London, ON: As Canadians' personal debt levels reach all-time highs, the biggest dilemma this RRSP season is whether it is better to contribute to your RRSP or pay down debts. "How you respond to this perennial Canadian dilemma not only impacts your retirement fund decades from now, but also your short-term financial security," says Talbot Stevens, a London, Ontario-based financial educator and author of 'Financial Freedom Without Sacrifice'. He offers 5 guidelines when considering RRSPs vs. paying down debts.

1. SECURITY. Since most of us are driven more by emotions than logic, deciding if you should contribute to RRSPs or pay down debt should first be evaluated in terms of which produces more short-term security to help you sleep at night, especially for those negatively impacted by the economy. The key overlooked factor is that RRSPs can double as an emergency income buffer to protect against low- or no-income periods. "This is the most important reason for most people to invest in RRSPs before paying down debts, like their mortgage," says Stevens. "Ironically, many people want to pay down their mortgage to eliminate the risk of losing their house. But having extra funds in your RRSP, which can be drawn from during tough times, might make the difference between keeping and losing your house."

2. MATH. Mathematically, most people should maximize their RRSPs before paying down personal debts that charge less than 10%. This means that paying down credit cards ranks ahead of RRSPs, but generally not mortgages. "A universal rule-of-thumb is that almost everyone should to pay off expensive debts that charge more than your mortgage, before investing in RRSPs," suggests Stevens. "Paying down a 19% credit card results in a guaranteed, after-tax return of 19%, which is pretty good when GICs don't pay 4%." When expensive debts are paid off, then we're left dealing with the more specific question of RRSPs vs. mortgage paydown.

3. BEHAVIOUR. After extensive analysis of 24 mortgage paydown vs. RRSPs scenarios, Stevens found that the most significant factor was the investor's behaviour and discipline level once the home is paid off, specifically how much of the newly freed up cashflow that used to go to mortgage payments actually gets invested. Obviously, if you never invest any of the mortgage payment cashflow, the RRSP is the better choice because eventually you end up with a debt free home and a retirement fund. Only the most disciplined, who will invest 100% of their mortgage payments after the mortgage is gone, will be better off paying down their mortgage sooner to invest in RRSPs later.

Your discipline level is key. "If you have little or no retirement savings after years of borrowing to enjoy today, is it realistic to assume that you'll save like a madman when your debts are gone and you'll magically end up with the retirement you want?" Stevens asks. If, like most of us, you aren't perfectly disciplined, you're probably better off starting the "pay yourself first" habit of saving some amount monthly so this momentum continues at a higher level later when debts decrease.

4. DIVERSIFICATION. With many Canadians having most of their net worth in their home, increased diversification is another reason to focus on RRSPs ahead of paying down mortgage debt.

5. MARKETS. For equity investors, market conditions are also a factor. "If markets have had a few good years and are at the high end of the cycle like they were before the 2008 crash, then it was safer to take the guaranteed return of paying down debts," explains Stevens. "However, after the market was already down over 40% like during the 2009 RRSP season, it made sense for equity investors to focus on investing more in RRSPs first, "buying low" while the markets were on sale.

Doing both is a non-answer. Finally, we should note that the typical response to the RRSPs vs. mortgage debate to do both, by investing in RRSPs and putting the refund against the mortgage, is a political non-answer that doesn't address the question of which strategy is better. "If RRSPs are the better strategy initially, they are also the better strategy a few weeks later when the refund comes in," claims Stevens. He concedes however, that investing in RRSPs and paying down debts are both great financial strategies and it's hard to go wrong combining them.

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Talbot Stevens is a financial educator, industry consultant, and author of "Financial Freedom Without Sacrifice" and "Dispelling the Myths of Borrowing to Invest". For other story ideas, visit the Free Resources menu of www.TalbotStevens.com. For more information, contact Judy Culford, Communications Director for Talbot Stevens, by calling (519) 663-2252, or emailing judy@TalbotStevens.com.