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The debt-free pauper syndrome

Last January, my friend made a New Year’s resolution to lose 100 pounds. He consulted his doctor and worked with a nutritionist to design a healthy weight loss plan. I suggested a ’diet only‘ plan may not be the best approach.

I recommended he add a personal trainer to his team to help build his physical strength in addition to reducing his caloric intake. Adding muscle mass would help him burn fat faster and contribute to his overall health. He said he’d start going to the gym after he lost the 100 pounds.

By August, he’d lost nearly 75 pounds and was confident he’d reach his goal before the end of the year. However, despite his weight loss, he just wasn’t the picture of good health. He wasn’t skinny, but he looked scrawny. Then, during a long-weekend getaway, he fell out of a canoe, was too weak to pull himself into the boat or swim to safety and drowned.

Of course, this story isn’t true. I wrote it to illustrate a point: focusing on only one area of health ­– be it physical or financial – may not be enough to reach your ultimate goal. In this hypothetical case, my friend was skinny, but not healthy. Similarly, devoting every spare dollar to paying off your credit cards may reduce debt, but leave you financially unhealthy.

Reducing or eliminating debt is certainly worthwhile, and I always recommend a debt-reduction strategy to clients carrying high-interest consumer credit debt; however, debt reduction should not be undertaken at the expense of saving. My goal as a financial security advisor is to help ensure these clients don’t become debt-free paupers.

Saving is the financial equivalent of both weight training and stretching. A cornerstone of a financial security plan is having three to six months of expenses set aside for emergencies or opportunities. This gives you the strength to withstand the unexpected blows to your pocketbook when things go wrong and the flexibility to take advantage of opportunities that present themselves.

It seems counterintuitive to set money aside while you have debt. But without ready access to cash, credit maintains its standing as the ‘go to’ when things go wrong. And things always go wrong. How often have you experienced a car breakdown or home appliance failure just when you think you’re getting ahead? It’s precisely those moments, and people’s inability to resolve them with their own money, that keeps the debt treadmill moving.

Einstein once said, “We cannot solve our problems with the same thinking we used when we created them.” Using credit in place of savings in hopes of using future money to pay the bill is exactly why people need to change their thinking and make saving a priority. My job is to help clients develop new behaviours and patterns of thinking that move them to new financial routines and results.

If you’re living with finances that are overweight in negative credit, look to increase your strength with savings while you work to reduce your debt.