Help clients tackle out-of-control debt through planning & budgeting

$228 billion was the amount by which U.S. aggregate household debt increased in the third quarter of 2023.1 Not the total amount of U.S. household debt in existence — just the amount it increased! The total U.S. household debt amounts to an unfathomable $17.29 trillion.1

Top debts include mortgages ($12.14 trillion), credit card balances ($1.08 trillion), auto loans ($1.6 trillion) and student loans ($1.6 trillion).1 Compounding matters is a bump in delinquencies. Aggregate delinquency rates in the third quarter of 2023 were up by 0.4% from the second quarter, with 3.0% of outstanding debt considered delinquent.1

Chances are, some of your clients, regardless of their demographics, are facing a few of these debts. Some may have found themselves in delinquent status — maybe even subjected to late fees that are making a bad situation worse. How can you help them relieve some of the burden through smart planning and budgeting?

First things first: Know what you’re working with

Ahead of meetings with your clients, encourage them to prepare by bringing any paperwork, contracts, bills, bank statements or other documentation displaying what they owe, as well as pay stubs to show what they’re paid each month.

Lay it all on the table

Challenges can’t be faced without first knowing what they are. As much as it might pain your clients to see their debts listed out, it’s important to shine a light on everything. Leave no stone unturned.

Create a spreadsheet to list the debts and their corresponding dollar amounts during a session with your clients. Doing this together in a formal session with a financial professional might be exactly what your clients need to recall some of the debts that fell by the wayside or exist as something they might not consider debts. Credit card debts, for example, might have faded to the background of “monthly bills,” when they really shouldn’t be treated that way.

List all income

What do your clients have available to use to chip away at their debts? Collect their income sources and amounts to see exactly what they’re working with.

This may be easier with younger clients in the middle of their careers than it is for retirees or those nearing retirement, but it’s still possible with retirees who are trying to get those last few debts paid off. Ideally, most of their debts would have already been paid prior to retirement, but we know the stars don’t always align that perfectly.

Be sure to include every bit of income your clients have, including side hustles, benefit payments and any other ways they’re regularly receiving money.

Analyze and prioritize

You can go about listing debts in order of importance in a few ways. There’s always the simple (on the surface) method of listing them from the highest outstanding amount to lowest, or vice versa. But a closer analysis should be done to ensure maximum value by also figuring out the interest that’s owed for each.

If their interest rates look unwieldy, consolidation could be an avenue to explore. Putting multiple debt balances under one loan with one manageable interest rate might help your clients more easily climb out from under the weight of interest rates that are hindering their progress.

Strategize and personalize

How you prioritize your clients’ debts or potentially encourage consolidation depends on their individual situations. Everyone accumulates their debts differently, and everyone’s earning different levels of income.

Decide on a method of debt payment. Take care of any delinquent accounts first. From there, will it be a strategy of paying off the lowest balances first and working their way up to the highest balance, or paying off the highest interest rates first? There are cases and arguments for either way, though it’s often recommended to handle the highest interest rates first. Still, this is why personalization is key. Devise a strategy that’ll truly help your clients individually.

Create a sensible budget

A realistic budget isn’t just necessary now to ensure debt payments — it’s also needed to help your clients prevent themselves from getting in over their heads in the future.

Work with clients to develop a budget that prioritizes the necessities — housing, groceries, utilities, health — while leaving room for building up savings accounts and fending off more debt accumulation. 

This could be another spreadsheet listing out every single monthly responsibility they have. When your clients see their rent or mortgage listed with monthly subscriptions, debt payments and even such items as fuel expenses, they’ll see the whole picture — including which monthly items they can do without and instead put the expenses toward their debt payment or savings.

Guide your clients toward a financially stable future

The whole picture — that’s the essential element at play. Too often, money comes and goes without being well accounted for, and that’s one reason these debt issues arise.

By writing everything down and keeping track of it all, your clients are better able to take control of their finances to work toward a debt-free clean slate while living within their means and planning for a bright, financially secure future.

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