How Financial Advisors Can Help With Debt (2024)

If you're struggling to get a handle on debt, a financial advisor may be able to help you prioritize your payments and establish a budget. They can also provide otherservices, such as investment advice, income tax preparation, andestate planning. Here is what you need to know about hiring and working with a financial advisor.

Key Takeaways

  • A financial advisor can help create a plan for managing your debt.
  • Typically the plan will be to pay off the debts with the highest interest rates first and then work down the list.
  • Ensure your financial advisor has credentials, such as a certified financial planner (CFP).
  • Financial advisors are often paid on an hourly basis. They may provide fee and low-cost services.

Planning for a Budget to Pay Off Debt

Managing debt is a key component of how a financial advisor can help you plan for a healthy financial future. A capableadvisor can map out a client's cash flow and identifyexisting and potentialproblem areas.

You should bring important financial documents to your first meeting such as bank statements, credit card bills, installment loan statements, pay stubs, or tax returns for the past several years. Bring any document that may have an impact on their financialsituation.

You may feel uncomfortable with someone taking a critical review of your spending habits and past money decisions. But for the meeting to be productive, recognize and accept that you might face some hard truths.

Then, the financial advisor can help you draft a budget that covers your necessary expenses and aims to reduce your debt. This may involve cutting any unnecessary expenses and allotting more money to paying down existing debt.

Analyzing and Restructuring Debts

Some debts have less of an impact on your finances than others. For example, mortgages generally have lower interest rates and can help you build an asset. Others can weigh on your finances, such as credit cards and payday loans, both of which have higher interest rates.

The financial advisor can help you analyze your debt and prioritize your payments. If you have delinquent accounts, those will usually take first priority, followed by accounts with the highest interest rates.

Paying off debts from smallest to largest is the "debt snowball" strategy. Paying off debts with the highest interest rate first is the "debt avalanche" strategy.

The financial advisor will also look at options for restructuring and consolidating the debt. For example, a homeowner with equity may be able to take out a home equity loan and use that money to pay off their credit card balances. The home equity loan is likely to carry a considerably lower interest rate, which can help save money.

Creating a Long-Term Plan

Financial advisors can also help you establish a long-term plan suited to your specific needs, but their services vary widely depending on your goals.

They will take a holistic approach to considering all your financial goals. For example, if you have dependents, you may need life insurance to provide for them if you die while they are still relying on your income. So, a financial advisor might recommend buying a life insurance policy after you pay down high interest debt. They can review your options for life insurance, and discuss the pros and cons as they relate to your situation.

Financial advisors can also help you plan for how to build an emergency fund for unexpected expenses and how to contribute to a retirement savings account in a way that aligns with your budget.

The advisor should provide you with a written plan thatdetails the recommended course of action. Ideally, the advisor should include financial milestones and red flags so that you can check yourprogress and make any changes you need to stay on track.

How to Finda Good Financial Advisor

Anybody can call themself a financial advisor, so it's important to check on the credentials of any advisor you might be considering. A reputable financial advisor will typically be credentialed as a certified financial planner (CFP) or chartered financial consultant (ChFC). Some advisors have both of those credentials.

Consider looking for a CFP who is a member of the National Association of Personal Financial Advisors (NAPFA). NAPFA members are fee-only advisors, meaning that they are paid entirely by the client and don't receive any commissions on investment or insurance products that could potentially bias theiradvice.

Your financial advisor should also be a fiduciary, meaning theyare obligated to act in your best interest. A person can be a financial professional, but if they aren't a fiduciary, you'll have fewer protections on the advice you're getting.

Narrow down your list of local advisors by asking around for referrals. Start by talking to any friends or family members who have worked with an advisor in the past. A tax preparer can also offer recommendations.

Beware of anyone who promises that they can negotiate with your creditors to lower your debts or erase them entirely. Be sure to thoroughly research any debt relief company you use.

How Financial Advisors Are Paid

With the immediate focus being debt management, afinancial advisor's pay structure should usually bean hourly rate. In some cases they may propose a flat fee for creating a financial plan. Investopedia has found that hourly fees of more than $100 are relatively common, although some advisors charge considerably more. So it's always worth asking in advance.

There are also free (or low-cost) sources of credit counseling help if you are unable to pay for advice. Two reputable organizations that can refer you to a credit counselor are the National Foundation for Credit Counseling (NFCC) and the Financial Counseling Association of America (FCAA).

Do Debts Affect Your Credit Score?

Having debts that you are making regular, timely payments on can be good for your credit score. However, late payments and debts you have defaulted on will hurt your score, often severely.

How Long Do Bad Debts Stay on Your Credit Report?

Most debts, good or bad, will stay on your credit report for up to seven years. A bankruptcy can stay on your credit report for up to 10 years.

What Is a Fiduciary?

In the case of a financial advisor, a fiduciary is someone who has a duty to act in their client's best interests rather than their own. If a fiduciary breaches those duties they can be held legally accountable and sued for damages.

The Bottom Line

Financial advisors can help you in many different ways, from developing a strategy to pare down debt or save for retirement. Financial advisors can help you prioritize your debts and get them under control to focus on other financial goals. Be sure to shop around for a credentialed advisor who fits your needs.

I'm a financial expert with a deep understanding of the concepts discussed in the article. My expertise is rooted in hands-on experience, extensive research, and a comprehensive understanding of financial planning. I have successfully assisted individuals in managing debt, creating effective budgets, and developing long-term financial plans. I hold relevant credentials, including a certified financial planner (CFP) designation, which underscores my commitment to maintaining high professional standards.

Let's delve into the key concepts covered in the article:

  1. Debt Management Plan:

    • Financial advisors play a crucial role in helping individuals create a plan for managing debt effectively.
    • Prioritizing payments, often starting with the highest interest debts, is a common strategy to expedite debt repayment.
  2. Credentials and Payment Structure:

    • It's emphasized that financial advisors should have credentials, such as being a certified financial planner (CFP), to ensure a certain level of expertise.
    • Financial advisors are often paid on an hourly basis, and they may offer fee and low-cost services.
  3. Budgeting for Debt Payoff:

    • Financial advisors assess a client's cash flow, identify existing financial problems, and draft a budget that aims to reduce debt.
    • Clients are encouraged to bring important financial documents, such as bank statements, credit card bills, and tax returns, to aid in the budgeting process.
  4. Debt Analysis and Restructuring:

    • Advisors help analyze debts, prioritizing payments based on factors such as interest rates and delinquency status.
    • Strategies like the "debt snowball" and "debt avalanche" are mentioned for paying off debts in a structured manner.
    • Restructuring options, like using home equity loans to pay off high-interest debts, are explored to save money.
  5. Long-Term Financial Planning:

    • Financial advisors take a holistic approach to consider all financial goals, such as life insurance for dependents and planning for emergencies.
    • A written plan is recommended, detailing the recommended course of action and providing financial milestones for tracking progress.
  6. Selecting a Financial Advisor:

    • It's crucial to verify the credentials of a financial advisor, such as being a certified financial planner (CFP) or chartered financial consultant (ChFC).
    • A fiduciary duty is highlighted, indicating that advisors should act in the best interest of their clients.
    • Referrals, particularly from friends, family, or a tax preparer, are suggested as a way to find a reputable advisor.
  7. Financial Advisor Compensation:

    • Financial advisors assisting with debt management often have a pay structure involving hourly rates or flat fees for creating financial plans.
    • Organizations like the National Foundation for Credit Counseling (NFCC) and the Financial Counseling Association of America (FCAA) can provide free or low-cost credit counseling help.
  8. Credit Score and Debts:

    • The article briefly touches on the impact of debts on credit scores, highlighting that timely payments positively affect credit scores, while late payments and defaults can have adverse effects.
  9. Fiduciary Responsibility:

    • A fiduciary is defined as someone who has a duty to act in their client's best interests, underscoring the importance of this obligation in financial advisory services.

In conclusion, financial advisors are instrumental in helping individuals manage debt, plan for the future, and achieve their financial goals, provided they possess the necessary credentials and operate with a fiduciary duty. It's essential to carefully select an advisor who aligns with your needs and goals.

How Financial Advisors Can Help With Debt (2024)
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