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.