Source/Contribution by : NJ Publications
How to help your Debt Stressed Clients?
Do you have clients who are burdened heavily under Debt upto their hairline? Do they have large credit card bills outstanding apart from their home loan and car loan EMI's, or are they still struggling to pay off their education loans?
Nowadays it's a normal scenario because of easy money, credit cards to fund lifestyle changes, getting a loan is child's play, so people are increasingly vulnerable to falling into the debt trap, especially the younger population.
You must have had clients who even stopped their SIP's or redeemed their investments because of the mounting debt. Because no matter how great the financial plan is, or how much impact can lack of investing have on the client's future, if one is burdened with debt, it makes more sense for him/her to offload the burden first and put off the investment activity to later.
Helping the clients manage their loans, is a very important aspect of overall financial planning, in fact Debt Management precedes the financial planning process. If you want them to invest, help them get out of their debt first.
So, the focus of this article is sharing insights on how you can pull your clients out of Debt. We have listed a three step process for the same:
Seek Commitment: Debt is the end result of towering expenses and an uplifted lifestyle. It's easy to upgrade the lifestyle, while it's equally difficult to mark it down. Getting out of debt is not easy, it requires genuine commitment and a strong willpower. So, to begin with, your first step as an advisor is to secure that commitment from the investor.
And securing that commitment involves a lot of communication, so there must trust between the two parties. Your client must be able to trust you with his financial acumen. As an advisor you have to act as financial doctor for your clients to treat his financial ailments.
And before proceeding to giving him any advice, it's best that you carefully analyze his financial position, his loans, the interest rates of those loans, his priorities, his expenses, his nature in general, etc. Because when you understand these aspects, only then you'll be able to establish the connect and give him the right advice.
The client will be willing to cut his expenses only when realization dawns upon him.
Show him the opportunities that he's loosing because of the huge Debt and resultant lack of investment. Show him the mirror, the possible repercussions, that his future goals are being sacrificed because of lack of investing. You can use formulas, graphs and examples to support your contention. And show him the bright side of being debt free, being free from the mental pressure and being able to start investing for his goals.
Cut Expenses: The obvious solution to debt disposal is paying for it, by cutting the discretionary expenses and carving out this payment from the borrower's regular income. The client knows it already, and you obviously don't want to be lecturing him on good and bad money habits. It's a sensitive issue, it's like telling a fat man to stop eating food. Don't be a critic, the client needs support, a solution, and you are that support system, that solution provider. You have to guide him in the right direction, there are various techniques that may be used by your client for cutting his expenses like:
1. Listing down Expenses: When he prepares a list of his routine expenses, he'll be able to better judge as to which type of expenses he could have done without. And all such expenses fall in the discretionary expense category, which should be the target points for elimination in the coming month. This activity of expense listing will help the investor keep a control on his high lifestyle expenses.
2. Following a budget: Next, it makes sense to develop a conservative yet realistic budget and aiming to keep the expenses within the boundaries of that budget. It'll be like a forced saving.
3. Experimental thrift: Say for instance, if your client is a shopping addict, a great way to cut his shopping is by uninstalling all the shopping apps from his phone for two months, or locking his credit card in his cupboard for a month. Such experiments can help the client eliminate his impulsive purchases and contribute towards achieving his goal of reducing his expenses.
Pay the Debt
The last step is putting the plan into action, initiating the Debt Repayment process.
1. Begin with the smallest debt: It's ideal to start with the highest interest bearing debt, but here your client needs an incentive. When he pays off a debt completely, it will motivate him even if it was a small amount or a lower interest rate debt, and build his zeal to strive for the second wicket.
2. Target the Sin Debt: Once your client has warmed up, the next step is he should be directing all his saving towards the high interest bearing sin debt, i.e. his credit card debt, loans from moneylenders or any personal loans. Sin Debt is the worst enemy of a borrower, the availability is so easy and the interest rates are so high, that once stuck it becomes extremely difficult for the borrower to disassociate himself from its clutches.
3. Swap the Debt with a lower interest bearing Option: You can also help your client refinance his debt at a lower cost in case options are available.
By now, your client would be out of the danger zone and would be left with his justified EMI's, the home loan, education loan or car loan EMIs. So this is the time when he should begin with the process of Debt Repayment and Investment simultaneously, because although it is important for your client to repay the debt, but it's equally important to take care of his future. Max he can get over with his student loan before proceeding with investing. These are the low cost loans, and they aid the investor in building an asset and meeting his goals.
So, the bottomline is, motivate your debt ridden investor to get over debt, by showcasing the benefits and the probable aftermath of his current situation. Guide him inculcate frugality so that he can pay of his loans gradually from the money thus saved.
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