Are you ready for a Financial Adviser?
I recently received a call from a prospective client. Let’s call him Joe. Up until 12 months ago, Joe was in a high paid management role. Naturally it was also a highly stressful job so Joe made the decision to switch careers into something with less stress so he could enjoy life more. Unfortunately the trade-off is that he had to take a significant pay cut.
Over the last 12 months, Joe and his wife have had to use credit cards and personal loans to keep their heads above water and he was seeking a financial adviser to help them get back on track. Joe and his wife could definitely benefit from some Financial Advice, however my number one concern here is that the cost of advice for them may exacerbate their debt problems and I pointed this out to Joe.
What I chose to do for Joe was spend 10 minutes on the phone to him, with a follow up email, to give him the following suggestions. Joe needs to do the following steps as soon as possible:
1. Sit down with his wife and prepare a detailed budget. Make sure to include ALL outgoings, this includes the necessary items, like food, power, mortgage repayments plus their lifestyle requirements, like eating out at a restaurant, gifts, new shoes, golf membership.
2. If by doing step 1 they identify that their outgoings are greater than their incomings, then they MUST curb their spending. They could try to review their contracts on insurance, power, telephone etc or alternatively rethink the golf membership. At this stage, they must do whatever it takes to not make the debt issue any worse.
3. Seek advice from their bank or (my preference) a mortgage broker to see what the pros and cons would be of consolidating their debt into one with a lower rate of interest. Alternatively if that cannot be done then they need to tackle each debt based on highest interest rate first. They should just pay the minimum on the remaining debts. Once the first one is paid, the amount they were paying on this should be added to the minimum on the second and so on and so forth. It is imperative that as each debt is repaid that they do not just fold those repayments in to their lifestyle or they may be paying them off forever.
Example: Amount Owing Min Repayments Interest Rate
Debt 1 $5,000 $50 pm 10%
Debt 2 $3,000 $30 pm 8%
Debt 3 $6,000 $60 pm 7%
They can afford an extra $20 per month. They should start by paying $70 per month to Debt 1. Once it is paid off, they should pay $100 per month (Min $30 on Debt 2, plus $70 from Debt 1) and so on.
4. Once they have paid all debts down to just the home loan, they should arrange a meeting with a financial adviser to set out some future goals and have the financial adviser help them to reach them. The training they acquired in steps 1-3 will come in very handy.
While there is no doubt that I would love to start working with these clients straight away, it is important that I consider the cost of doing that to their overall financial situation. It is clear that they will benefit from financial advice, hopefully in the near future, but it is important that they do a little work before hand to save them in the long run.
