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From page 17

For example, if you climinate a $1,000 debt on which you are pay- ing 10% interest, one year from now you will have an extra $100 in your pocket —- compared with carrying that debt for another year and paying $100 in interest.

Why is that so effective? If you invested $1,000 and wanted to end up with $100 in your pocket a year later, you'd have to earn perhaps 17% interest, explained the CGA, ‘You'd ‘declare the $170 interest, pay 41% tax (if your. taxable income is roughly between $30,000 and $59,000) and that would leave you with $100 after tax.”

In. other words, paying off a 10% locn is the same as investing at 17% before tax. And you can- not find any risk-free investments yielding 17%,

The CGA came up with even ‘more dramatic figures:

“Paying off an outstanding

credit card balance — which could be costing you as much as 32.9% a year — is the same as making an investment earning 56% inter- est before tax if you are in the 41% tax bracket, And there is no possible way to carn that sore of interest, short of loan sharking.’*

If you are in the highest tax bracket, you will pay close to 50% tax on every dollar, The only good news is that paying off a 32.9% credit card debt is the same as earning 66% interest before tax,

Even if you are in the lowest tax bracket of about 27% (that is, your taxable income js below $25,000 this year), paying off those credit cards is still worth- while. You will be doing just as well as earning 45% interest be- fore tax. '

Even paying down a 9% mort- gage is the same as earning 12.3% interest before tax. If guaranteed savings certificate rates are around

6%, then paying off your mort- gage provides more than double the return.

The CGA explained that to calculate the equivalent before-tax yield when you are looking at debt reduction, you take the debt in- terest rate and divide by one- minus-your-marginal-tax-rate.

Example: The debt interest rate is 9%, Divide that by one- minus-your-0,27-marginal-tax- tate — that is, divide by 0.73.

Nine divided by 0,73 cquals 12.3%. So paying off a 9% debt is the same as earning 12.3% in- terest on an investment.

Being tax-aware will also help you sec why it makes sense (and dollars) to use some or all of the $5,000 you might have in savings to pay down a $5,000 debt (pro- vided you won't then run up the debt again).

If the savings now are paying 6% interest, after (41%) tax, your real return is only 3.5% -—~ while

the debt is probably costing you between nine and 32.9%,

“tf you are (or become) a suc- cessful investor, only then should you consider other investments in- stead of paying off debt,’’ the CGA said.

“For example, if you do well in

Gy RCSA TERT PN NAS TS

‘RRSP’s Te GUARANTEED INVESTMENTS

and RRIF’s

the stock market, you pay no tax on your profits as tong. as you can claim your capital gains exemp- tion. So if you make a profit of 15% and there is no tax to pay, that’s obviously better than paying off a debt costing anything less than 15%."

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