I’m the first of my generation to own a house and the first to earn that much annually and I don’t want to screw it up. Specifically, how can a financial advisor help me?
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Question: By the end of 2022, I will have earned $350,000 before taxes as a sole breadwinner and head of household. This is a great starting point and I am very aware of how lucky we are to be in this position, but I am always looking forward to improve. I currently have $88,000 left in student loans (originally close to $150,000) and very little credit card debt (less than $2,000 with over $25,000 available). I have two auto loans totaling $170,000 for two electric vehicles at 5% interest.
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I was recently offered a $200,000 HELOC at 9%, which would help me lower some of my monthly payments and make some small home repairs and improvements, but I want to make the right moves. And I’ve also been introduced to some long-term real estate investment opportunities that are out-of-state rental properties currently offering 10-12% ROI. But my biggest concern is that after taxes, 401(k) contributions, bills, savings, and mortgage ($4,500), on paper I’m paycheck to paycheck. I would like to use this HELOC to consolidate debt while also participating in some of these investment opportunities. I’m the first of my generation to own a house and the first to earn that much annually and I don’t want to screw it up. Specifically, how can a financial advisor help me?
Answer: You have a few questions to address here, so let’s go one by one. The first is the HELOC. Yes, HELOCs can be a great way to consolidate debt, but the rate you’re being offered isn’t favorable, as average HELOC rates are just over 6%. “I would wonder if 9% is the best rate you can get, because it seems a little high,” says Chris Chen, a certified financial planner at Insight Financial Strategists. Also, “I would like you to consider the potential impact that our Fed policy and inflation have on interest rates, since HELOCs tend to have variable interest rates and we are in an environment with interest rates on the rise. You can start at 9% and end up significantly higher,” says Chen.
Also, your student loans, car loans, and mortgages are likely all under 9%, so consolidating through a HELOC isn’t likely to save you money. “You may want to start in a different place, like the snowball method, where you focus on one loan, usually the smallest, and direct all of your resources toward paying off that loan while keeping up the payments on the others,” says Chen. This method could work to wipe out your student loans and maybe one of your car loans, for starters.
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When it comes to these real estate investments, what do you really know about these returns? “For real estate investments, I’m guessing the 10% to 12% ROI you’re talking about is the income you’d get from the investment. If so, that’s very high and often when you get a return that’s significantly higher to the norm, there’s something else that makes the investment less desirable. Be careful,” says Chen. (Also looking for a new financial advisor? This tool can help match you with an advisor who can meet your needs.)
Certified financial planner Kaleb Paddock says you may want to work with a money coach before working with a financial advisor. While a financial advisor helps develop investment strategies and long-term financial plans, a money coach provides a more educational experience and focuses on short-term money management goals. “A money coach will help you pay off all your debt, maximize your cash flow, and help you create systems and processes to proactively direct your money,” says Paddock.
While having a high income is great, there’s a concept called Parkinson’s Law, which basically says that your spending will always increase to meet your income, no matter how much that income increases, Paddock explains. “Working with a money coach will help you defeat Parkinson’s Law, eliminate your debt, and then allow you to increase your investing and life planning with a financial advisor,” Paddock says.
A financial advisor could also help, and Danielle Harrison, a certified financial planner at Harrison Financial Planning, says to look for someone who does comprehensive financial planning and helps you create a more holistic plan for your money. “They can help you create both short-term and long-term goals, and then help guide you through financial decisions and the opportunities that come your way,” says Harrison.
A financial advisor would also help you take a long-term approach to your money and help you create a spending plan where you don’t feel like you’re living paycheck to paycheck on a $350,000 salary. “Everyone has blind spots when it comes to their finances, so finding a competent financial partner can be invaluable,” says Harrison.
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