The Financial Foundations You Need to Build for a Bright New Year

A new year is a new opportunity for young professionals like you to start things off on the right foot.

What do you want to accomplish in the next year, five years, or even 20 years down the road? While growing your wealth isn’t necessarily a goal in itself, it is a tool you can use to help achieve these grander life goals and visions for the future. 

By planning for your financial life early on, you’ll give yourself and your portfolio more time to accumulate wealth and build the lifestyle you’ve always envisioned. Here are six pillars of financial well-being we help professionals like you conquer through our Financial Foundations.

#1: Goal Setting

Goals are like your north star, they help you determine the direction you want your life to head in. But in terms of goal setting here, think beyond your finances. At Partners in Financial Planning, we help our clients by utilizing a holistic approach to goal setting.

Focus on your personal values, and consider how those values work into your financial life. If helping your children live comfortably in adulthood is important to you, maybe that translates to establishing a trust fund or contributing to a 529 plan. If you enjoy hosting loved ones and spending time together, perhaps you’d like to purchase a vacation home for the family to gather at year after year.

Use these values to create both short- and long-term goals. These should be flexible enough that they can grow with you throughout your different seasons of life.

#2: Debt Reduction Planning

Debt is sneaky — it can add up quickly, and it’s easy to forget about when the payments are put on autopay.

Examples of common debt include:

• Mortgage
• Auto loan
• Personal loan
• Credit card balances
• Lines of credit (like a HELOC)
• Student loan debt for you or a child
• Medical debt
• Business loan
• Special financing or installment plans for store purchases

It’s true that not all debt is created equal. You can categorize your loans into a few different types including:

• Fixed-interest loan: The interest rate stays the same for the life of the loan. 
• Variable-interest loan: The interest rate will change throughout the life of the loan, typically fluctuating based on the federal funds rate. Some variable loans will include a fixed-rate period, typically at the start of the loan.
• Secured loans: Loans that have some sort of collateral tied to them. In the event you default on the loan, the lender will be able to seize the collateral. These loans tend to have lower interest rates (i.e. mortgages, business loans, auto loans).
• Unsecured loans: Loans that do not have collateral, making them riskier for the lender. These tend to have higher interest rates. (i.e. credit cards, student loans, personal loans).

Take some time this new year to list out all current debts, as well as the type of debt and interest rate. This can help you prioritize what should be paid down and in what order. Debts with high or variable interest rates should almost always be the first to go from a numbers perspective. However, it can also be helpful psychologically to “snowball” your debt by paying off the smallest-balance loan you have first, then “rolling” that payment into the next bill you owe. This can help to gamify the debt repayment process, and help you feel more accomplished – which encourages you to stick with your debt repayment plan.

From there, take a financial inventory to understand how much cash you have coming in and what your recurring expenses are. You may find that you have more money available to make additional payments. The more you can put toward the principal amount of any outstanding loans, the less interest you’ll accrue over time.

Don’t forget to look into loan forgiveness or debt relief programs in 2023, such as the pending student loan forgiveness program for federal borrowers.

Paying down debt isn’t easy, but making a plan is half the battle. We understand that this can be especially tough for physicians with a high-income potential who come out of school with large amounts of student loan debt. Our team at Partners in Financial Planning is here to help you strike the right balance between paying down debt and saving for your future goals.

#3: Costly Mistake Avoidance

Avoiding costly mistakes primarily comes down to how much risk you’re able to tolerate within your portfolio.

Every type of investment has some amount of risk, and every investor has their own risk tolerance level that’s unique to them.

In terms of costly mistake avoidance, there are two terms to know:

Risk tolerance: This refers to the amount of risk you’re comfortable taking with your investments. In other words, can you afford to lose all your money on an investment tomorrow and still get by? Or would that loss financially ruin you?

Risk capacity: This is the amount of risk you must take with your investments in order to see returns. For example, bonds that are backed by the federal government are some of the most secure investments available. Because of this, they tend to offer low rates of return. To gain higher returns, you’d need to invest a portion of your portfolio into riskier investments, such as stocks.

Your risk tolerance will change throughout your life. As a young professional, you’re more likely to have a higher risk tolerance than when you retire. That’s because the younger you are, the more time you have for your portfolio to recover from potential dips in the market. The longer you can go without withdrawing from your investments, typically the greater your capacity for risk.

As you age and transition from accumulating wealth to maintaining and preserving it, your risk tolerance will lower. Why? Because you don’t have as much time to recover from those potential market downturns.

#4: Insurance Analysis

Believe it or not, well-suited insurance is one of the best assets you can have.

Work with your financial advisor to determine if your coverage is still meeting your needs and how you can best maximize your benefits.

Ask questions like:

• Is my current health coverage the best plan for me, given other options offered by my employer?
• Is my life insurance enough to cover my family’s needs without me, and is it a low-cost term policy (instead of high-cost whole or variable life insurance policies)?
• Is my disability insurance policy robust enough, or should I obtain additional coverage?
• Do I need personal liability coverage?

#5: Basic Estate Planning

There are so many facets to estate planning, but you can make your 2023 estate planning checklist simple by focusing on:

• Your will and testament
• Financial power of attorney
• Healthcare power of attorney
• Healthcare declaration or living will

Of course, no one likes to think about death — especially not their own. But having an estate plan in place can save you and your loved ones a great deal of time and heartache during an already stressful time. This is especially critical for those with children who are still minors. Even small, proactive gestures like showing your family where to find your estate planning documents or financial papers can help them tremendously during a crisis. 

Simply put, your estate plan is there to ensure your wishes are carried out as you intended.

#6: Basic Tax Planning

In the new year, you may find it helpful to determine what tax deductions and credits you are eligible for and utilize them when applicable. This can also help you determine if it’s in your best interest to take the standard deduction or itemize. Since the standard deduction is at historic highs, only around 11.47% of people choose to itemize.¹ 

You and your accountant can take a closer look at your tax situation to determine which course of action is best for you. If you don’t currently work with an accountant, feel free to reach out to us. We can assist with tax preparation for an additional fee.

Feel Financially Confident in 2023 With PIFP

Our team is here and excited to help you with all of these foundational elements of financial planning through our Financial Foundations Service. This is an affordable offering that includes no asset minimums — making it ideal for young physicians and professionals who are still finding their footing and building wealth.

Sound like you? Don’t hesitate to reach out and schedule time to chat with our team.

^Sources:

^{1How Did the Trump Tax Bill Affect Itemized Deductions? – 2021 Study}