Should you invest in your RRSPs or pay off debt?

When you’re falling asleep isn’t it always the thought of credit card debt that comes to mind? What would feel better? Having some money in your RRSP and debt, or no debt at all? Probably the latter — especially if you’re paying 20 percent in interest on your credit cards, seven percent on student debt, besides owing your parents a whole bunch of money.

It makes emotional and financial sense to pay off your debt first. Once it is all paid off you can start to save the money you paid off your debts with and contribute to your RRSP.

But where do you start?

The best way to blow up your debt is with a plan. A plan to stop bleeding money on interest and set spending thresholds in order to eliminate that debt. Below are some of the best strategies to flex your money muscle and live in the black.

Step 1: Map out where you are

Take an evening, open a bottle of wine or drink of your choice and make a list of every kind of debt you owe and the respective interest rates on that debt. Include bank overdrafts, credit cards, department store cards, bank of Mom and Dad or Auntie Gertrude, student lines of credit, personal lines of credit, home owner lines of credit, auto loans, and mortgages. Make sure to include any “don’t pay now” until later loan too. Just because you aren’t spending money on it right now doesn’t mean it isn’t debt.

Step 2: Which of your debt products have the highest interest rate?

This can be emotional interest too. If Auntie Gertrude makes you feel like jumping out the window every time you’re at a family event then prioritize that she needs to be paid off first. The killer interest rates come with department store cards and credit cards. Department store cards have up to 30 percent interest and most credit cards charge an average 20 percent in interest. If you buy a $1000 sofa on a department store card and only make minimum payments you’ll have paid $1,000 MORE in just over three years at an interest rate of 30 percent. Basically, you could have had two sofas by now if you had just paid in cash.

Step 3: Make more money to throw on the debt

Make more money to throw on the debt. Put everything you don’t want on E-Bay, Craigslist, or have a garage sale. Old comics, jewellery, coins, toys and collectibles can make you a tidy sum. Ask for a raise or try to get extra cash doing something that you love to do anyway. Collect as much money as you can from selling your services or items that you don’t need and put it right on that debt. Be sure to celebrate your success every time you see that balance drop.

Step 4: Evaluate what you can live without Commit to an amount that you want to allocate to the debt and every pay day, transfer the money in chunks to pay down the most expensive debt first. Use cash for everyday variable spending and limit it by taking a small amount out each week for the entire week. When it is gone it is gone. Based on your payments, calculate when you’ll be debt free and mark your “liberation” day on a calendar. It will motivate you every time you look at that date so post it everywhere.

Step 5: Pump all your debt repayments into an RRSP

When you’re debt free of all of your consumer debt (not including investment loans or mortgages), you’ve turned the tables. The consumer shackles are off and you need to be treated well for your discipline and industriousness. Now figure out how much you saved to pay off your debts and redirect that money into your RRSP. Keep up your money discipline and use the same resolve to build up a big RRSP, perhaps to use for a first home or eventually, retirement.

David Lester is the author of two finance books — I (Heart) Money, and From Middle Class to Millionaire.