Help Your Clients Kick the Debt Habit
By 1st Global Staff
The Federal Reserve announced in early October that household debt in the U.S. climbed $39.4 billion to a staggering $13 trillion during the second quarter of 2012. While this development could boost consumer spending and assist in the economic recovery, it means that each household in America carries roughly $114,000 in debt ($13 trillion divided by the total number of households counted in the 2010 Census).
Whether you cater to the affluent or have a lower-income client base, debt is a reality for nearly all of your clients.
However, not all debt is a “four-letter word”; certain types of debt are desirable and can play an important role in a comprehensive financial plan. Home mortgages, car loans and education loans often are a substantial piece of your clients’ financial picture. However, if your clients’ debt is mostly comprised of high-interest credit card bills, they may be living outside of their means and need to rein in their spending.
Elective Debt vs. Unavoidable Debt
Your advice on debt management should have two facets: eliminating elective debt and planning the payoff of unavoidable debt.
For “elective” debt such as credit card balances and outstanding short-term loans, you can help your clients by planning a debt relief schedule. For necessary or “unavoidable debt” such as home, auto or education loans, you need to plan for the ultimate payoff of these debts. Providing a plan for “future unfunded liabilities” like long-term loans can include insurance solutions. After all, how will clients pay off debt if their income is interrupted by disability or death? Be sure to fully explore insurance options with your clients – nobody wants to leave a spouse or children unable to pay a home mortgage in the event of their untimely death.
Clients who have high levels of “elective” debt should analyze their situation immediately. Clients may need to focus on taking care of debt first because, often, debt payments limit the amount of funds available for financial goals such as education and retirement planning. Getting discretionary debt under control quickly should be your clients’ highest priority so they can stop making high-interest payments to credit card companies and put that money toward their comprehensive wealth management plan.
7 Steps of Debt Management
1.Collect information on your client’s actual cash flow for the past 12 months
2.Use that data to project cash flow for the next 12 to 24 months
3.Review your client’s spending habits by major category
4.Review your client’s existing debt structure
5.Uncover whether your client has cash management problems
6.Use excess cash for implementation of other financial planning decisions
7.Use projected cash flow to assess impact of financial planning decisions
If you have clients with moderate elective debt levels, work with them to develop a cash-based budget. Clients who develop and stick to a timeline and a specific plan are more likely to pay off their debt quickly. If your clients are turned off by the word “budget,” you can work with them to create a “spending plan.”
Clients with high elective debt levels may want to consider the use of credit counseling services. Organizations that advertise credit counseling, such as the National Foundation for Credit Counseling, often arrange for consumers to pay debts through a debt management plan and sometimes even work with credit card companies to reduce the principal your client owes. Reputable credit counseling organizations employ counselors who are certified and trained in consumer credit, money and debt management and budgeting. These organizations are nonprofit and have a legal obligation to provide education and counseling.
Helping your clients get their household debt under control is the first step in building a long-term relationship with them. Getting them past that hurdle enables you to work with your clients to help them fulfill the important promises they have made to loved ones through a complete financial plan.
1st Global Capital Corp. is a member of FINRA and SIPC and is headquartered at 8150 N. Central Expressway, Suite 500 in Dallas, Texas 75206; (214) 265-1201. Additional information about 1st Global is available via the Internet at www.1stGlobal.com.
1st Global was founded by CPAs on the belief that accounting, tax and estate planning firms are uniquely qualified to provide comprehensive wealth management services to their clients. Each affiliated firm is provided with education, technology, business-building framework and client solutions that make these firms leaders in their professions through dedicated professional client relationships built around wealth management.
Voice of the Editor
Which isn’t completely true. I mean, occasionally I drop by when I manage to sneak out of the nonstop frat party over at Going Concern, but I’m mostly a wallflower over there. I’m happy to say that I’ve been given express permission (or explicit orders, if you like) to wander over here to AccountingWEB more often.
Why is that, you might ask? My job is to replace the irreplaceable Gail Perry as Editor-in-Chief. What does that mean? I don’t really know! I think it’ll be fun getting a feel for things, throwing in my own thoughts here and there, and listening to the discussions you’re having about the accounting profession.