I often hear people talking about the decision to either pay off debts or keep the money & build savings.
Your credit card charging you interest is 100% guaranteed while an emergency is a big maybe. Logic dictates you would pay off debt to the best of your ability even if it jeopardizes your savings plan while USING CREDIT STRATEGICALLY to ensure you have a credit history without incurring interest by paying it in full monthly.
The money you save by not paying interest increases your savings potential. Every time you pay debt you increase your personal net worth by an amount equal to the payment BUT you must reduce cash savings by the amount of interest incurred on debt to calculate your personal net worth which makes it less profitable.
Once you pay off debt and the savings begin, you should invest the savings in an income tax exempt product like an RRSP linked to an Exempt Market product so that, in addition to the tax savings, you earn 7 – 10% per year rather than the 1 – 3% paid by banks.
In summary: Pay debt first, save as a result then invest the savings to save income tax & grow your retirement savings. This is the best strategy around for people with only small money to play with.
No bank will ever tell you this because they can’t sell Exempt Market products because they cannot earn commissions from them AND they want you to be in debt due to the interest they earn.
DGB