How Does Financial Counseling Work & How is It Beneficial For You?

By Myles Leva

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Last Updated: February 1, 2022

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Financial counselors are professionals who specialize in helping individuals and families.

They offer their financial expertise to help their clients develop better financial habits and financial literacy. For families or individuals who are struggling, they offer practical solutions which they walk them through.

As of Q1 2021, household debt in the US was equal to 79% of GDP. Consumer debt then surged by a record $40 billion in Q3. Even before the pandemic, there was a large collection of statistics pointing towards an economy where consumers were struggling more from debt.

This general situation is one that puts people in a position that leads some to seek financial counseling. Financial and credit counseling are busy industries right now. Given the situation, it’s a good time to go over:

  • What exactly financial counselors are
  • How financial counseling differs from other personal financial services
  • How the counseling process works
  • Whether/when financial counseling is a good idea

 

What is the difference between a financial advisor and a financial counselor?

There is often confusion regarding the difference between “counseling” and “advising”. Then there’s also the “financial planners” as well.

Every financial planner is a financial advisor. However, financial advisors are not necessarily financial planners. There are actually dozens of certifications that financial professionals can attain. These include several types of financial advisors.

When an individual or business seeks financial services, they normally end up going to some kind of financial advisor. These include financial:

  • Planners
  • Consultants
  • Analysts
  • Others, each with a separate license or designation

However, financial counselors have a specific role in the financial services industry.

Financial counselors are financial professionals that serve individuals and families. Specifically, they help them understand the world of finance and build better financial habits. As such, financial counselors help people struggling in some area of finance; this is their role.

This definition is deliberately broad. That’s because the range of services that financial counselors offer is also quite broad:

  • Tackling immediate financial struggles
  • Reaching savings goals
  • Taking advantage of public financial assistance
  • Managing debts (can specifically include mortgages, student loans, etc.)
  •  Emergency debt solutions
  •  Credit counseling
  •  Helping work towards buying a house
  •  Financial education
  •  Helping people find financial support (resources)
  •  Referring people to other professionals should the situation call for it

Compared to other financial professionals, counselors have a more intimate relationship with their clients’ finances. They are personal finance experts who can directly help clients manage money effectively. Many of their services are directed towards the needs of lower-income households that are struggling with a mix of the above problems.

 

 

How does financial counseling work?

Financial counseling service delivery will vary depending on the needs of the client. However, it’s normally a process that starts with a consultation.

First, a financial counselor must get to know their client and review their financial troubles. This diagnostic step is necessary for the counselor to come up with a solution.

Depending on the diagnosis, the financial counselor will offer what services they can. Because of the wide variety of services they offer, there are many different courses of action that they can recommend.

 

Debt and Credit

As we’ve covered, consumer debt is a huge problem in the US and many other countries. One common reason to seek out counsel is a debt and credit crisis. If you’re struggling with a low credit score, you will be faced with the difficulty of getting approved for financing. You will still be able to borrow, but you will have to accept much higher interest rates.

Credit counseling services are the typical solution to the above problem. A counselor would walk you through the process of budgeting and paying down existing debts. Another part of the process is repairing your credit score. This involves building a better relationship with your credit accounts. Specifically, they will counsel you on:

  • Budgeting to be able to handle your debts
  • Paying back debts to improve your credit
  • A longer-term path to improving your credit score

The latter may involve such measures as credit builder loans. Non profit credit counseling is one of the ways that low-income households can access these services.

 

Budgeting Challenges

Even without crippling debt, meeting your goals on a limited budget can be difficult. Financial counselors work with clients in a wide range of financial situations. For those who have goals like buying a house, they may offer a different approach.

Financial counselors will review your financial statements and consult you. Then, they may take such actions as coming up with a realistic budget and training you to stick with it. They may provide financial education as a part of the process.

 

Next Steps

Once their clients’ finances are under control, a financial counselor’s job is coming to an end. However, they normally leave their clients with any mix of:

  • Educational material to maintain progress
  • A list of steps to carry on with
  • A referral to another financial professional

In the latter case, there are plenty of options. If, for example, you’ve been working with a financial counselor for a long time and have shaken off debt and started saving, they may send you to an investment advisor or another kind of financial advisor.

 

Is debt counseling a good idea?

When your problem is driven mainly by debt, it is always a good idea to seek a professional who specializes in it. A debt counselor is a more specific kind of counselor, though not one with a separate formal designation.

If you’re worried about the costs, there are still options for you. Non profit debt counseling can be the solution if you are having financial difficulty but your situation is salvageable.

 

Conclusions

“Financial counseling” is a broad term, and financial counselors offer a wide range of services. Their services are primarily meant for lower-income or middle-income households with serious financial challenges. If you think you could use their professional assistance, it makes perfect sense to look for counseling near you. There are non profits that offer these kinds of services, especially those related to debt.

Photo by Andrea Piacquadio from Pexels

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