If you find yourself drowning in debt, you may ask yourself, how can a financial advisor help with debt? Not to worry, an experienced, certified financial advisor can provide the help you need to get back on a solid financial footing and we will help explain how.
Household debt in the United States reached an all-time high of $13.29 trillion this year, leaving many Americans struggling to meet their obligations. Individuals with debt are often reluctant to seek professional help, wondering how can financial advisors help with debt since it requires incurring another financial obligation. By carefully analyzing your situation, prioritizing bills, and finding the best options for consolidating your debt, an experienced financial advisor can help you create a workable plan that will enable you to pay down balances and get your finances back in order.
How financial advisors help with debt
Managing debt is one of the key services that financial advisors provide to help their clients. Once debt begins to accumulate, it is not uncommon to feel hopeless or overwhelmed. Debt is so stressful, in fact, that a recent GoBankingRates survey revealed that 71 percent of respondents believe they will never get out of debt. That kind of thinking narrows options.
Unlike debt settlement or bankruptcy, which can damage your credit for years to come, financial advisors help with debt by providing a plan that will enable you to pay off balances and take control of your finances so you can enjoy a more sustainable, debt-free future. The services that financial planners can provide to help you get out of debt include:
- Creating a budget
Low income, high cost of education, and the high cost of living are some of the top reasons that people struggle with debt, according to GoBankingRates. A financial advisor can examine your expenses and identify areas of unnecessary spending. Financial planners are experts at creating workable budgets that enable you to cover your essential expenses while freeing up funds to pay down debt. Be aware that this budget will require you to give up some items you may not recognize as non-essential. You may also need to get a second job, increase your workload, or delay retirement.
- Analyzing and prioritizing debt
Mortgages, student and auto loans, and credit cards are the biggest sources of debt, according to the Federal Reserve Bank of New York. Financial advisors can analyze the debt load you carry to identify “good” and “bad” debt. Mortgages, which typically have a low interest rate and high tax deductibility, are considered benign debts, while credit cards and payday loans, with exorbitant interest rates, penalties, and fees, are toxic debts. After analyzing your debts, a financial planner can formulate a payback strategy that prioritizes the most expensive and damaging forms of debt.
- Consolidating debt
Financial planners may be able to advise you on ways to consolidate your debt so you have lower interest rates and longer to pay. While there are several options that may be available to you, it is important to weigh the long-term consequences you may face before you sign for a new loan. Financial advisors have the experience and knowledge to help you figure out how to pay off debt without worsening your long-term financial prospects.
- Taking out a home equity loan can enable you to pay off credit card bills and other higher interest rate debts. Borrowing against the equity in in your home can enable you to get a low-interest rate, but can put your home at risk if you are unable to meet payments.
- If you still have a good credit score, you may be able to obtain a debt consolidation loan that extends your payments and features a lower interest rate to make your debt more manageable.
- Taking a loan from your 401(k) generally should be avoided, because you will need to repay the loan within five years or face tax penalties and shortfalls in retirement. However, if you are carrying high interest credit card debt or facing bankruptcy, this may be your best option.
Credit: Charles Schwab
- Creating a sustainable financial plan
One of the most important ways that financial advisors help with debt is by creating a sustainable financial plan that protects your well-being now and for the future. Financial advisors can help you create a more secure situation for you and your family while you are paying down debt. This may include purchasing life-insurance once you pay down some of your highest interest rate debts, starting an emergency fund to avoid more credit card debt, or starting a retirement fund to ensure your long-term security.