Can a financial advisor help with debt?

Financial advisors are usually thought of as experts in investing. While less often perceived as debt management experts, advisors who specialize in financial planning can be very helpful when debt starts becoming overwhelming — or even when it may not even seem to be a problem at all.

“Many clients come to me because they want to invest,” said Sara Zuckerman, a certified financial planner (CFP) with her own firm, Reset Financial Planning, in Scottsdale, Arizona. “But after reviewing their finances, I often tell some of them that we have to get their debt under control first, before we can focus on investing.”

Why use a financial advisor to deal with your debt?

Sometimes, people can take on too much debt without realizing it. Signs of debt starting to be a problem — whether it’s student loan debt, car loan debt or credit card balances — can be constant juggling to meet monthly payments, an inability to pay more than the minimum due, and not being able to save and invest on a regular basis.

Carrying debt that is disproportionately high to your income and being late or missing payments can lower your credit score, which banks and other lenders use to assess your creditworthiness. According to two of the major credit bureaus, Equifax and Experian, three-digit credit scores generally range from 300 to 850:

• 300 to 579: Poor
• 580 to 669: Fair
• 670 to 739: Good
• 740 to 799: Very good
• 800 to 850: Excellent

A low credit score makes it harder and more expensive to borrow for really important expenses, like buying a house, because lenders look at you as being a risky borrower.

Long before debt spins out of control and leads to severe problems, such as having your car repossessed or filing for personal bankruptcy, a top priority should be getting a handle on your debt, whittling it down and improving your credit score. That’s where a financial advisor can help.

Role of financial advisor in executing your debt management plan

Financial advisors start by looking at your total financial picture — income, expenses, savings and investments, insurance and debts. Since many people have only a hazy idea of their total spending or what they are spending on, an advisor will often help clients get a clearer picture of spending as a first step.

Often, they recommend using one of the popular budgeting apps, such as:

• Quicken Simplifi
• You Need a Budget (YNAB)
• Monarch Money
• Goodbudget
• EveryDollar
• PocketGuard

These simplify keeping track of spending and typically allow users to set limits and alerts.

Once they help clients understand their spending, which helps prevent going further into debt, advisors will create a plan to pay down and eliminate current debt. Typically, advisors turn to one of two approaches to do that: the “avalanche” approach or the “snowball” approach.

Debt avalanche versus debt snowball

The debt avalanche method

The avalanche method focuses on paying down your highest-interest-rate debt first. If you have credit card debt on which you are paying 24% annual percentage rate (APR), for example, while a car loan you took out a few years ago is charging 6%, you would pay off the credit card debt first. From a purely dollars-and-cents point of view, the avalanche approach makes the most economic sense because it reduces total debt expense most quickly.

The debt snowball method

In contrast, the snowball approach starts with paying off a debt that is smallest in dollar terms, regardless of the interest rate. When that is eliminated, you then pay off the second-largest debt and continue until you tackle the largest debt in dollar terms. While the snowball approach may result in paying more interest in total, its advantage lies in the sense of empowerment it generates. As you see yourself make progress in eliminating debt, you’ll feel less overwhelmed and more enthused about sticking to their plan.

Creating financial security with the help of a financial advisor

Derek Merkler, a CFP whose Trophy Point Financial Planning firm is located in Georgetown, Kentucky, said the approach he uses to help create financial security for clients depends on their unique circumstances.

“For some people with high-interest-rate credit card balances, for example, it might make sense to stop contributing to a 401(k) plan for a while and use that money to pay down their debt,” he said. “For others, there might be a better balance between paying off debts and other financial objectives.”

The skills to chart a step-by-step path out of debt based not only on the math but on an individual’s unique experiences and emotional attitudes toward money and spending are what make a financial advisor’s assistance valuable.

Debt and newlyweds

At significant life milestones, a financial advisor’s input can be particularly helpful when debt compounds the stress.

Cristina Perez of Mindful Millions in Phoenix, Arizona, who is also a CFP, often works with newlyweds and the newly divorced, who face particular debt-related problems.

“With newlyweds, sometimes one has debts and the other doesn’t, or we have to figure out how to manage the combined debt of the marriage,” the financial planner said. “For the newly widowed or divorced, there is often the challenge of dealing with financial matters for the first time and understanding budgeting and spending in a new way.”

Life after debt

While many may view the prospect of turning to a financial advisor or planner for help with debt as appealing as swallowing medicine, the truth is that getting and staying out of debt is liberating. The help of an advisor to remove the anxiety that debt creates and show you practical ways to save for the things you really want — a home, a child’s education, a nice vacation — can greatly increase your happiness and satisfaction.