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The average Canadian consumer has almost $27,000 in debt, not including any mortgage debt they might have. While it’s important to pay down debt, it’s also important to save money. It’s always wise to have a financial cushion to fall back on in case an unexpected expense creeps up, which is almost inevitable. You might want to save up for retirement, for college tuition for your kids when they get older, or for that big family vacation, you’ve been longing to take. The thing is, how to save money and pay off debt? With all that money that you still owe – plus interest – how can you possibly set some money aside to be put towards something other than your monthly bills?

How To Save Money And Pay Off Debt

There are many strategies for saving money and paying down debt. Here are some steps and strategies to help you get started: 

1. How To Save Money And Pay Off Debt: Choose A Method To Pay Down Your Debt

In order to start saving while in debt, you’ll need to first create room in your income to start saving. That happens by first paying down your current debts. Here are two strategies to help pay down debt:

Snowball Method

This strategy involves paying off the debt with the smallest outstanding balance first and then making minimum payments on all other debts so you’re not late paying them. Continue focusing on your smallest debt until it’s paid off, then put the money you were using to pay off the first debt towards the next smallest debt.

Continue this pattern until all of your debts are paid off. This method is attractive because it will take a shorter amount of time to pay off a smaller debt than a larger one, and with each new debt paid off, you’ll create more room in your income to save or put towards your other debts.

Avalanche Method

Rather than focusing on the smallest debt, this method involves paying down the debt with the highest interest rate first. Considering the fact that a higher rate makes debt more expensive, it would make sense to get rid of that debt first in order to avoid spending all of your money on interest. Once you’ve paid that debt off, work on the next highest interest rate debt, and so on until you’re debt free.

2. How To Save Money And Pay Off Debt: Create A Budget

A budget is necessary to get a clear and accurate understanding of your finances. In order to save, you need to know how much money you are spending versus how much you are bringing in.

The more detailed you can be, the better. That way, you can identify any areas that require close monitoring. If there are any areas where you spot some overspending, you can make the necessary adjustments to help you free up money that could be put toward your savings. 

You can use budgeting apps to help you create your saving goals and better track your spending.

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3. How To Save Money And Pay Off Debt: Don’t Miss Any Payments

When it comes to saving money despite lingering debt, a little arithmetic is in order. Add up absolutely everything that would be required to meet your debt obligations, and make sure that all of these bills are paid in full and on time at the end of each billing cycle.

This list of payments should take precedence, as you don’t want to miss payments and get slapped with late fees, which will just add to your overall debt. Whittling down your debt will also get you closer to financial freedom, at which point you can dedicate more funds towards savings.

4. How To Save Money And Pay Off Debt: Cut Down On Your Expenditures

If using your credit card is causing you to rack up tons of debt, then stop using it. Instead, put it away and start using cash instead. It’s a lot harder to part with physical cash than to simply swipe your credit card when you’re at the cash register. Until your debt is under control and you’ve been able to free up enough money to save a little each month, keep your credit card at home and use cash instead.

Check out what you can do if you have maxed out credit cards.

If overspending is a problem for you, then that’s an area of your financial life that needs some adjusting. In order to free up some money to be put aside, you will need to make some sacrifices. Rather than going out for dinner every weekend, going on spending sprees at the mall, or splurging on expensive lattes every morning, consider cutting back on these expenditures. It might not be fun and may be a bit of a sacrifice, but it will be well worth the effort once you see the pile of money saved at the end of the day.

5. How To Save Money And Pay Off Debt: Automate Your Savings

How much are you looking to save every month? Ten percent of your paychecks? One hundred dollars per month? Whether it’s a percentage or flat dollar amount, make that decision from the get-go and stick to putting that amount aside every month. Just make sure you are completely realistic and that the number is doable.

Consider automating your savings so you aren’t worried about using more than you can afford. By automating your savings, you know that the amount in your account can all be used towards your debts and bills. You can set up your online banking to have your predetermined amount transferred into your savings account every month. This will make the process much easier. Not only will you not be faced with temptation, but you’ll also take one more task off your plate.

How To Save Money And Pay Off Debt If You Have Too Much Debt?

If your debts are getting so troublesome that they’re preventing you from saving any money, here are some of the more serious relief options you can access in Canada:  

Credit Counseling

A good credit counsellor can help you create a budget, manage your finances better and, when necessary, negotiate debt payment strategies with your lenders. Make sure to do research here, since agencies may be non-profit (free of charge) or for-profit where service fees will apply.

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Debt Consolidation Loan

This process involves taking out one large loan to pay off multiple debts at once. Ideally, this leaves you with a single monthly payment and lowers the amount of interest and late penalties you would pay for several debts. Debt consolidation can be very effective for unsecured debts, like credit cards. However, qualifying for one with bad credit can be difficult.

If you’re a homeowner, you can qualify for a low-interest loan, even with bad credit, by tapping into your home equity. Lenders like Alpine Credit offer affordable home equity loans to homeowners, regardless of their credit score or income level.

Consumer Proposal

A consumer proposal is a legally binding process you can file for with the help of a Licensed Insolvency Trustee (LIT). They will work out an arrangement with your creditors that lets you pay back part of what you owe, with no interest. You can qualify with under $250,000 of unsecured debt.  


This legally-binding process is also administered by a LIT but is the only one that offers total debt-forgiveness. Here, your assets can be seized to resolve your debts. You also have to pay a base contribution of $1,800 and may need to make surplus income payments, depending on your earnings and debt amount.         

How Much Of Your Income Should Go Towards Paying Down Debt?

If you’re worried about having too much debt and not enough savings in your bank account, there’s a general guideline you can follow called the 20/10 rule:

  • The first part of the rule means you should be borrowing no more than 20% of your annual pre-tax income. This figure must exclude your mortgage payments since they can help you build equity, which increases your wealth over time. 
  • The second part of the 20/10 rule takes your monthly payments and cash flow into account. Here, the idea is to devote less than 10% of your income toward all your regular debt payments combined (again minus your mortgage or rent payments).

How Much Is Too Much Debt?

While it’s sometimes easy to tell if you have too much debt, you can assess your situation better by analyzing your debt ratios, like your debt-to-income and credit utilization ratios:

Debt-To-Income Ratio

You can calculate your DTI ratio by dividing your monthly debt obligations by your monthly net income (after taxes). Generally, a ratio of 35% or less is where you should be, whereas anything over the 43% mark probably means you’re holding a dangerous level of debt.   

Having a healthy debt-to-income ratio is important since it’s one of the first things most lenders will look at when you apply for new credit. This is especially true for risker, more expensive products like mortgages. In fact, many of Canada’s banks and credit unions will only approve you for a mortgage or other large loan if your DTI ratio is under 42%. 

Credit Utilization Ratio 

Lenders may also assess your credit utilization ratio, which is the amount of available credit that you’re currently using. Your credit utilization ratio is one of the key components that make up your credit score, and the lower your ratio is, the better. 

To do a basic calculation of your credit utilization ratio, divide your outstanding debt balance by your total available credit.

Can You Afford Your Minimum Credit Card Payments? 

Credit cards may look affordable, but they can lead to a lot of high-interest debt when you misuse them. Plus, interest will be applied to your unpaid balances, which means you’ll only accumulate more debt when you make minimum payments every month. 

If you can’t even afford your minimum credit card payments, the situation will get much worse as late penalties start to apply. 

Final Thoughts On How To Save Money And Pay Off Debt

Saving money and paying down your debt is best done with a solid plan in place. That said, the plan is only as good as the action behind it. If you don’t put your plan to good use and are not responsible with your finances, you likely won’t make much of a difference to your debt load or your savings account. Make sure you’re self-disciplined enough to come up with a good plan and stick to it until you’ve reached your goals.

It’s important to remember that there are times when budgeting and planning aren’t enough to get you out of debt. Sometimes more severe actions must be taken to get your debt under control. Consider speaking to a credit counsellor, they will be better able to evaluate your debt and finances and offer you a solution that best meets your needs.

How To Save Money And Pay Off Debt FAQs

Should I pay down debt before saving money?

It depends on your financial situation, but if you have a significant amount of debt, it’s probably smarter to pay it off as fast as possible. Once your debts are back to a more manageable level, you can rapidly build your savings account by investing any money that you might otherwise have spent on interest and late penalties.

Is there such a thing as good debt?

Yes, as long as the money you’re investing will add to your wealth in some way. For instance, a mortgage can help you finance a home and build equity in your property. 

How much should I have saved by age 30? 

Everyone’s situation is different. However, once you hit 30, the general rule is to have the equivalent of your annual salary saved up (ideally more). So, if you normally make $40,000 a year, you should have at least $40,000 by age 30. That amount increases the older you get, until you reach retirement age and have all your largest debts paid off. 
Bryan Daly avatar on Loans Canada
Bryan Daly

Bryan is a graduate of Dawson College and Concordia University. He has been writing for Loans Canada for five years, covering all things related to personal finance, and aims to pursue the craft of professional writing for many years to come. In his spare time, he maintains a passion for editing, writing screenplays, staying fit, and travelling the world in search of the coolest sights our planet has to offer.

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