How to Create a Financial 5 Year Plan

by Darren Wu on 11 February 2013 6 comments
Photo: mac.rj

"Most people don't plan to fail; they fail to plan." — John L. Beckley

Where do you want to be five years from today, financially?

My guess is that your answer probably sounds something like this — "I want to be in a better position than I am now."

We all have dreams we want to pursue and goals we want to achieve. We want to make progress in our lives.

But do you have a clear idea of what you want financially? Have you given it some serious thought?

If you haven’t, then the days, months, and years will still pass by. But at the end of that time, you’ll likely comment that not much has changed. Or that you’ve been stuck in a rut.

Instead of vaguely wishing for a better financial future, create an actual game plan. It’ll serve as your roadmap to get you where you want to go. (See also: Financial IQ Test: How Healthy Is Your Financial Plan?)

Questions to Ask Yourself

First, let's ask some key questions about four financial fundamentals to find out where you are and where you want to go. Get out a piece of paper, and start writing!

Debt

Do you have debt? If so, how much?

Dumping your debt is an obvious way to move into a better financial position. You can’t build wealth until you dig yourself out of debt.

How soon do you want to be debt free? One year? Two years? Three years?

Income

Your income is your greatest wealth-building tool. How much money do you make now?

More importantly, how much money do you want to be making in five years?

Emergency Savings

No job is 100% secure. If you were to lose your job, how long can you stay afloat and keep your bills paid? The size of your emergency fund will answer that question.

How big of an emergency fund do you want in five years?

Retirement

Many people doubt that Social Security will provide anything of substance in the future, and pensions are fading away. As such, we’re all responsible for making sure we have a comfortable retirement nowadays.

How much do you want to have saved up for retirement in five years?

Create Your Plan

Now that you’ve answered these questions and have them written on paper, it’s time to create a plan. Write a statement for each area that describes how you’ll achieve your goals.

Debt

How are you going to pay off your debts faster?

Example statement:

I will be out of debt in two years. To make this happen, I will find a part-time job working evenings and weekends, an extra 10 hours a week. And for the time being, I will cut all expenses that aren’t absolute needs. These are temporary sacrifices that I will make until I’m debt-free.

As far as steps are concerned, I will utilize the snowball method popularized by Dave Ramsey. I will pay off the debt with the smallest balance first in order to get a quick win and build momentum.

Income

ARTICLE CONTINUES BELOW

What kind of job do you want? How much do you want to be making? How are you going to qualify for that type of work?

Example statement:

I now make $60,000 per year as a project analyst. I will be making $85,000 per year as a project manager by January 1st, 2018.

To qualify for this position, I will take advantage of my employer’s tuition reimbursement program and take project management courses on the weekend to expand my skill set. I will demonstrate my skills by asking for opportunities to lead projects. And I will stay up-to-date on advancement opportunities by checking job postings monthly.

Emergency Savings

How big of an emergency fund do you want?

Example statement:

Within five years, I will have an emergency fund that’s big enough to protect me for 12 months. I will follow this step-by-step emergency fund guide to help me achieve this.

Retirement

How much do you want to have saved up for retirement in five years? In 2013, you can save $17,500 in your 401(k). You can also save $5,500 in your Roth IRA. Let’s say you contributed the maximum amount to both accounts. That’s a total of $23,000 each year. How can you do this?

Example statement:

I will save $211 each pay period and have it sent automatically to my Roth IRA using direct deposit. By the end of the year, I will have contributed the maximum amount of $5,500.

I will also save $673 each pay period and have it sent automatically to my 401(k) using direct deposit. By the end of the year, I will have contributed the maximum amount of $17,500.

With both my 401k and Roth IRA, I will have saved up $115,000 in five years.

Think of this as your financial mission statement. Customize your answers to fit your personal situation, and then follow through on your commitments. Read your plan daily to stay motivated. You'll be amazed at what you've accomplished five years from now.

Have you created a five year financial plan? How have you kept yourself on track?

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Guest's picture

Darren,

My 5 year plan consists of expanding my emergency savings and saving for a downpayment for an apartment (while still contributing to my medium and long term investments). The biggest factor in keeping myself on track is to reduce my expenses. I use mints PF App and I enter EVERYTHING I spend. While it pulls all of my CC spending for groceries, bills, etc. I enter everything else manually to know exactly what I am spending. This is an excellent tool and I recommend anyone looking to monitor their spending closely to give it a try.

Darren Wu's picture

Looks like to have a sound plan! Good to see that you're working on both building up your emergency fund, as well as contributing to your long-term investments.

And thanks for sharing about the PF App.

Guest's picture

Five years ago I launched this notion of a Private CFO and running your family like a business. The most important part of making expense decisions in your family is what will drive your top line revenue (your income). Without growth of income, it will be very hard to accelerate your personal net worth even if you are a good saver. Ask that question first every year. . . what is the best spending decision to drive my top line income.

Darren Wu's picture

Hey Ted,

Great point about the importance of having a strong income. You can only cut your expenses down to a certain point. But in theory, you income is limitless.

Guest's picture

Great idea. Will be trying to creat such a plan this weekend, hope I can go strictry according to it. I've been thinking about opening a savings account for quite a long time now and never had the chance to do it. I think now is the right time to start saving.

Darren Wu's picture

Good luck creating your plan Rachel! It's never too late to start saving.