still going to be tough to find an investment that's likely to yield a higher after-tax return than you'd get by paying your mortgage down.

But it is possible, particularly if you're looking at investing within an RRSP.

The major factors to consider here are current and future mortgage interest rates and amortization, the expected return in the RRSP, your tax bracket, your age and how long you're prepared to invest, and your ability to capitalize on mortgage prepayment privileges.

Then again, for a more complete picture, you also have to factor in the timing of and tax on the eventual RRSP withdrawals.

The truth is, there's no definitive answer. That's why so many people opt for making RRSP contributions as early as possible and then using the tax refund to reduce their debt. But that's not necessarily always the way to go.

Let's say Raymond is in the 40 per cent tax bracket, and he currently pays 4.5 per cent on his mortgage. Keep in mind that his RRSP contribution is tax-deductible, and the money compounds on a tax-deferred basis while it's in the RRSP.

If Raymond puts the $1,000 down on the debt, he saves an after-tax interest cost of 4.5 per cent. But if he contributes the $1,000 into his RRSP, he gets back $400 in tax savings which he can then put down on his debt. So his choices are between having no debt and no savings, or having $1,000 in his RRSP, and $600 in debt.