It’s not news that American households have accumulated a lot of debt. As of March 31, 2016, total household debt was $12.25 trillion, comprised of mortgage loans, student loan debt, credit card debt and auto loans, according to the Federal Reserve Bank of New York’s Quarterly Report on Household Debt and Credit, May 2016. That’s a lot of bills that people receive every month and a mountain of debt to pay off.
You can find different strategies to get out of debt, however, the whole process might be overwhelming. One way to attack the problem is to hire a financial advisor to help you chart a path to financial freedom.
How to Pay Off Debt While Also Paying a Financial Planner
At first, it might seem counter-intuitive to spend money hiring someone to help you with debt management. You’d incur an additional expense that you didn’t budget for. When you’re evaluating your budgeting, you’re usually trying to spend less money rather than more. However, a financial advisor might be the appropriate professional who can help you when you’re not clear about how to get out of debt.
Although you have to pay fees for a financial planner’s services, it might be worth it in the long run. A financial planner might show you how to get out of debt sooner and therefore save you from interest you would have otherwise paid.
An experienced financial advisor could also evaluate your entire current financial situation, not just your debts. He might suggest a plan for paying off debt and also planning for the future. You might have goals like buying a house, paying for college tuition for yourself or your kids or saving for your retirement years.
Find Out: What Is a Good Debt to Income Ratio?
How to Find an Affordable Financial Planner
Here’s a list of some different types of financial advisors who can help you manage your debt. It can be confusing because they use acronyms to designate their classification.
- CFP: Certified Financial Planner. These financial advisors must meet rigorous professional standards, including education, experience and examination requirements.
- ChFC: Chartered Financial Consultant. Similar to the CFPs, professionals who attain the ChFC designation have to undergo extensive education including completing college-level courses to become financial planners.
- CPA: Certified Public Accountant. A CPA is an accounting and tax planning and preparation professional. The exact requirements are state-specific.
- Credit Counselor certified by The National Association of Certified Credit Counselors (NACCC) or the National Foundation for Credit Counseling (NFCC). Credit counselors can assist consumers to get control of their finances by addressing debt and money management issues.
In addition, agencies such as the National Association of Personal Financial Advisors and the Financial Planning Association maintain lists of financial planners so you can find one in a location near you.
Financial Advisor Fees
Aside from credentials, when you decide to engage a financial planner, make sure you hire one whose fees will be appropriate for your needs. You need to understand how they will charge you. Here are some possible fees that you might incur by using a financial advisor:
- Flat fee. The financial planner charges you a pre-agreed fee for the services they provide — for example, creating a financial plan for you. Make sure it’s clearly specified in your written agreement exactly what those services or deliverables are.
- Assets under management. The financial advisor provides their services based on a percentage of your assets.
- Hourly rate. The financial advisor charges you based on how long it takes them to provide their services. Again, make sure your agreement specifies what tasks they will perform.
- Commission. The financial advisor is compensated for the products they sell you. This might mean that they are less objective when advising you about your investment options.
If you want to hire a financial advisor who is fee-only, which means they do not receive commissions, check the NAPFA website and the Garrett Planning Network. You can also ask friends and colleagues for recommendations if they’ve worked with a financial planner.
An option that might be better for your wallet is a personal finance website like LearnVest which charges a one-time set-up fee of $299 plus $19 per month for ongoing support. They provide a plan, access to a professional financial advisor and online tools.
How Financial Planners Provide Debt Help
A good financial planner takes a holistic view of your finances. Your debt is only part of the picture. Financial planners provide a wide range of services which might or might not include helping you with budgeting and paying down debt. You need to find a financial advisor who can help you with those tasks rather than one who caters to investors with high net worth.
For example, an advisor might instruct you to track all your expenses for several months to see where you’re spending your money. You can easily see where the “fat” is and where you can make cuts.
The advisor might also look at your income and current investments and suggest ways to maximize your earnings. For example, you might have directed your employer to take out too much tax out of each paycheck with the result that you get a big refund at tax time. It might be more advantageous to simply adjust your withholdings so you get more take-home pay each month.
When you’ve got a better picture of your typical income, spending and changes you can make, the advisor might formulate a debt-management plan so you have a clear way forward to get out of debt.
Your financial advisor might suggest you try debt consolidation. You could apply for an unsecured loan with a peer-to-peer lender like LendingClub, which might enable you to combine all your credit card debt and make a single monthly payment. Your interest rate on the loan might even be lower than the interest rates you were paying on your credit cards.
When a Financial Advisor Makes Sense
When you’re stressed about how to get out of debt, it might make sense to engage a financial planner to help you figure out a plan. Investigate the different options for hiring some type of financial advisor. It could be just the thing you need to get help with debt that’s keeping you awake at night.
“A good financial advisor will bring structure and focus to your efforts to control spending and pay down debt,” said Roger Whitney, a CFP and partner at WWK Wealth Advisors in Fort Worth, Texas. “This alone could justify the cost.”
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