What All Financial Advisors Should Do (but Don’t): Review Your Debts

It’s natural to think of a financial advisor as the one you turn to help grow your assets. But what about when you have debts? Here, too, a good financial advisor can proactively help you. They can review your liabilities, recommend strategies to pay down loans, and ultimately strengthen the position of your overall financial picture.

In some cases, a financial advisor well-versed with your situation may even recommend taking on debt. Keep in mind that having a debt isn’t necessarily the same as being in debt in terms of your overall portfolio. A good financial advisor can help you think of debt more strategically. And if you do have more liabilities than assets as a whole or face a net debt, that advisor should be able to put together a plan to help get you out of debt in a way that aligns with your financial needs and goals.

What are some specific steps your financial advisor should help you with? Here are some of the ways our Denver-area, fee-only fiduciary financial planning firm would work with you as a client:

Evaluating Debt-to-Asset Ratios

The first step in reviewing your debts often means looking at your total amount of debts, your total assets, and determining the ratio between them. There’s not necessarily one golden ratio to aim for; much depends on your circumstances and goals. But it’s good to get a baseline.

Perhaps you went back to school for a doctorate degree, and now the student loans feel overwhelming. But when we look at your total debt-to-asset ratio, it becomes apparent that your cash, investments, and even physical assets, like collectibles, together outweigh your debt. You gain more confidence in your financial health.

Whatever the ratio looks like, it’s essential to know where you stand.

Managing Debt

Once we’ve evaluated your debt-to-asset ratio, we help you develop a debt paydown strategy to meet outstanding liabilities efficiently. That doesn’t necessarily mean paying off debts as quickly as possible but rather figuring out a plan that you are comfortable with and makes sense financially.

Debt management can mean working with lenders to reformulate a payment plan or working with external debt management programs to help you pay down liabilities based on more favorable terms. We monitor current interest rate and lending environments to identify opportunities to increase your savings and cash flow by implementing different debt management strategies.

For example, instead of paying, say, an 18% APR on credit card debt to a credit card company, you might take out a loan at a lower rate (say, 10%). Then you use that loan to pay off your credit card debt. The lower interest rate on the new loan equates to lower monthly payments, meaning you have more cash to put into your retirement savings, housing budget, or other financial need.

Focusing on Tax-Efficient Debt

We focus on whether you’re using tax-efficient debt when available and applicable. Not all debt has the same net cost because some types of debt provide more tax advantages than others. For example, the interest you pay on student loan debt and mortgage debt could potentially be deducted from your income tax return, helping lower your overall tax bill.

It’s important to take these tax benefits into account when taking on debt. Perhaps it makes more sense to secure a mortgage rather than paying cash for a house. You could then use some of that cash to buy a car instead of taking out an auto loan. A “big picture” view is critical, and we help provide it.

Debt Accessibility Planning

Lastly, we help make sure you can access an adequate credit line based on your financial needs and risk tolerance. Remember, not all debt is bad. It may make sense to take out a loan to pay for something you have the assets to cover if you can earn a higher return from those assets than what it costs you to borrow money.

For example, say you can borrow $10,000 at 3% annual interest, and you can keep $10,000 in an investment account that earns an average of 6% annually. Then it typically makes financial sense to take that loan rather than sell your investment assets.

Ready to Review Your Debts?

Overall, a good financial advisor should review these types of debt areas so that you can meet all your financial needs cost-effectively and grow your wealth. Reviewing both debts and assets is vital for your full financial health.

Our Greenwood Village, CO fiduciary financial advisory firm offers a complimentary 15-minute call. We can briefly discuss your financial situation and concerns and share how we may be able to help.

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