How to Write a Five-Year Financial PlanJanuary 27, 2021
It’s impossible to predict the future, but creating a Five-year financial plan can give you a good idea of what you can expect, as well as the motivation to make it happen. Whether you want to pay off your credit card debt, buy a house, or begin investing, writing down your goals and developing a strategy to achieve them can make the difference you need.
Here’s how to make a five-year financial plan and steps you can take to shape your financial future the way you want it.
Why Focus on Five Years?
You may be wondering why you should be focusing on a five-year financial plan instead of a one-year plan, 10-year plan, or any other number of years. While it’s important to plan for the short and long term, a five-year financial plan makes it possible to tackle some of the larger financial goals you might have to help build a foundation for your future.
For example, most people will have a hard time establishing a robust emergency fund, saving for a home down payment, building credit, or paying down large debts in a year or less, but you also don’t want to stretch out those goals so long that you lose steam.
With a five-year financial plan, you can work on all of these significant but essential aspects of your financial health without being unreasonable.
That said, depending on your goals, you may decide to go with a different time frame. The important thing is that you build your financial plan based on your specific situation.
How to Make a Five-Year Financial Plan in Five Steps
Building a plan for the future can be daunting, especially because there are so many things you can’t control. But the more time you spend developing your plan and how you’re going to implement it, the higher your chances of success even in the face of adversity.
Here are five steps you can take to achieve your financial goals in the next five years.
1. Think About What’s Important to You
You may already have an idea of what you want to accomplish over the next five years, but take some time before you begin to think about your top priorities. This process will not only help you identify the right goals but also help you determine which ones are more important to you than others.
For example, if you want to pay down high-interest credit card debt and save for a home down payment, you’ll want to decide which one would put you in the best position financially and satisfy your desires.
2. Write Everything Down
As you go through this process, it’s crucial that you write everything down, even in the beginning stages. It can be easy to forget an idea or goal, even if it’s important to you. Putting your goals and plans to paper will also help you develop a vision for what you want to accomplish and how you can get there.
Finally, writing down your five-year financial plan can help you stay on track because you can always refer back to your list to remind yourself. It’ll also make it easier to evaluate your progress and make adjustments along the way.
3. Be as Specific as Possible
Virtually everyone wants to pay off debt and save more money. But if you’re not specific with your goals, it’ll be difficult to work toward them because you won’t have a reference point or concrete plan.
Again, it’s not possible to predict what your life will look like in five years, but writing down specific goals with real figures can give you a clear picture of what you’re going to do.
For example, if you want to build an emergency fund, specify exactly how much you want to have set aside in your five-year savings plan. If you want to pay off credit card debt, decide exactly how much and when you want to be debt-free.
4. Be Reasonably Ambitious
One of the most difficult aspects of setting goals is finding the right balance between ambition and reason. If you set your sights too high, for instance, you could be setting yourself up for failure from the start. And once you realize you’ll never make it, it’ll be that much easier to give up.
On the flip side, if you set goals you can achieve without much effort, you may end up regretting the lack of challenge when you realize you could’ve done more and put yourself in a better financial position.
As you find the right balance, it’s also important to plan to regularly assess your progress over the next five years. Again, you won’t be able to control all of your circumstances.
So if in a couple of years, you get a big promotion and pay raise, you may be able to step up your game and update your goals to be more ambitious. Or if you lose a job or deal with other financial difficulties, you may want to adjust your goals to make them more achievable.
Needing to make adjustments to your goals isn’t a sign of failure, though. It’s important to work hard to accomplish your goals but also be mindful of your circumstances and abilities.
5. Create a Budget
A budget is one of the simplest things you can do in your financial plan, but it’s also foundational. Without a budget, it’ll be difficult to achieve your goals because you won’t have much control over where your money is going.
Start by writing down your monthly income and expenses over the last few months. Then take a look at which categories you’re spending your money on and how you can divert some of that cash flow toward your goals instead.
Then set up a plan to allocate your income based on your goals. For example, if you’re building an emergency fund, set up automatic transfers from your checking account to savings. If you have a debt payoff goal, increase your monthly payment automatically, so you don’t have to do it manually every month.
As with your overall financial plan, it’s also important to evaluate your budget from time to time to see if you need to make some changes. Also, make sure you plan for discretionary spending, so you can still enjoy your life during the process. If you restrict your spending too much, you may burn out and end up sabotaging your plans.
The Bottom Line
A five-year financial plan is one of the best things you can do to work toward reaching your financial goals. While there’s no guarantee you’ll meet all your goals, these steps can improve your chances of achieving what you want to with your financial well-being.