To pay off debt or to save money, that is the question

This is one of the most common questions I receive outside of how to create a budget.  It is a dilemma that we all face and the answer, while it seems simple, really isn’t … just like Shakespeare’s Hamlet.

Debt is a big issue for people…okay almost everyone (considering Canadians have debt repayment levels sitting at 165% of their income) and as I stated in a previous post there are many kinds of debt to be wary of.

On the opposite side of the coin is our saving problem.  Canadians are not saving enough in general but especially for retirement.  We have become reliant on short term credit because of how low interest rates have gotten and how easy it is to obtain.

So how do you choose?  Pay off your debt or save your money? Can you do both? Where do you even begin?  

Well I am here to help you solve this dilemma with an easy step by step process.

Photo by  Lou Levit  on  Unsplash

Photo by Lou Levit on Unsplash


Step One:  Assess the situation

  • You need to see where you are sitting debt wise and savings wise
  • Gather all your statements of loans, mortgage, credit cards and line of credits

  • Gather all your statements for your savings, this includes work retirement plans, your RRSP, TFSA, savings/emergency accounts, etc.


Step Two: Organize according to priority

  • Pay off the debt with the highest interest rate first, then the second highest, etc.

  • Your saving priority should be according to shortest time frame. 

    • For example, if retirement is 20 years away and you have a work plan that you are contributing to but you don’t have an emergency fund then your emergency fund is your first priority

  • Ask yourself which is more important to you….paying off the debt or saving.  Can’t decide between the two? Then it is probably both.

    • This is important.  Your money personality plays a huge role in this.  Always adjust the plan to fit your money personality...

    • Incredibly debt averse people will not agree to putting more money into savings until their debt is paid off.  So if your debt situation is keeping you awake at night then you need to focus there, and vice versa with saving.

Photo by  STIL  on  Unsplash

Photo by STIL on Unsplash


Step Three: Create an action plan

  • This involves your budget…..hopefully by now you have some sort of a budget.  If not please re-read the following two posts: The Financial Bird and Bees or How Horror Movies can help you Budget

    • Why does she ALWAYS mention budgets?  You would think budgeting is important or something….almost like the foundation of financial planning….sigh

  • Got your budget?  Good. So now you know what your variable cash flow is outside of mandatory expenses.  Now we need to know from that cash flow what you can attribute to paying off debt or saving or both.

For example:  Jane has variable cash flow of $1000 a month ( I like to use round numbers) to spend on clothes, entertainment, her Kobo book addiction, her husband's fish tank obsession and her son's new found love of fidget spinners, etc.

  • From that she is willing to divert $300.00 a month towards debt repayment and/or savings. 

  • It is really important that this amount is realistic.  The worst thing you can do is over-commit yourself with a huge amount only to find yourself re-borrowing what you just paid off.

    • Jane is going to split it equally between debt repayment and savings. 

      • You may overweight it in whichever is of greater importance to suit your individual preferences.


Step Four:  Execute plan

  • All of this will only work if you actually follow through.  You would be surprised how many people create the planand DON’T ACTUALLY EXECUTE IT……sorry deep breaths…okay… is okay Caval….moving on.

  • So this is what it would look like

    • $150 to the credit card at 19.5% until it is paid off

    • $150 to the emergency savings account until it has the balance you are comfortable with

    • Once the credit card is paid off you divert the $150.00 to your line of credit at 6% and the other $150 can top up your travel fund for that trip you want to take in 2 years

    • Once the line of credit is paid off, divert that $150.00 to your car loan…move the $150.00 to top up your TFSA or RRSP

    • Repeat for the rest of your life…or until you have no debt, mortgages….

  • Now….if at any point you have debt accumulate on the credit card again you go back to putting the $150 there.  This is the same for the emergency fund….you needed new winter tires so you tapped into the emergency fund so you divert the $150 until it is topped up again.

Photo by  Austin Schmid  on  Unsplash

Photo by Austin Schmid on Unsplash


Now I know what you are thinking…..this sounds like it will take a lot of time and effort, just like reading Shakespeare.  You are right, it absolutely will.  I hate to break it to you but there are no free parking spaces and get out of jail free cards in real life….unless you are a celebrity. 

Those plans that offer to help you get debt free within a year take extreme dedication and sacrifice that most people can’t make.  Let’s face it, adulting is hard work and you have to do it for the rest of your life.  This is why you should make a plan that allows you to accomplish your goals while enjoying the life you are living today.


What is more important to you?  Paying off debt or saving money?  Share it in the comment section below!

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