Because I’ve never been in a position where an RRSP loan made a lot of sense I never considered all that many financial strategies that were associated with them. This led to a bit of a surprise last week when one my friends (we’ll call him “John” to keep it anonymous) called and asked for my opinion on a somewhat unique financial move he had read about and was thinking would work out well for him.
Before we get to John’s RRSP loan strategy, I’ll give you a bit of background on his situation. He readily admits that he wishes he had pay more attention to his finances a little earlier in life, but as a kid his parents didn’t have a lot of money and they absolutely never talked about how to manage any. Coming out of high school, because his parents’ income was quite low, he was able to receive large student loans – which he took advantage of like most 18-year olds out there. After four years of post-secondary John had developed some really bad spending habits. He worked hard in the summers and made a lot more than the average student did, but he also spent a ton of money.
He graduated with slightly higher-than-average student debt and a few thousand dollars’ worth of credit card debt. He didn’t expect this to be a problem since he had graduated from a unique program that allowed him to attain both a university degree and a college diploma in that four year span – and he naturally believed this would allow him to land a great job. The problem was that the field he had chosen – journalism – had some really terrible job prospects (and still does today). John knew he had to pay his dues and get some hard-fought experience within the industry, so he took every minimum wage job he could find in media and worked multiple serving jobs on the side to pay the bills. Of course because he still hadn’t learned anything about money, and had those negative spending habits to contend with, he continued to pile on credit card debt. This sort of spiral continued for a couple of years.
They All Lived Happily Ever-After
Thankfully, this story has a happy ending. John caught on to a great job with a provincial government (after several months of total unemployment) where he could put his media skills to use “from the other side of the fence”. He is now 29-years old and is making roughly 70K a year. A couple years ago when John landed his current job and felt like he finally had his head above water he began to talk to me about his financial situation and ask for help a little at a time. We talked about some budgeting basics and consolidating the staggering amount of credit card debt he had accumulated into a low-interest loan. Even after that step, he still owed over 20K on a LOC locked in at 11% (due to his bad credit rating this is the best loan he could secure) and a decent-sized student loan. Continue Reading →