Creating a Financial Plan for 2023
As a young professional, it's important to take control of your finances and create a plan to achieve your goals. The end of the year is the perfect time to reflect on where you are financially and set your sights on where you want to be in the future.
First, let's start with an annual review of the past year. Determine your Net Worth (Assets - Liabilities), and Cash Flow Health (Income - Expenses). Once you have these numbers you’ll have an idea of your overall financial health. Now take some time to look back on your financial progress over the past 12 months. Were you able to pay off any debt or increase your savings? Did you make any investments or achieve any financial milestones? Celebrate your wins, it’s an important part of the process.
Now that you have a sense of where you stand, it's time to set your financial goals for the new year. Some common goals for young professionals might include:
Pay off debt: If you have high-interest credit card debt or student loans (anything above 10% would be considered high), it's important to focus on paying them off as quickly as possible. The longer you take to pay off your debts, the more you'll end up paying in interest. Consider setting a goal to pay off a certain amount of debt each month or to pay off a specific debt by a certain date. Also it might be worth holding off on investing until all high interest debt has been paid off. Although personally I think instead of waiting to invest to start with investing a lower amount like $50/month, while paying down the debt in order to build the investing habit, and gaining experience in the market.
Save for a down payment on a home: If you're ready to buy a home, it's important to start saving for a down payment. A down payment is a large chunk of money that you'll need to put down on your home when you buy it. The size of your down payment will depend on the type of mortgage you get, it used to be recommended to put down at least 20%, but that advice is quite outdated with increasingly larger home prices and historically lower interest rates (even in 2022), some prefer putting the minimum down, usually 5% of the purchase price. Your tolerance for debt, market conditions, and personal perferences will determine the right option for you.
Build an emergency fund: It's important to have an emergency fund in case something unexpected happens, such as a job loss or a medical emergency. The rule of thumb is to save at least three to six months' worth of living expenses in an easily accessible account. So if you spend $3,000/month, then an emergency fund of $9,000-$18,000 would be the normal range. The more confident you are about your job security, as well as how quickly you can obtain a new job, will determine the size our your emergency fund. For people in a more niche job, or volatile industry, people who are more conservative might feel better with a year of expenses in their e-fund. Understand your situation and decide what feels right for you. You can gauge if the decision is right based on how well you sleep at night. If you’re up worrying about future expenses, you might need a more conservative (larger) emergency fund.
Save for retirement: It's never too early to start saving for retirement. If your employer offers a RRSP or other retirement savings plan where they match your contributions, consider investing enough to get the the maximum contribution. The company match usually outweighs the higher fees these plans usually come with. You can also open a Tax-free Savings Account (TFSA) and save for your retirement on your own.
Invest in your education: Half the battle of personal finance is raising our incomes. Continuing your education can help you advance in your career and earn more money in the long run. If you're interested in going back to school or learning news skills, consider setting a goal to save for tuition and other education-related expenses. Online courses, books, new equipment, classes, etc, are all accessible ways to learn in today’s internet age. Think of these purchases as a investment into your knowledgebase which will pay dividends in the future.
Travel: If travel is one of your big values, and you want to see the world, consider setting a goal to save for a trip or several trips. Create a travel sinking fund. This is an account that you move a certain amount each month to fund a future trip. This way you can see the progress while saving towards your next trip, and help feel less guilty spending it while on the trip. For example I have a $150/paycheck sinking fund for travel. This helped us visit Peru and hike Machu Picchu without stressing about money.
Improve your credit score: Your credit score is a three-digit number that lenders use to evaluate your creditworthiness. A higher credit score can make it easier to qualify for loans (like mortgages) and credit cards and can also help you get lower interest rates. Consider setting a goal to improve your credit score by paying your bills on time, reducing your credit card balances, and disputing any errors on your credit report. Credit scores can take a while to improve so start improving it now so it’s ready for when you will need it.
In summary, it's important to take control of your finances and create a plan to achieve your goals. This includes reflecting on your financial progress over the past year, setting financial goals for the future, and creating a plan in order to stay on track. Don’t worry about perfection, worry about making progress in the right direction. Here’s to a good 2023!
