Testing/Simulating Circuits
whatever works - I've prototyped, built PCBs for more complex stuff, done extensive verilog simulation for large digital designs (100,000s of gates), thrown that in FPGAs for some testing and then built real silicon

Really you need to figure out the place on the cost/time to market curve that works for a particular project - for digital circuits it's worth being able to extract net lists for (verilog/vhdl) simulation, for analog stuff you use spice 

Getting access to digital (verilog/vhdl) models for microcontrolers can get to be expensive - it may be faster and cheaper to just go ahead a build a pcb (or protoboard) so you can hack away - it depends on how much you value your time and your budget