Doug, pretty much everyone who writes about
personal finance thinks you should pay yourself first. It’s like the first commandment of
personal finance. I know you are a skeptic, explain. Well I agree in most cases it makes
perfect sense, and the conventional wisdom is,
if you don’t pay yourself first, there won’t be any money left at the end of the month after you have paid all your bills, you’re going to get into trouble. So I agree with that with one exception and that’s
if you have debt. If you have debt I modify the rule to say, pay your high interest debt first then
worry about savings. Okay, so you come at this from the point of view of a licensed insolvency trustee, correct? Yes. Alright, how often do you find people are saving money and yet they have this high interest rate debt? It’s amazing that people will come in to see me and they will own $50,000 on credit cards and other loans, and yet they have a $1,000
in a TFSA, and I go, I don’t understand, why is that? Well, I have to have a saving plan,
I have to have an emergency fund. Yah, but unfortunately you are earning 1% in your TFSA
and paying 20% interest after tax on your credit card debt. It doesn’t make any sense. What are the interest rates on other forms of debt that you are seeing come in there, so we can compare it against
what might earn in your investments. Well, the highest interest
rates would be on a payday loan, which depending on how quickly you are
paying it off, could be 400% or more. Okay that’s grotesque. Then you go down to credit cards, still faintly
grotesque at close to 20%. What are some of the other loans
and lines of credit go for these days? Well, lines of credit, if you have a HELOC on your house,
it could be three, four, five per cent. It could be a much more reasonable number. If it’s unsecured it might be seven, eight, nine per cent. But that’s still probably higher than
what you are earning on your investments. Interesting. So, we have
to refine pay ourselves first then, and we have to say that if you’ve got
high interest rate debt, then that come first. Absolutely and remember as well, when you pay off debt, your also eliminating risk. So, I know you want to have money
in a savings account so that if there is an emergency
you’ve got access to it, but if your debts paid off it’s a lot easier to
then borrow and get that. So, save the money,
reduce the interest, pay off the debt. Thanks Doug. Thanks Rob.