Should I Pay Off Debt or Save Money? By Jordan EvansNow that the holidays have come and gone and many of us are attempting to deal with our holiday spending-induced\u00a0credit card debt, we may be asking ourselves the same question:\u00a0should I pay off debt or\u00a0save? Getting out of debt\u00a0is a common New Year\u2019s resolution, but resolving to save money for retirement or emergencies is just as common. Deciding whether to\u00a0pay debt or save\u00a0- or perhaps use a balanced approach - is a situation many people find themselves in. Although there isn\u2019t a simple cut and dry answer, here are some points to keep in mind when deciding whether you should be\u00a0paying off debt\u00a0or saving money.Reasons to Pay Off Debt With some credit card companies charging as much as 30% interest on outstanding balances, and most savings accounts earning about 1% in interest, simple math suggests that your money is better spent if you\u00a0pay off debt\u00a0instead of contributing to a saving account. By resolving to\u00a0pay off debt fast, the sooner you\u2019ll be able to enjoy the mental clarity and financial freedom of being\u00a0debt free.Paying High Interest Makes it Hard to Manage Regular Expenses When you're making high interest payments each month, or if you're only making minimum payments, it can feel like you're spinning your wheels and running short of money for the regular expenses you need to pay each month. It will also feel like you're going to stay in debt forever - well, maybe not forever, but at least for a very long time. To figure out how long it will take you to pay off your debts, try using a\u00a0financial calculator. And to see how topping up your payments can benefit you, use a\u00a0Canadian credit card debt payment calculator. There is a big difference to overall cost and time between paying the minimum amount that you are required to pay to keep your account in good standing versus making a fixed minimum payment each month. \u00a0Paying Off Debt Can\u00a0Improve Your Credit Score Paying off debt\u00a0first can also\u00a0improve your credit score, which can better your chances of qualifying for a car loan or a mortgage \u2013 or maybe a consolidation loan if you\u2019ve got a lot of debt. While having a sizeable savings account with your bank doesn\u2019t factor into your credit score, where\u00a0credit card and loan balances certainly do, savings\u00a0is taken into consideration when you apply to borrow money. \u00a0However, by paying down your debts you\u2019ll improve your credit worthiness, making you eligible for lower rates on loans and mortgages. The magic numbers when paying down your credit cards are 75% and 50%. Paying each credit card balance down to below 75% of your credit card limit significantly improves your credit score, and paying them down further \u2013 to less than 50% of your credit limit \u2013 improves your credit score even more. If you decide that paying off your debts is the best route for you, the best way to\u00a0get out of debt\u00a0is to create a personal budget that factors in your income and your expenses, so you\u2019ll be able to live within your means while ensuring your debts are getting paid. Using a\u00a0budget calculator spreadsheet\u00a0is a great tool that will teach you not only how to budget, but also how to get out of debt.Reasons to Save Money Depending on your financial situation and the interest on both your credit cards and savings account, it could be a better option to make\u00a0saving money\u00a0a priority. Not only will you create a financial cushion to offset unexpected emergencies, but you\u2019ll also be instilling good saving and spending habits.You Need Savings for Emergencies and to Get Out of Debt Although it makes financial sense to pay off your higher interest rate debt instead of funneling all your money into savings, any short-term gains will be lost if you revert back to credit to cover the cost of emergencies and unplanned expenses. It\u2019s very important to\u00a0squirrel away some money and build up an\u00a0emergency savings\u00a0fund\u00a0of about $1,000, to start. If you\u2019re working at paying off your debt, maintaining a $1,000 balance in your bank account enforces good saving and spending habits and forces you to spend \u2013 and live \u2013 within your means. Once you\u2019ve paid off your expensive debt \u2013 like credit cards \u2013 you can then increase your savings to enough money to last you from three to six months. In the event of a sudden illness, a job loss or a divorce, having an emergency fund will help you ride through the storm without having to rely on credit and falling back into debt.Use a Balanced Approach: Pay Debt and Set Aside Small Savings Instead of focusing on either eliminating your debt or rebuilding your savings, depending on your financial situation you could consider a balanced approach that would allow you to\u00a0pay debt\u00a0while building a small reserve for financial emergencies. After you\u2019ve created a budget and set your financial priorities, determine whether you have enough savings to get you through a financial emergency, such as an illness or a job loss. Track your expenses for a month so you can get a picture of how much you\u2019ll need for groceries, clothing, entertainment and other fixed and variable costs. If you have enough saved up to cover about three months worth of these costs, you\u2019re in good financial shape and you can focus on\u00a0how to pay off debt. If you don\u2019t have enough emergency savings, you can still have the best of both worlds.\u00a0After accounting for your fixed and personal expenses, you can divide your take-home pay and any extra money you receive, like a tax refund, between saving and paying down your debt. This allows you to repay what owe in a steady, systematic way, while at the same building up a small savings fund. Once you\u2019ve saved up enough in your emergency fund,\u00a0you can focus on blasting through your debt. Although it will take a bit longer to pay off your debts and for your savings to grow, in the end you will have achieved both of your financial goals. And, you can always increase your debt payments once you\u2019ve saved up a reasonable nest egg to cover the cost of any emergencies you may encounter. No matter which route you take, it\u2019s important to evaluate your personal financial goals and decide which is more important.\u00a0As with all things in life, deciding whether you should\u00a0pay off debt or save\u00a0is all about balance.Get Help With Reaching Your Financial GoalsWhether It's Paying of Debt or Saving Money Regardless of whether you're focusing on paying off debt, saving money, or a balance between the two, a non-profit credit counsellor can give free, confidential help. You can meet with them over the phone or in person, and they don\u2019t obligate you to anything. The counsellor will review your whole situation with you and then suggest options to help you reach your goals. Typically, the earlier you contact a credit counselor, the more options you\u2019ll have.