First Things First: Setting Your Financial Priorities Straight

Derek Penner
Jan 18, 2023
4 min read

Updated: Jan 21, 2023

Putting a solid plan together for your financial future can be pretty daunting. There's so much to consider that if you're new to it, you might not know where to start. Here's a handy step-by-step guide to prioritizing the different pieces of your financial puzzle correctly.

Let's dig in a little deeper!

Just like any house worth spending your life in, your plan needs a proper foundation, so the unexpected things life throws at you don't derail everything else. That's insurance's job in your plan - to either

protect your family in the event of a sudden interruption or loss of your income (because of injury, illness, death, etc), or to
step in and fill the gap for expenses beyond what your income could provide (car insurance, home insurance, etc).

This comes first, because without your income, all the rest of these steps are impossible!

The next two (paying off debt and building up emergency funds) could be done in either order, but ideally should be worked on at the same time. Emergency funds exist to protect you from going into debt; it's easy to see how important that is if you're also in the middle of trying to get OUT of debt. Make your first goal a $1,000 emergency fund, then aim to set aside 3-6 months worth of expenses. Take stock of your debt, and decide which one needs to go first (high-interest credit is usually a good target), then focus your efforts on that one.

Once your income is protected properly, you've built up a bit of a rainy-day fund, and you're on track to paying off your debts, the next priority is planning for retirement. More Canadians than ever are reaching retirement age and finding themselves unable to retire. Why is that? ... well, one reason is that studies show Canadians save more for luxury items, travel and vacations than they do for retirement ... ouch!

Some people also choose to save for their kids' education at the expense of their own future. The issue with that is, once those people reach the retirement they didn't save for, they become a financial burden to their kids, which is exactly what they didn't want - so DON'T neglect this. You AND your children will thank you later! There are some great options out there for saving for your kids' futures as well, like RESPs and In-Trust accounts. We'll tackle those in more detail another time!

After that's taken care of, consider saving for large purchases so you can pay for them in cash instead of borrowing the money. There are some situations where taking on debt is unavoidable, but not all debt is created equal. It's better to go into debt for something that will go up in value or pay you money (like a home, or an education) than for something that will just go DOWN in value and COST you money (like a car).

Finally, once you've 1) laid a crisis-proof foundation of proper insurance protection, emergency savings and your debt is on its way out the door and 2) made sure you're on track to make some important life events happen (like your own retirement, your kids' education, and even some fun stuff like traveling!), it's time for Step 3: ensuring that as much of what you've worked so hard to build goes to the people it was intended for as possible. This starts with taxes. You want to save money on the taxes you pay on - Your current income, - Your current savings/investments, - Your future retirement income, and - Your estate (once the time comes to pass it on to the ones you love).

There's enough ground there to make this post WAY too long, but we'll cover each of these a bit more in-depth in their own blog post. For now, here's a few quick pointers:

If your money is sitting in a savings account, not only is it "growing" less than inflation is eating away at it (translation: the longer it's there, the less money you have), all the interest you're earning is 100% taxable. If nothing else, consider moving it to a Tax Free Savings Account (preferably invested in something that can at least outpace inflation).

RRSPs can be a great tool, particularly if your "earned income" is fairly high. The key, though, is to USE that extra money back on your taxes to get ahead! Either by paying off high-interest debt, or investing it so it can grow. Try also to avoid putting all your retirement "eggs" in the RRSP "basket" - all of this money will be taxable at the time you withdraw it, and you will benefit from having as much tax FREE money available in retirement as possible.

When it comes to your estate, it's not something everyone is pumped to think about, but setting things up properly could mean the difference between your family GAINING or LOSING hundreds of thousands of dollars. That's worth putting up with a bit of inconvenience, don't you think?

Each of the steps we've laid out build on the ones before. If the right foundation isn't there, any other planning you do will be on shaky ground. Properly protecting your income isn't enough if you get to the end of your income-earning days and have nothing to show for it. And it would be a huge shame if you did everything right until the end, and you and your family missed out on half of the fruits of your labors due to a lack of planning!

Where are you at in this process? Whether you have yet to start or you're well on your way, we're here to help make your plans .