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How to make a 5-year financial plan

Craft a robust 5-year financial plan for a secure future. Learn key strategies to set and achieve goals effectively.

Anna Baluch
February 1, 2024
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It can be difficult to predict your life in five years — but you likely have an idea of where you’d like to be. A 5-year plan can help you take vague aspirations and turn them into set objectives with a strategy for success.

With a solid 5-year financial plan, you can stay on track and meet your goals. Whether you’d like to pay off student loan debt, buy a car, or pay for a wedding, a well-designed plan paired with persistence and hard work can help you get there.

How your financial future benefits from a 5-year plan

No matter where you find yourself on the timeline of life, a well-crafted 5-year plan can help you transform your situation. A 5-year plan offers: 

  • Clarity: A financial plan provides a panoramic view of where you stand today and where you'd like to in the future.
  • Risk mitigation: Life is filled with the unexpected, but planning is a shield. You can reduce any negative impact by anticipating and preparing for potential risks.
  • Empowerment and control: Creating a plan helps you better manage your money and, in turn, achieve what you hope to. 

If you think about it, five years is the perfect amount of time — close enough that you can picture what you’d like and long enough to make real changes. 

How to create a 5-year plan

If you’re ready to design a 5-year plan, follow these steps:

Consider your wants and needs

Begin by envisioning where you want to be in the next five years. What financial milestones do you hope to achieve? Whether it's buying a home, starting a business, or tackling debt, having clear aspirations should guide your plan. 

Consider both your immediate goals and those requiring more time and effort. The dual perspective will help you build a plan supporting — and balancing — quick wins and larger, long-term success. 

Evaluate your current situation

Next, take stock of your current finances. You'll want to look at your income, expenses, debts, and assets. By doing so, you can gain valuable insights into your starting point, the challenges you may face, and what's realistic for your circumstances. 

Evaluating your financial health can also help guide your priorities. For example, if your goal is to buy a home but your debt-to-income ratio is high, you'll know that paying off debt will initially take priority over saving. 

Define your financial goals

Once you know where you stand and where you want to be, it's time to breathe life into your goals. 

Since a 5-year plan extends over a decent period, it's best to have a good mix of short and long-term goals. Of course, goal setting ultimately depends on your unique situation. 

Short-term goals typically take less than a year to achieve, while long-term goals can take five years — or even more. Some examples of short-term goals are building an emergency fund, tackling debt, or funding a vacation. Long-term goals can include aspirations like paying for a child's college or saving for retirement. 

The key is to balance priorities and what your current financial situation allows you to do. After defining and writing down your goals, it's time to begin planning. 

Create your plan

SMART goal setting and budgeting are at the core of making your financial dreams a reality.  

SMART goals are concrete goals that you can easily track progress on over time — SMART stands for specific, measurable, attainable, relevant, and time-bound. For example, say you decide that one goal will be to save for a car. To make this a SMART goal, you must be precise: Save $10,500 for a car over 15 months. It highlights the need to save at least an extra $700 a month within the given timeframe to accomplish the goal. 

To strengthen goal-setting and ensure you're on track, you'll need a budget. Various types of budgets exist and can help you manage your money. Be sure to pick one that makes sense for your situation — and that you’ll be keen to stick to. 

As you work towards your goal, schedule regular check-ins to assess your progress and make any necessary adjustments. 

financial-goals

Building a strong financial foundation 

Your 5-year plan will depend on your needs, wants, and circumstances. Whether you’re looking to get your finances back on track, fund your next big purchase, or are looking for long-term wealth, here are some goals to boost your financial health: 

Emergency fund 

Unexpected expenses, like a car repair or medical bill, can pop up when you least expect them. Without the funds available, your goals can easily be derailed – especially if you have to take on debt to cover the costs.

With an emergency fund, you can cover unexpected expenses without hindering your plan. The general rule is to save three to six months of expenses. If you don’t have a reserve to tap into, it’s best to include a savings goal as a short-term priority. 

Debt repayment

Eliminating debt is a crucial aspect of good financial health. There are several debt repayment strategies to leverage, including:

  • A payoff plan: The debt snowball method helps you prioritize your smallest debts first to build momentum and stay motivated. The debt avalanche method is designed to save you as much money on interest as possible by initially focusing on the highest-interest debts.
  • Debt consolidation: Debt consolidation rolls multiple debts into a single loan, ideally with a lower interest rate than the rates you’re currently paying.
  • Debt settlement: Debt settlement refers to repaying your debts for less than you owe through the help of a non-profit company or debt attorney who can negotiate on your behalf.  
  • Credit counseling: Credit counseling usually involves a debt management plan (DMP), which can lower your interest rates and help you become debt-free faster. 

Investing

If your finances are in good shape, consider wealth-building through investing. You can inflation-proof your finances and take advantage of compound interest through a myriad of opportunities. 

There are certificates of deposit (CDs), stocks, bonds, and mutual funds. You can even invest in real estate by buying and renting a property or taking a more hands-off approach through a Real Estate Investment Trust (REIT) or real estate crowdfunding. 

It's always good practice to diversify your investments across different asset classes rather than putting all your eggs in one basket. A professional can help you tailor your goals and risk tolerance into a well-crafted plan. 

Retirement planning

Chances are you’d like to leave the working world and retire one day. Maybe your dream retirement involves traveling the world or taking on more hobbies. 

Regardless of the lifestyle you want to settle into, the earlier you start saving for retirement, the easier it will be to get there. Explore various accounts to begin: 

  • 401(k): A 401(k) is usually an employer-sponsored retirement account. You can make pre-tax contributions, and your employer may match them to a certain percentage. 
  • Traditional IRA: A Traditional Individual Retirement Account or IRA is a tax-deductible account you can personally fund without an employer. It can be a great option if you’re self-employed.
  • Roth IRA: A Roth IRA taxes you upfront. Unlike with a Traditional IRA, you won’t have to worry about paying taxes when you withdraw funds in retirement. 

Your particular goals for retirement will determine how much you should save. However, most financial experts recommend saving about 15% of your pre-tax income yearly.

Final thoughts

Creating a five-year financial plan is dynamic — blending aspirations with strategic objectives. With SMART goal setting, budgeting, and tracking progress, you can find the short and long-term success you want to see. Remember that if you put in the hard work now, you’ll reap the benefits in the future. Happy planning! 

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