Written By: Research to Practice Task Force
New Year’s Resolutions: Helping Clients Navigate Debt Reduction | Insights from the 2022 AFCPE® Symposium
It’s that time of year when many people realize they’re awash in debt and make New Year’s resolutions to pay it off. Financial Counselors can use insights from the 2022 AFCPE® Symposium to help clients navigate the choppy waters of debt repayment.
Survey the landscape
The quest to become debt free is like studying a pirate’s map. You’re looking for signs of perils (burdensome debts) and treasures (money for payments). Take a close look at recent credit card and bank statements. Pull a credit report from annualcreditreport.com. Build a complete list of lenders, balances, due dates, minimum payments, and interest rates. Be sure to check for debts such as “pay in four” purchases and loans from friends/relatives.
With your client, check pay stubs and bank statements for job/benefit income and pay dates. Brainstorm income sources together and create a list of side gigs and items that can be sold for quick cash. Tax refunds can help slash debt. January is a good time to book an early appointment with VITA which offers free income tax preparation for limited-income clients. Some VITA sites also help people assess withholdings, to boost current net pay.
Create a new map with ideas from the 2022 AFCPE® Symposium
A budget gives people a map for their debt repayment journey. In the Symposium poster session, “Budget Your Dreams”, Jenni Whiteley and Alena Johnson described the process and worksheets they developed to help clients align a budget, actions, and goals. This process can be adapted to create a budget that frees up money to pay off debts and pairs that with motivating visuals.
The Budget Your Dreams process begins by estimating expenses and debts. The client identifies key dreams/goals that are important to them and determines the cost of that goal. Expenses are then categorized as essential, important, or enjoyment. Clients strategize actions they can take to reduce their flexible expenses. Then they assign each saved dollar to a key goal. By dividing the cost of the goal by the dollars assigned to it, the client can see when they’ll reach their goal. This directly connects their cost-cutting efforts to their vision. In the Budget Your Dreams process, clients also create a visual “dream board” to serve as a daily motivator. Clients can also use tools like PowerPay or Unbury.me to explore how their debt-free date will be affected by different payment sizes and interest rates.
Be prepared to negotiate
It can be empowering to negotiate debt terms with lenders, but many clients avoid that because they are nervous and don’t know what to say.
In the Symposium session “Creative strategies for debt reduction with clients”, Danae Hannah described how she used role play to help an anxious client practice making calls. When the client made her first live call to a lender, Hannah joined the call to provide support and encouragement. Soon the client was able to call lenders on her own. You can also help clients role-play negotiations that increase their income for debt payoff, such as pay raises, side job contracts, and the sale of items.
Stop taking on water
Paying off old debt while adding new debt is like trying to bail a ship that has a hole in it. It can be very hard to change credit card habits, but that is essential to effective debt repayment.
In the session, “Financial atomic habits: The power of small changes for big results” Cherie Stueve and Beth Watts explained that breaking an old habit involves making the cue (trigger) for the habit obvious, planning ways to make it more difficult and unpleasant to respond to the craving, and reducing rewards. They shared an example of a person trying to cut back on impulsive, online shopping. A client could reduce cues and cravings by unsubscribing to social media sellers/influencers. They could unlink vendor sites, remove stored credit card data, and make cards less accessible.
Financial counselors often have clients who want to reduce debt but don’t want to give up credit cards. Hannah shared how she successfully approached this challenge with a client. She helped the client restructure financial accounts to large substantial debt payments on all credit cards, except for one. The client agreed to use only that credit card and to pay off the entire balance on that card each month. This strategy began with changes the client was willing to make and rewarded her with decreasing debt loads.
Track your course
As clients navigate debt repayment, they need to know if they’re following their map (budget) or going off course. If they overspend their budget limits, not only will there be less money to pay down debt, but debt could also end up growing. Mary Bell Carlson’s session “Cash flow technology solutions for financial coaches and counselors” included a close look at the budgeting app Qube. Qube can be a helpful tool for people who want to pay with “plastic” but are trying to stick to a budget to pay down debt.
Qube is a digital envelope system that integrates banking, budgeting, and a debit card. The app lets people set spending limits for budget categories and then deposit money for each category into their Qube account. When making a purchase, users open their Qube app to see how much money remains in that category. Then they transfer the budgeted funds to their Qube debit card. When they run the debit card, any unused funds will be credited back to their Qube bank account and the budget category. The person cannot overspend because the debit card will be declined if their purchase costs more than the amount they transferred to the card.
Know the power of each step
The journey to becoming debt-free can feel epic to clients, but small, sustainable steps are the key to big financial changes. Stueve and Watts explained that building systems of habits can lead to transformational changes. They noted that the author of Atomic Habits, James Clear, said, “habits are the compound interest of self-improvement”.
You can help clients identify one small, doable step on their debt repayment journey. This will enable them to experience initial success. Small successes give rewards and encouragement, which will help clients sustain that action so it becomes habitual. This builds their skills and confidence to add another step, and then another. Over time, this forms systems of habits that change how they view their financial abilities and turns their resolutions into the future they envision.
More information about the 2022 Symposium is available here.
Atomic habits: An easy & proven way to build Good Habits & Break Bad Ones. James Clear. (2022, November 14). Retrieved December 2, 2022, from https://jamesclear.com/atomic-habits
Clear, J. (2021). Atomic habits: Tiny changes, remarkable results: An easy & proven way to build Good Habits & Break Bad Ones. CELA.