The economy is rolling and money is flowing in to household budgets and Americans know this and are spending accordingly. In fact, Americans are spending too freely, and now it’s likely they’ve accumulated twice more debt than savings, according to the Northwestern Mutual’s 2018 Planning & Progress Study.
So, is it time to have the “debt talk” with your client?
From this report:
- The average personal debt is $38,000, exclusive of mortgages (up from $37,000 in 2017)
- Americans are twice as likely to have accumulated $5,000-$25,000 in debt than personal savings
- 2 in 10 people allocate 50-100 percent of their income towards debt repayment
- 1 in 10 expect to be in debt for the rest of their lives
Emily Holbrook, director of planning at Northwestern Mutual said that Americans are forced to choose between their quality of life now, and saving for their future.
“Despite recognizing that debt is dangerous waters, Americans are jumping in with both feet and struggling to stay afloat,” Holbrook said. “People’s purse strings are clearly caught in a tug of war between enjoying the present and saving for the future.”
Adding fuel to the debt fire is the perception that the roaring stock market will continue unabated, and that the economy will only continue to flourish.
“Our data indicates that while people believe that another financial crisis is possible, they are not putting together plans that can withstand market cycles,” Holbrook said. “That’s because there tends to be a disconnect between logic and emotions when it comes to finances, which can lead to a gap between intentions and actions.”
A financial advisor is helpful to closing that gap. “An advisor is like a coach or personal trainer who keeps you motivated and focused on meaningful goals and away from distractions,” she said.
Advisors Need To Get A Grip On Client Debt Woes
In a high spending, high debt scenario, investment advisors may feel compelled to step in and save a client from him or herself, before household debt levels get out of control.
Kathi Bradshaw, vice president at Vice President, Support the Enlisted Project, in El Cajon, Calif. said conversations about debt can be challenging.
“As a social worker for more than 30 years who is also certified in Personal Financial Counseling, this is a conversation I have almost daily with my clients,” Bradshaw said. “As with all conversations about personal finances, it can be challenging.”
Bradshaw says she finds it most effective to talk with clients from strength’s perspective. “If we know what the client’s goals are, we can identify barriers to achieving those goals and plan to work around those barriers,” she said.
Rather than point out the depth and breadth of the problem when she sees a high debt load, Bradshaw asks the client how he or she feels about their finances and what differences they’d like to see over the next six, 12 or 24 months. “Based on those answers, we can talk about how a growing debt is preventing progress toward those goals,” she said. “This, of course, opens the door to planning debt reduction.”
Investment advisors can get ahead of client debt problems by focusing on “red flags” that indicate bad financial choices – and steering clients toward better money management decisions.
Beverly Harzog, a consumer finance analyst and credit card expert at US News & World Report said, “An early warning sign is using credit cards to cover monthly expenses. If you’re using rewards credit cards for the point, that’s fine,” said Harzog, as long as you pay the balance in full by the due date. Once you start carrying a balance, you’re entering a slippery slope to debt.”
Breaking down a client’s debt picture can help provide a “big picture” outlook on how to handle debt, spending and savings.
“Our general budgeting philosophy would suggest 60 percent of a consumer’s income should go toward fixed expenses (including minimum debt payments), 20 percent toward discretionary expenses and 20 percent toward savings goals,” Holbrook said. “At a high level, going through the budgeting process should give people better perspective on how to structure their dollars and see where the pressure points reside.”
For advisors counseling their clients on big debt issues, Holbrook advises making the following points directly to clients:
- Get a full understanding of how much debt you have. “Write down all the debts you have, including amount you owe and interest rates,” she said.
- Make minimum payments on all your debts. “Prioritize paying the debts with the highest interest rates first,” Holbrook said.
- Try to lower your rates on the debts you have.
- Find extra money to put towards your debt. “That Includes taking a look at your budget for savings or picking up a side-hustle to generate extra funds,” she said.
- Celebrate any and all progress
A Barrier To Personal Prosperity
The fact is most Americans have a combination of credit cards, student loans, mortgages, car loans and personal loans, which make it difficult to get ahead in paying off burgeoning debts.
“Having debt has become a common occurrence and some of the stigma of it has evolved over time,” Holbrook said. “That said, when debt is high interest, as a result of lack of discipline or an overabundance of frivolous spending, it becomes an ankle weight that makes it much harder to build long-term financial security.”
Brian O’Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC’s Guide to Creating Wealth. He’s a regular contributor to major media business platforms. Brian may be contacted at firstname.lastname@example.org.
© Entire contents copyright 2018 by AdvisorNews. All rights reserved. No part of this article may be reprinted without the expressed written consent from AdvisorNews.