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How to Create a Five-Year Financial Plan

Where do you want to be in five years? Debt free? Living in your own home? Enjoying a “mini-retirement” volunteering or traveling around the world? I’ve written a lot about making spending plans (i.e., monthly budgets) and debt reduction plans, but these are only part of the key to building financial security. You also need to set long-term financial goals.

If you are like I was five years ago, you might be thinking: I don’t even have a clue where I’ll be working or living in five years from now! That’s okay. You can set financial goals that are independent of your career or lifestyle goals. Whether you plan to earn an MBA and climb the corporate ladder, get married and start a family, or bounce between a half dozen cities and jobs in the next five years, a five-year financial plan will help.

Why Five Years?

Five years is barely “long-term”. We’re not talking about paying for your kids’ education or planning your retirement just yet. We’re talking about setting goals over a period of time that’s brief enough to feel tangible but long enough to allow you to accomplish a few things. If you put your mind to it, you can accomplish a lot in five years, such as:

  • Save up a down payment for a home
  • Eliminate most, if not all, of your debt
  • Save an emergency fund of over $25,000 with about $400 a month
  • Build excellent credit

Then again, if you don’t set long-term financial goals, five years can pass you by and you may find your financial situation unchanged. That’s why creating, rereading, and occasionally revising your financial play can make such a difference.

How to Create Your Plan

There’s no right or wrong way to set a long-term goal, although self-help gurus tend to emphasize that the most effective goals are specific, achievable, and in writing.

Make Goals Specific: It’s impossible to predict exactly what job you’ll hold, where you’ll live, or what your savings account balance will be in five years. But the more specific you can be about what you’d like your financial situation to look like down the road, the better. Instead of simply saying that you’d like to have an emergency fund in five years, write down exactly how big of an emergency fund you’d like. Want to purchase your first home in the next five years? Write down how much the house will cost, how much you’ll put down, and what your mortgage payment will be.

Make Goals Achievable: Although you don’t want to set goals that you’ll easily achieve in two years (let alone five), you don’t want to set yourself up for failure. Banking $1 million is a nice goal, but unless you earn more than $200k a year or hope to sell or expand your own business, it’s probably out of reach in the next five years. Figure out how much you can save and/or how much more you can earn in the next five years, and set savings goals based upon those realities. Don’t be afraid to push yourself, but don’t create goals that will only disappoint you when you don’t achieve them.

Put Goals in Writing: Goals differ from dreams—especially when goals are in writing. When you put your goals in writing, you not only reinforce your desire to achieve those goals as you write them, but you’ll have a concrete reminder of your goals whenever you need it.

What to Include

Your five-year financial plan is yours alone. What will it include? Debt reduction and savings goals are obvious starting points, but they’re only the starting points. Perhaps you want to have multiple income streams in five years (e.g., your salary, a side business, and rental income). Maybe you want to be your own boss, or be able to work part time. Perhaps you want to go back to school. All of these possibilities have financial implications—and require financial resources. Ask yourself what you want to accomplish in life in the next five years (and beyond), and then ask yourself what you need to do to your finances in the next five years to be in a position to realize those ambitions.

My Five-Year Financial Plan

Since I started this blog, my biggest financial goal has been to be 100% out of debt by my 30th birthday. I have work yet to do in my remaining two years, but I’m on track. Now that I’m looking ahead, it’s time to write a new five-year financial plan. There are some uncertainties in my future. For example, I may return to law school in 2010. Also, I’m getting married this year, and we’re not sure when we’ll start thinking about kids. That said, there are a few financial goals I want to accomplish in the next five years regardless of the other turns my life takes:

  • Continue to live debt-free (except a mortgage)
  • Have a $25,000 emergency fund
  • Have at least $25,000 in retirement savings (due to my debt, I’m admittedly behind in this category)
  • Own my home with a 15-year fixed mortgage and no PMI

What about you?

What’s your five-year financial plan? Have you set financial goals in the past and found them helpful? Please share your story in a comment.

About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.

Comments

  1. Five years seems so far! I was asked for two years worth of cost projections for my new business and I practically peed my pants.

    But you are right, a plan is definitely needed.

    So psyched you found me on Facebook. You are so in my feedreader now!

  2. This was a really good post. I graduated undergrad in 06 and I definitely had only one goal which was pay off my student loans, granted I did not really adhere to the steps needed to maintain that goal, and as a result I have clearly fallen off with reaching it. I have been trying to get on track. Being that I am 25 my goal for the next 3 years is to completely be debt free, which should not be too difficult since my biggest debt is my student loan debt. I have an auto loan that is at about 10K at 6%, even though the student loan I have with the highest intrest rate is less than the car loan, I have been focusing more on the student loans. My rationale being that if stuff gets too bad I can always try to sell the car and knock the autoloan down by at least half, can’t get rid of the student loans w/o paying them.

    I think people under 30 get so bogged down in trying to do so many things, that we don’t really focus on incremental steps like you are talking about in this article, of course we all have grand dreams of working for ourselves or being rich but you are right, we definitely need to take a step back and ask ourselves, how are we going to get there.

  3. I have to say, I haven’t thought about this much, but it is definitely a good idea. I haven’t thought about much for the next five years, finance or life goals. Thanks for the idea. I need to make some concrete plans. But that being said, I think I am going to focus on fixing up my condo and paying down my mortgage to save in the long run since I only envision renting it out if I move. I already have a yearly goal of maxing out my allowable ROTH IRA contributions which I have done for the past 3 years. I also definitely want to invest more, but also focusing on budgeting for lifestyle goals like nice vacations and eventually getting married.

  4. Why SUCH a big emergency fund? ($25k?)

    • A good emergency fund should cover 6 months worth of expenses (especially in these times 6 months is a good time frame)…A good conservative figure for me is 4,000 expense per month which calculates to 24,000.

  5. Great information for folks to read and implement. I try to break my goals into categories ranging from something tangible I can do today ranging up to 5 year goals… in between I have annual goals which are ‘scheduled’ monthly throughout the year. It helps me perform each day in a manner parallel with my longer term vision.

    I’ve shared a good bit on this and I love seeing someone else share a similar vision and perspective.

    Thanks!
    Dave

  6. Great post. I’m 23 and my five year goals are:

    - stay out of debt
    - build & maintain $20,000 emergency fund ($6000 to go)
    - max out Roth IRA each year (need work on this one)
    - save $20,000 for down payment on a home

  7. I’m 19 and my five year plan is this:

    - Build my Emergency Fund to $5000
    - Max out my retirement fund contributions each year
    - Pay off my student loans (as much as possible)
    -Put money aside for big life goals (wedding, house deposit, children)