Debt management a growing part of financial planning

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Financial planners help people invest their money, grow it and organize it for retirement. But these days, more and more planners are simply helping them get out of debt.

Debt management is now counted among the basic services offered at most financial planning firms in Colorado Springs. And it’s not a fringe service accessed by only a few clients.

Very few people walk into financial planning offices unencumbered these days, said Tim Watson, a certified financial planner with Strategic Financial Partners.

Americans had more than $2.4 trillion in consumer debt at the end of 2010, according to Federal Reserve figures. That averages to $7,800 per person if you include every person, even infants. About 33 percent of the debt comes from revolving lines of credit like credit cards and the other 67 percent can be attributed to auto and student loans.

Mortgages do not factor into consumer debt figures.

Debt management has become a big part of what financial planners do.

“A small percentage of our clients don’t have any debt at all,” said Michael Pennica of Pennica Financial. “But it’s a very small percentage.”

Those who have no debt have often worked to get rid of it in the past, he said, and some have even suffered through bankruptcy, swearing never to get in over their heads again.

“When we’re first learning about the client’s financial situation, it’s going to be 20 to 30 percent of those initial conversations,” Watson said of debt management.

Debt is not the easiest or most natural subject matter for a financial planner to bring up with a client.

“A lot of clients don’t want to talk about it,” Watson said. “It’s something that they’re embarrassed about.”

It’s also not the most profitable conversation, Pennica said.

“There are many people in our industry who don’t want to talk about debt,” Pennica said. “They want to talk about investments because investments are where they make their commissions.”

However, both Pennica and Watson argue that debt management is a necessary first step for nearly all of their clients. Without reining it in, debt can eat up investment profits and negate otherwise careful retirement planning.

The first mistake a lot of clients make when it comes to debt management is sacrificing their savings goals and plans in order to tackle debt, both planners said.

“I believe in a balanced approach,” Pennica said.

His clients get rid of the debt, but not at the expense of everything else. He doesn’t believe in the Dave Ramsey approach, he said. Ramsey is a radio personality who encourages people to use any means possible to get free of debt. His radio program sometimes features extreme stories about people selling everything and starting over more conservatively.

But focusing solely on debt and neglecting long-term savings is a good way to get behind, Watson said.

Pennica, who agrees with that sentiment, said he has a client with two mortgages, three cars, student loans and more than $65,000 in credit card debt. The client makes good money, six figures, but he has a lot of debt to contend with.

“He still desperately needs to invest,” Pennica said. “When you look at it, he’s way behind the curve.”

Financial planners have started to make it part of their business to help clients manage debt while simultaneously investing, saving and planning for the future.

The trick is picking out the debt that has to go first and tackling the overall load piece by piece, Watson said.

“Often it’s hard for people to distinguish which debt to get rid of first,” Watson said.

And it’s not always the highest interest rate.

There are tax benefits on some debt like mortgages and student loans that lower the actual cost of the debt, he said. Other loans, like car loans and credit cards, don’t have any tax benefit. So even if a car loan has a lower interest rate than a student loan on its face, the car loan might be the better one to eliminate first, Watson said.

Colorado Springs comes with its own unique set of debt issues that set it apart from other areas of the county.

Watson said he’s seen more people here than anywhere else in the country who used retirement investments to buy rental properties and have found themselves fighting against foreclosures and worrying about losing the real estate as they default on their mortgages that started as low interest-only payments during the housing boom and have since ballooned.

“That’s thrown a wrench in their plans,” he said.

Watson believes some of the marketing tactics used by lenders to get homeowners and would-be investors into new interest-only adjustable rate mortgages may have been more prevalent here than in other parts of the country.

Pennica has also seen a few traits specific to the Colorado Springs crowd. First, there’s a large religious population here because of a high concentration of Christian nonprofit organizations.

“The Christian community is very sensitive to debt,” Pennica said. “Sometimes they go overboard.”

There is a culture in Christian community that can be rather damning of debt, he said. And when members of that community go into the red, they are sometimes shamed into dropping all other financial interests in favor of eliminating debt.

That’s where the dangers of failing to save and plan for the future can come back to haunt clients, Pennica said. It’s important to approach financial planning and debt management with balance, he said.

He also noted that the military, especially young military families, have trouble saving and putting money away for retirement. As somone familiar wih the Air Force, Pennica said he can relate with the difficulties military families face.

They’re always moving and a lot of moving expenses aren’t reimbursed.

“The curtain rods don’t fit in the new place,” Pennica said. “You see military families going into debt to furnish their new homes.”

Regardless of where the debt comes from, “you have to address it” in financial planning, Watson said. It has become a major element of what financial planning and advising firms do today.