Is it better to pay off your debts or save your money?

You will likely need to ask this question frequently as you begin making increasingly important financial decisions throughout your life. In fact, as you read this, many people across the country are trying to determine what is most beneficial for their financial health: pay off their debts as quickly as possible or save their money for other things.

This is a difficult question to solve since everyone’s financial situation varies. A person might have accumulated a lot of high interest consumer debt, another person might not have it. Same thing for savings. People’s priorities differ with regard to the money they earn and save. Some people want to stock money to buy a house or for retirement, while others prefer to spend their money to live their lives to the maximum before settling. However, both choices come with their pros and cons, and the opinions vary a lot. While our advice may not be appropriate for your lifestyle or financial goals, we see many Canadians asking themselves this question. Here are our tips for people who are currently juggling between saving and paying off their debts.

Pay off your debts first

Image result for pay off debt Debts, especially consumer debts from credit card balances, are something that most of us will experience at one time or another. Since consumer debt accumulates over time, it may take some time before we realize the seriousness of the situation. High interest debt is a particularly serious problem because the longer a consumer waits to pay, the more it will cost him dearly. In addition, if you are a regular user of credit cards, it is likely that you will need to reuse these cards again before you have paid off your total balance. Then, if you continue not to pay your balance completely from month to month, you could end up in a vicious circle of revolving debts.

Advantages

The advantage of paying your debts first is that you will be able to break the vicious circle of debts and start saving properly.

In fact, if you have a lot of high interest debt, it’s probably best to get started and pay off as much debt as possible as quickly as possible. In any case, your monthly minimum payments will decrease, making your debt more affordable.

Be aware that the consequences of not paying your debts can be just as, if not more serious than not having saved money. If you do not pay your debts, you may suffer the onslaught of a collection agency, which may seek to get a payroll seizure from you or any other legal action. This scenario is not limited only to high interest credit card debt. There are other types of loans that can definitely put you in the hot water if you fail to pay them back. Missing a payment on any type of debt is never a good idea, you will have to pay a fee, it will damage your relationship with the lender or creditor and the health of your credit will be affected greatly.

In the long run, repaying a debt saves you money, which can then serve you for productive purposes, such as retirement, owning a home or having an emergency fund.

disadvantages

The biggest disadvantage of paying off all your debts is that you could end up with very little or nothing in the face of an unforeseen situation that could arise in the near future. Unfortunately, you never know when an emergency may occur and you would be taken without money. If all your money has been used to repay your debt, you will no longer have emergency funds to get you out of this delicate situation. You will then have to load everything on your credit cards, creating a new, even larger, revolving debt, even if you try to get rid of it.

You will also have less money to invest in other avenues, such as in your pension plan. This means that you may not be able to retire at the age of 65 and will have to continue working in the next decade.

Save first

Image result for save first When it comes to saving, one of the most important practices you can maintain is to use some of your hard-earned money to create an emergency fund. In fact, many financial experts will recommend you to have the equivalent of 6 months of typical expenses in your emergency fund. On the other hand, a good deal of the money you make should also be spent on your retirement, and invest in an RRSP account. In any case, the advantage of prioritizing savings to pay off your debts is obvious, you will have access to money for your current and future expenses, in case an unexpected situation arises.

Advantages

This brings us to some other benefits that come with saving your money. The main benefit is, of course, that in the face of an unexpected expense, you will not have to wait for your next pay check before you can handle the situation. However, there are other places where saving would be of great benefit to you. Once you have surplus money, you can set up an automatic transfer so that a specific amount is deposited into your RRSP. An RRSP account is an excellent financial tool. First, any amount you contribute to your RRSP is tax deductible. With an abundant RRSP, you can not only retire earlier and with greater ease than those who do not have savings, but you can also take advantage of the RRSP Home Ownership Plan if you decide to buy your RRSP. ‘to buy a house. The Home Buyers’ Plan allows you to withdraw money from your RRSP to fund the down payment of your home. You will then have 15 years to repay this money.

disadvantages

The downside of saving your money instead of paying off your debt is pretty clear. Letting your debts go out of control can lead you to a situation where it will be even harder to solve other financial and debt problems in the future.

And, once you have fallen into the trap, it can be extremely difficult to get up. The longer you allow your debts to accumulate, the more difficult it will be to pay them back. As a result, your credit will be negatively impacted, which will lower your credit rating and make it more difficult to approve a loan. Even people with a lot of money can have a low credit rating, so imagine not having money because of your constant debt combined with poor credit.

What is the best answer?

The problem with this question is that you have to look at both sides of the coin and that the answer depends a lot on a person’s financial situation. Many professionals will tell you that paying off your debts should be your first priority. Again, it depends on the type of debt you have to pay back. High interest debt can lead to serious financial problems. So it’s best to handle the problem before it gets out of hand. However, a low interest rate debt of another type of loan may be easier to manage because of low costs and repayment schedule.

So your best mie will probably be working towards stability, using both options to achieve a balanced budget and lifestyle.

For high-rate debt, it may be beneficial to spend as much money as possible on the repayment, or at least to repay more than the minimum monthly payments. Then you can set aside for your emergency fund. The best thing about a typical savings account is that you can add anything you want. After all, every dollar counts. Then you will have a background to help you in the event of an unforeseen situation. Once you have found a way to balance your payments and savings, you will have learned an important lesson on financial stability.

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Why was my loan application denied?

Image result for denied loanGetting a refusal of a loan application is of course annoying, but rest assured, this happens very often. In addition to your financial situation, other factors may influence your loan application. The best way to increase your chances of success is to analyze your financial situation first. Here are the most popular reasons for refusal. Knowing them may help you avoid a negative answer.

 

Debt Ratio

If your debt-to-income ratio is too large, most creditors will consider you a risky client and therefore refuse your request. The debt-to-income ratio is the percentage of your monthly income (before taxes) that is used to pay your debts. If too much of your monthly income goes to pay your debts, it is likely that the creditors will refuse the loan, because in their eyes, the loan would only make your situation worse.

Credit history poor or absent

Image result for poor creditIn order to obtain a loan, you need a credit history. Credit cards, for example, are a good way to accumulate more credit history. If you are afraid of credit history, it is unlikely that a creditor wants to make a loan. Before agreeing to make a loan, any creditor will look at your credit rating. The higher the rating, the more it proves to the creditor that you are responsible with your loans. They will also check to see if you have any bad comments, such as bankruptcy, insolvency, reaching your credit card limit, and so on. Taking care of your credit history should be one of your priorities, as it may help you make better progress in life, especially when buying a home or car.

Many investigations of your file

An investigation of your file takes place each time you make a new application for credit. Unfortunately, having too much investigation of your file will work against you when you apply for a new credit. In concrete terms, too many investigations are proof that you have desperately tried to obtain loans without having any success. This presents you to the new creditor as an unwanted customer because the other creditors have refused you in the past. Learn more by clicking HERE.

Employment situation

Having an unstable job or not having a job at all are the two main reasons why loans are often refused. The creditors want to have at least a minimum of security when they make you a loan. Thus, your employment situation is often a way to reassure them. So if you do not have a job with enough income it makes you a risky client, which decreases your chances of getting the loan.

Accumulation of debts

If you are already having trouble repaying your debts and your payments are often late, it is highly likely that the creditor will deny you another loan. It’s hard to handle the extra debt, but once you get organized, put the payments back on time, once you’re on the right track, getting a new loan will be easier. . Use your refusal of credit as a source of motivation to improve your financial situation and work to achieve it.

Member of a financial recovery program

 

If you are on the verge of bankruptcy or have enrolled in a financial management assistance program, then congratulations. You are on the right path to a better financial situation. Even so, you will still not be approved for a new loan. By being part of financial management assistance programs you will demonstrate to your creditor that you will not be able to manage another loan responsibly. Once you leave the bankruptcy situation and have completed your assistance program, do not hesitate to reapply to apply for a new loan.

Learn more about bankruptcy loans and the consumer proposal.

Collection of debt

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A collection of debt is when you have a credit account (credit card or loan) whose payment deadline has long passed. Usually, in such a situation, the creditor has already sent the collection agents to recover his money. Having a debt collection is the worst thing if you want to apply for new loan. Most likely, if you are in such a situation, the loan will be refused.

Even if you have been refused the new loan, you can still improve your financial situation soon. The first step in rebuilding your reputation is to understand why you have been denied. So, you could avoid the same mistakes and finally get the loan.

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The taxation of contributions to Insurance Plans Insured (PPA)

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Saving or constituting a capital or income that serves to supplement our retirement pension is in itself a more important reason, but if we achieve a fiscal saving in the process, we add one more reason.

This is the case of the Insurance Plans Insured (PPAs), it is a life insurance policy with the guaranteed interest rate and that although it has coverage of death, its main purpose is to constitute a capital or a receivable at the time of our retirement The PPA, therefore, have the same purpose as a Pension Plan, and with them they coincide in two points in the liquidity and in its advantageous taxation. In the first point, the insured may not have the accumulated value in their PPA (contributions and interest generated) until the time of retirement or death but there are exceptions, such as tota, severe illness or long-term unemployment duration. In return, we have a very favorable tax regime in the contributions we make to the PPA.

 

Taxation of contributions, general rule

The premiums paid to the PPA can be subject to a reduction in the taxable income of the IRPF:

  • Taxpayers up to 50 years : 10,000 euros or 30% of net income from work and economic activities (the lowest).
  • Taxpayers over 50 years old : 12,500 euros or 50% of net income from work and economic activities (the lowest).

The maximum annual contribution is joint for all the social welfare systems, that is, it includes pension plans, social security mutual funds, insured pension plans, corporate social security plans and dependency insurance.

In addition to these direct contributions to our own PPA, there are specific cases. The first case is that of taxpayers whose spouse does not obtain net income from work or economic activities, or whose amount is less than 8,000 euros per year. In this case, the tax base may be reduced by the amount of the contributions made to the PPA of which the spouse is the holder, with a maximum limit of 2,000 euros per year.

The second case is in the contributions to PPA of relatives in direct or collateral line up to third degree, with a degree of physical disability equal or superior to 65%, psychic equal or superior to 33%, as well as of people with disability that have a disability declared judicially regardless of his degree, in which there is a tax limit of up to 10,000 euros per year. Of course, the contributions of family members, plus those of the person with one of the degrees mentioned, can not exceed the maximum set of 24,250 euros per year.

It is important to point out that those contributions that could not have been subject to reduction in the taxable base due to the insufficiency of the same or to the application of the percentage limit, can be applied in the following five years, but always respecting the indicated limits.

 

The specific case of the Basque Country and Navarre

The Basque Country and Navarre are governed by their own provincial haciendas, which is why they have their own tax regulations. In the Basque Country there is no percentage limit of the income from work and economic activities, so that the contributions made may be subject to reduction in the General Tax Base, regardless of the origin of the income. The limits differ between the different provinces, in Álava and Vizcaya, the limit of private (non-business) contributions to pension plans including PPAs is 6,000 euros up to 52 years and from that age add 500 euros for each year that exceeds 52 to a maximum of 12,500 euros. In Guipúzcoa the limit is 5,000 euros regardless of their age.

In Navarra, a maximum contribution can be made with a deduction of 8,000 euros, which for people over 50 years of age rises to 12,500 euros, with the same limits as in common territory: 30% of their income in general and 50% from 50 years old.

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