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If you’re struggling to get a handle on your debt, a financial advisor can help you prioritize your payments and establish a budget. Financial advisors can also provide other services like investment advice, income tax preparation, and estate planning.
Key Takeaways
- A financial advisor can create a plan for managing your debt, which will typically entail paying off the debts with the highest interest rates first and then working down the list.
- Ensure your financial advisor has credentials, such as a certified financial planner (CFP) designation.
- Financial advisors are usually paid hourly, although there are also free and low-cost services available.
Budgeting to Pay Off Debt
A financial advisor can help you draft a budget that covers your necessary expenses and aims to reduce your debt. This process may involve cutting unnecessary expenses and allotting more money to pay down existing debt. A capable financial advisor will be able to map out a client’s cash flow and identify existing and potential problem areas.
You should bring important financial documents to your first meeting with a financial advisor, including:
- Pay stubs
- Credit card bills
- Bank statements
- Installment loan statements
- Tax returns for the past several years
In short, bring any document that may impact your financial situation.
You may feel uncomfortable with someone taking a critical review of your spending habits and past money decisions. However, for the meeting to be productive, it’s important to recognize and accept that you might have to face some hard truths.
Analyzing and Restructuring Debts
Some debts have less of an impact your finances than others. For example, a mortgage usually has a lower interest rate, and it allows you build equity and (eventually) own a home. Other debts, such as credit cards and payday loans, have higher interest rates and put a greater strain on your finances.
A financial advisor can help you analyze your debt and prioritize your payments. If you have delinquent accounts, those usually take first priority, followed by whichever accounts have the highest interest rates.
Tip
Paying off debts from the smallest to largest balance is known as the debt snowball strategy. On the other hand, paying off debts from the highest to lowest interest rate is known as the debt avalanche strategy.
A financial advisor will also review options for restructuring and consolidating your debt. For example, a homeowner with equity might qualify for a home equity loan that can be used to pay off their credit card balances. Typically, home equity loans offer much lower interest rates than credit cards, saving you money in interest charges.
Creating a Long-Term Plan
Financial advisors can help you establish a long-term plan by taking a holistic approach suited to your specific needs and financial goals.
For example, if you have dependents, you may need life insurance to cover their expenses should you pass away. If you also have a lot of high-interest debt, a financial advisor might recommend taking out a life insurance policy after paying that down first. They can review options for life insurance and discuss the pros and cons of each based on your situation.
A financial advisor can also show you how to build an emergency fund for unexpected expenses and contribute to a retirement savings account while staying within your budget.
Your financial advisor should provide a written plan outlining the recommended course of action. Ideally, they should also include financial milestones and potential red flags so that you can track your progress and avoid any pitfalls.
How to Find a Good Financial Advisor
Anybody can call themself a financial advisor, so it’s important to check the credentials of anyone you’re be considering. A reputable financial advisor will typically be accredited as a certified financial planner (CFP) or chartered financial consultant (ChFC). Some advisors have both of those designations.
Consider looking for a CFP who’s a member of the National Association of Personal Financial Advisors (NAPFA). NAPFA members are fee-only advisors, meaning they get paid entirely by the client and don’t receive any commissions on investment or insurance products that could potentially bias their advice. Your financial advisor should also be a fiduciary, meaning they’re obligated by law to act in your best interest.
Narrow down your list of local advisors by asking around for referrals. Start by talking to any friends or family members who have previously worked with an advisor. A tax preparer can also offer recommendations.
How Financial Advisors Are Paid
If your immediate focus is debt management, a financial advisor may charge you an hourly rate or a flat fee for creating a financial plan. Investopedia has found that hourly fees of at least $100 are relatively common, although some advisors charge considerably more. As such, it’s always worth asking in advance.
There are also free (or low-cost) sources of credit counseling help if you’re 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?
Making consistent, on-time payments on your outstanding debts can improve your credit score. Conversely, making late payments and defaulting on your debts on can severely damage your credit score.
How Long Do Bad Debts Stay on Your Credit Report?
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 develop a strategy to prioritize your debts in order to get them under control. Financial advisors can also help you focus on other financial goals, such as establishing a budget or saving for retirement. Be sure to shop around for a credentialed advisor who fits your needs before agreeing to work with anyone.
