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How to Create a Five-Year Financial Plan

By Rebecca Lake
October 4, 2019

You might have a five year plan in place for your career but what about your money? 

When it comes to setting financial goals – and achieving them – planning can play a big part in your success.

If you’re wondering how to create a plan to manage your money and reach certain financial milestones over the next five years, we’re here to help. 

Here’s what you need to know to create a roadmap to reach your money goals. 

Write Down Specific (but Realistic) Financial Goals

You might already have some money goals in mind but if you don’t, you can kickstart your 5 year plan by setting some. Setting clear goals can help you get organized so you can outline the actionable steps you need to take to pursue them.  

When you’re setting goals for your finances, there are a few rules to follow. For example, it helps to make sure your goals are:

  • Specific
  • Measurable
  • Achievable
  • Realistic
  • Time-bound

If you don’t recognize the above points, they spell out a formula for setting “S.M.A.R.T.” goals. The idea is that when you’re setting financial goals, or any other kind of goal, you have a specific target you’re working toward that’s measurable. From there, you can reasonably achieve your goals within a set time frame. 

As you write out your money goals, focus on the realistic part and really think about what you can do in the next five years. For example, maybe you can’t bank $1 million on your current salary. But, you could start a side hustle or angle for a promotion at work to increase your income so you can save an extra $5,000 or $10,000 a year. 

Keeping your goals realistic and tied directly to your current financial situation can help you avoid getting frustrated and throwing in the towel. When your goal is challenging but still within reach, it’s much more motivating to keep pushing forward, especially if you can see yourself making progress month over month or year over year. 

Once you’ve honed in on some specific goals, break them down even more. So, say you want to save $5,000 a year for the next five years. That’s a big number to start with but if you break it down monthly, it comes out to $416 and change. If you divide it up weekly, it’s $96.15. And daily, it’s just under $14.

Saving at $14 a day may not seem as intimidating as saving $5,000 a year. You can take that smaller number and look at different ways to cut back on spending or increase your income daily, weekly and monthly to hit your goal. 

What Should Your Financial Plan Look Like? Four Factors to Consider

Personal financial planning is just that – personal. 

Your five year financial plan may be completely different from your best friend’s or sibling’s. So, as you create your plan, keep in mind that it should be tailored to fit you and your financial circumstances.

If you’re not sure what to include, there are some guidelines you can follow. For example, there are four key questions to focus on. Take a look:

1. How Much Debt Will You Pay Off in Five Years?

If you’re carrying debt – whether this includes student loans, credit cards, a car loan or a personal loan – you may be in a hurry to pay it off. After all, it’s easy to get discouraged if you’re constantly thinking about how your debt is keeping you from getting ahead financially. 

Yet, when shaping your 5 year plan, you have to think about how much debt you can realistically pay off over that time period. The other side of the coin is thinking about which debts you want to get rid of first. 

Here’s where it’s helpful to look at the emotional versus financial cost of debt. Say you have $10,000 in credit card debt and $10,000 in student loans. The credit card debt carries a 17% APR versus 7% on the student loans. 

The credit card debt is costing you more financially, but the student loans can take a mental toll on you if you’ve been paying them down for several years. You may be fed up and ready to wipe them out. 

Looking at your debt through that lens can help you shape your financial plan and debt repayment strategy. If you want to get rid of the highest interest debt first, for example, you might choose the debt avalanche method. On the other hand, the debt snowball method could help you get a quick win by paying off your lowest balance debt first. 

Either method can help you pay off your debt over the next five years. Crunching the numbers can help you decide which makes the most sense, based on your budget and other financial goals.

2. Will You Incur Any New Debt Over the Next Five Years?

While you may be focused on getting rid of your high-interest credit card debt or knocking out student loans, it’s also important to consider whether you’ll add to your debt load while working your five year plan. 

For example, you may decide to get a car loan to purchase a new car. Or you may venture into home ownership, which would require you to take on a mortgage loan.

Those goals may be just as important to you as paying off debt. The key is finding a way to include them in your financial plan. That might mean rethinking your budget to find extra money you can save, while still keeping up with your debt repayment. 

If saving money for a down payment on a home is a goal, for example, look at what you can do to make that easier. Using direct deposit to automatically send part of your paycheck to your Chime savings account, for instance, can help you grow your money without having to think about it. 

3. Will You Be Making More Money?

Ideally, what you’re taking home in your paychecks now will be higher five years down the road. You may get a promotion or pay raise, move to a new company that offers a higher salary or start a profitable side hustle that brings in some extra income. 

The upside of that is that you should have more money to put toward debt, add to cash savings or get started with saving for retirement. The downside is that you may face more temptation to spend once you start earning more. 

Accounting for higher income in your 5 year plan can help you make the most of those extra dollars instead of giving into lifestyle inflation. A good way to stay on track with this is to review your budget monthly and yearly to see how your expenses, savings and debt payoff amounts change over time. 

You can then compare that to your income the previous year and your expected income next year. For instance, say your total annual income is $60,000. You spend $55,000 of that but you know that next year you’ll get a 2% raise, putting an extra $1,200 in your pocket before taxes. 

You could then add that money into your financial planning efforts, based on how you prioritize your goals. 

Likewise, if paying off debt is most important, you could put all of that extra cash toward what you owe. On the other hand, if you’re balancing saving with debt, you might do a 60/40 or 50/50 split instead. 

4. How Much Will You Save in Five Years?

Saving is a pretty broad term and while it’s good to stash money away, those dollars should have a purpose. As you’re handling your personal financial planning to-do list, think about which savings goals matter most. 

That might include:

  • Creating or growing your emergency savings fund. 
  • Setting money aside to buy a home. 
  • Putting money into an IRA for retirement. 
  • Saving money so you can become a digital nomad and travel the world.
  • Building a cash cushion so you and your spouse can start a family.
  • Creating a startup fund so you can eventually start your own business. 

If you have multiple savings goals, prioritizing them can help you decide where to put your dollars first. Out of these examples, putting money into emergency savings and a retirement account are two biggies. An emergency fund can help you cover unexpected expenses, without having to borrow money. 

With retirement savings, it’s best to start putting money aside as soon as possible. That’s because when you invest money in an IRA or in your 401(k) at work, you can cash in on the power of compounding interest. Essentially, this is the interest you earn on your interest. The longer your money has to grow and compound, the bigger your nest egg can be by the time you’re ready to retire. So, if you haven’t started saving for retirement yet, there’s literally no time to waste. 

As you size up your savings goals, consider how much you can afford to allocate to each one over the next five years. Go back to your budget and income expectations to make sure those goals are realistic. And if you can’t save for everything at once, prioritize what’s most important to your financial health first and start from there. When you reach that savings goal, cross it off your list and continue working your way down. 

Create Year-to-Year Check-Ins to Help Accomplish Your Finance Goals

One thing to keep in mind about financial planning is that your five year plan isn’t necessarily set in stone. 

It’s good to revisit your plan at least once a year to review your written financial goals and make sure you’re still on track to reach them. If you need to make a few tweaks because of a life change or career change, don’t panic. And don’t stress out if you aren’t able to hit every goal exactly to a tee. Ultimately, creating a 5 year plan is about building a strong foundation of personal finance skills to help you create a brighter financial future. 

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