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Should You Pay Off Debt First or Save?

Managing personal finances involves a delicate balance between paying off debts and saving for the future. Determining the optimal approach depends on various factors, including the types of debts, financial goals, and your overall financial situation. 

Here we’ll delve into the age-old question: Should you pay off debt first or save? By exploring key considerations, we aim to provide insights that will help you to make informed decisions about your financial well-being.

Should You Pay Off Debt First or Save?

The decision to pay debt first or save depends on your individual financial situation, goals, and priorities. Here are some considerations to help you make an informed choice:

Paying off debt first

  • High-Interest Debt: If you have high-interest debt, such as credit card balances or high-interest loans, it’s often financially prudent to prioritize paying off these debts. The interest on such debts can accumulate quickly, and eliminating them can save you money in the long run.
  • Financial Stress: Carrying debt can be stressful, affecting your overall financial well-being. Paying off debt can provide a sense of financial security and peace of mind.
  • Improved Credit Score: Timely debt payments positively impact your credit score. A higher credit score can lead to better interest rates on future loans and financial products.
  • Financial Flexibility: Reducing debt provides more flexibility in your monthly budget, allowing you to allocate funds to other financial goals once the debt is cleared.

Saving first

  • Emergency Fund: If you don’t have an emergency fund, saving should be a priority, provided you are able to put some dollars aside. An emergency fund helps cover unexpected expenses, reducing the need to rely on credit cards or loans during financial crises.
  • Employer Matching: If your employer offers a retirement savings plan with a matching contribution, consider taking advantage of this benefit. Employer matches are essentially free money, contributing to your long-term financial security.
  • Financial Goals: If you have specific short-term or long-term financial goals (e.g., buying a home, education, retirement), saving can help you work towards these goals.
  • Opportunity Cost: While paying off high-interest debt is essential, consider the opportunity cost of not saving. Over time, the power of compounding can significantly grow your savings, especially for long-term goals.

Balanced approach

  • Establish a Budget: Create a budget that allows you to allocate funds for both debt repayment and saving. A balanced approach ensures progress on multiple financial fronts.
  • Emergency Fund and Debt Repayment: Consider building a small emergency fund while simultaneously paying down high-interest debt. Once you have a basic emergency fund, focus on more aggressive debt repayment.
  • Evaluate Interest Rates: Compare the interest rates on your debt with potential returns on savings. If the interest rates on your debt are substantially higher than potential savings returns (e,g., a 20% interest rate on your credit card versus a savings account that yields 3%), prioritizing debt repayment may make more sense.

Ultimately, the answer to “should you pay off debt first or save” depends on your financial goals and circumstances. It may be beneficial to consult with a Licensed Insolvency Trustee to create a personalized plan based on your unique situation.

Should you be saving or paying off debt? This podcast looks at strategies to help you do both.

Paying Off Credit Card Debt 

In the second quarter of 2023, Equifax Canada reported that credit card balances surged to a record-breaking $107.4 billion, indicating a persistent increase in financial strain amid inflation and escalating interest rates. Concurrently, the agency disclosed that the overall consumer debt in Canada reached $2.4 trillion during the same quarter.

Paying off credit card debt requires a strategic and disciplined approach. Here are steps to help you effectively manage and eliminate your credit card debt:

  • Assess Your Debt: Begin by gathering information on all your credit card balances, noting the outstanding amounts, interest rates, and minimum monthly payments. This provides a clear overview of your debt situation. 
  • Create a Budget: Develop a comprehensive budget that outlines your monthly income, essential expenses, and discretionary spending. Allocate a portion of your income specifically for debt repayment.
  • Prioritize High-Interest Debt: Identify the credit card(s) with the highest interest rate, as these accrue the most interest over time. Prioritize paying off these balances first to minimize interest costs.
  • Make More than Minimum Payments: If you can, pay more than the minimum required payment on each credit card. This accelerates the debt repayment process and reduces the overall interest paid.
  • Consider Debt Snowball or Avalanche: Choose a debt repayment strategy based on your preference. The debt snowball method involves paying off the smallest balance first, while the debt avalanche method targets the highest interest rate debt. Pick the strategy that aligns with your financial goals and motivation.
  • Negotiate Lower Interest Rates: Contact your credit card companies to negotiate lower interest rates. A reduced interest rate can significantly ease the burden of repayment.
  • Explore Balance Transfer Options: If feasible, consider transferring high-interest balances to a credit card with a lower interest rate. Some credit cards offer promotional periods with low or 0% interest rates on balance transfers.
  • Cut Unnecessary Expenses: Temporarily cut back on non-essential expenses to free up more money for debt repayment. Redirect these savings towards paying off your credit cards.
  • Generate Additional Income: Explore opportunities to increase your income, such as taking on a part-time job, freelancing, or selling unused items. The additional income can be dedicated to accelerating debt payments.
  • Seek Professional Advice: If your debt situation is challenging, consider seeking advice from a Licensed Insolvency Trustee. They can provide guidance on debt management strategies and may negotiate with creditors on your behalf.
  • Stay Disciplined: Consistency is key. Stick to your budget, make regular payments, and resist accumulating new credit card debt. Celebrate small victories along the way to stay motivated.

Remember, paying off credit card debt is a gradual process that requires commitment and patience. Stay focused on your goal of achieving financial freedom and make adjustments to your plan as needed.

Debt Relief in Canada

In Canada, you have access to many debt relief strategies to assist you in managing and alleviating financial burdens. Common options include:

  • Debt Consolidation: Combining multiple debts into a single loan or credit line with a lower interest rate.

Pros: Easier management, potential interest rate reduction.
Cons: Requires qualification for a consolidation loan.

Pros: Professional guidance, potential interest rate reductions.
Cons: Payments still required, potential impact on credit.

  • Debt Settlement: Negotiating with creditors to settle debts for less than the total owed, often through a settlement company.

Pros: Potential debt reduction.
Cons: Possible negative credit impact, fees from settlement companies.

  • Informal Negotiation: Direct negotiation with creditors to create repayment plans or settle debts.

Pros: Flexible, no formal process.
Cons: Depends on creditor cooperation, lacks legal protection.

  • Government Assistance Programs: Government programs offering financial assistance or debt relief.

Pros: Tailored assistance for specific situations.
Cons: Eligibility criteria may apply.

  • Consumer Proposal: A formal, legally binding process involving negotiation of a repayment plan with creditors.

Pros: Protection from creditors, potential debt reduction.
Cons: Appears on credit report, affects credit score.

  • Bankruptcy: A legal process involving surrendering assets to eliminate most unsecured debts.

Pros: Fresh financial start.
Cons: Serious credit impact, potential asset loss.

Before choosing, you should assess your financial situation, consider credit impact, and seek advice from a licensed professional. Understanding terms, fees, and consequences is essential for any selected debt relief strategy.

Financial Problems? We Can Help

At Allan Marshall and Associates, our trustees offer various options to assist you. Whether you require budgeting advice and improved money management for bill payments or a more substantial solution like a Consumer Proposal or Bankruptcy, we are here to help. For inquiries or assistance in managing your debt, contact us today for a free, no-obligation consultation. Reach us at 1-888-371-8900 or connect with us online.

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Mary-Ann Marriott

Mary Ann has been working in the insolvency industry for 25 years. In 2005 Mary Ann received her Chartered Insolvency & Restructuring Professional (CIRP) designation and attained her license as a Licensed Insolvency Trustee (LIT) in 2014. She is passionate about helping others become financially literate, and has been a guest speaker to various groups and organizations on the topic of Money Management. Mary-Ann also hosts a weekly radio show, as a volunteer in her community. Her tagline is “Helping you have happier, healthier finances”.