You know that molehill that is now a mountain? That forever growing weight on your shoulders that is like an annoying itch. It causes daily stress and frustration and you can’t seem to find your way out that ever deepening hole. Its harmful to your personal relationships and embarrassing to talk about. Its all about humility. You really don’t know who to turn to. Well, one I suggest you avoid is these so-called “debt restructuring firms for a large upfront fee. More about that later.
Let me introduce another source who have all the tools or external resources at hand. Financial advisors can be a great help in getting a handle on debt. They’re experts at helping their clients get their finances in shape for today and the future. They may provide several services, such as investment management, income tax preparation, and estate planning.
Planning for a Budget
Managing debt is a key component of how a financial advisor can help you plan for a healthy financial future. A person overwhelmed with debt is like a person bleeding from an open wound – the first step is to stop the bleeding. A trusted advisor can map out a client’s cash flow and identify existing and potential problem areas.
The client should bring all relevant documents to the meeting to ensure that your advisor gets the full picture. This includes bank statements, credit card bills, instalment loan statements, pay stubs, tax returns for the past few years, and anything else that may have an impact on your financial situation.
Some people might feel like it’s intrusive and hurtful to have a person they just met criticize their spending habits and past money decisions. For the meeting to be productive, a client should recognize that they might face some hard truths. A second set of non-judging eyes with a fresh perspective may be just the ticket.
Once the client gets past this obstacle, the financial advisor can draft a new balanced budget that covers the essentials while not adding more debt to the pile. This typically involves trimming off any unnecessary expenses, so that any excess funds are available to pay down existing debt.
Analyzing and Restructuring
There are many different types of debt. Some are relatively benign, such as mortgages low interest rate and full tax deductibility), while others are downright toxic, such as credit cards with high interest rates and delinquent accounts generating penalty fees on top of exorbitant interest.
After analyzing the debt held by the client, the financial advisor can begin to prioritize the client’s debt payback strategy. The most expensive and delinquent accounts go on top, while the more modest ones go to the bottom.
For example, if a client has $600 a month to pay off existing debt in the new budget, the bulk of it should go to pay off the debts, causing the most additional costs. It is important to continue making minimum payments on the lower-interest accounts too so that they don’t backslide into delinquent status and start racking up penalties.
The financial advisor also looks at the options for restructuring debt into more beneficial options. For example, a homeowner with equity in their property may be able to take out a second mortgage and use that money to pay off three credit cards in one fell swoop. The lower interest rate of the second mortgage would enable the homeowner to pay off a chunk of the new principal each month instead of just keeping up with the interest payments. Be prepared to handle the communications and outreach on your own. Most financial advisors just advise their clients what to do, leaving the legwork to each person seeking debt relief. Smarter ones have relationships with external advisors and firms that can assist with the legwork and can provide an introduction.
Another benefit of getting the levels of debt under control is that the client’s credit score suffers every month they have high-balance or delinquent accounts. As the new budget takes effect, the accounts become current, and the balances gradually sink. Their credit score increases accordingly, which opens the door to renegotiated terms with creditors (at lower interest rates) and may even lower seemingly unrelated things, such as insurance premiums.
The goal isn’t always to pay off debt as fast as possible. The financial advisor will help determine priorities.
The goal of meeting with a financial advisor isn’t necessarily to help the client pay off all debt as quickly as possible. While the initial focus is debt reduction, there are often other considerations that arise once the immediate fires are put out. While each situation is different, it’s the financial advisor’s job to take a holistic view to establish a long-term plan suited to each client’s specific needs.
For example, a person with dependents may need life insurance to provide for them in case of premature death. The financial advisor may recommend paying down a couple of high-interest accounts first and foremost, but then slow down the debt payments to start a sturdy life insurance policy. The next step may be to start a retirement savings account once a few more debts are fully paid off.
Finding a Good Advisor
The client should leave the meeting with a written plan that explicitly spells out the recommended course of action. Ideally, the financial advisor should provide milestones to check off and red flags to watch out for so that the client can check their progress and catch any potential missteps early.
The decision to hire a financial advisor isn’t one to take lightly. Make sure that the person is indeed certified to give financial advice. The best bet is looking for a Certified Financial Planner (CFP). FP Canada, the regulatory body for CFPs in Canada, can provide a source of CFPs local to you. (www.fpcanada.ca) Finding an advisor who has an active membership in the The Financial Advisors Association of Canada (www.advocis.ca) is a good practice as well.
Your financial advisor should also be a fiduciary. That means he/she is obligated to act in your best interest at every turn. A person can be a financial professional and know everything about money, but if they aren’t a fiduciary, you’ll have fewer protections on the advice you’re getting. It may seem like a minor detail, but it could be the difference between being advised to pay down a 25 percent interest credit card or starting a brokerage account at $200 per month. The latter may technically not be an unsuitable product and thus not wrong, but a fiduciary would in all likelihood recommend paying down high-interest debt before making any new investments.
Narrow down your list of local advisors by asking around for referrals. Start by talking to friends and family who have received help tackling debt in the past. A tax preparer is certain to know several financial advisors, too.
Getting assistance with your debt early in the process, is a prudent move. Sometimes your situation is easily resolvable. For others, not so much. It isn’t so much about the situation at hand but the actions and decision-making that has gone into creating your debt dilemma. If your not sure how someone call help, don’t let your naivety be the deciding factor. The second opinion may be the optimal solution and shed light on easier ways to resolve your own problem and implement strategies to prevent it from getting worse and avoiding it in future. Being prudent is an active way of Keeping Life Current.