Looking at anything that’s 5 years down the line can feel a little distant, so what’s the point? A lot can happen in that span of time, so worrying about it may seem a little unnecessary. But the reality is, 5 years isn’t as far off as you might think, and time can fly by in the blink of an eye.
This also means that it may be a good idea to sketch out a plan for this period of your life, specifically when it comes to your finances. In 5 years, you may be able to save up for a down payment on a house, pay off your debt, and stabilize the financial side of your life. Your goal may even be to do something as simple (but important) as figuring out how to comfortably pay all of your bills.
But these can be hard to do without a plan in place. When laying out financial goals of any kind, your capacity to achieve them can ride a lot on your ability to put a thorough plan together and follow it through. These things aren’t going to happen on their own, and you’re going to have to put in the time, research, and hard work required to achieve your goals. But this doesn’t mean it’s impossible!
If you’re looking to get your finances on track or meet some big financial milestones over the course of the next 5 years, we’d like to help! We’re going to go over some important steps to put together your 5 year financial plan and go over some essential questions to consider during this process.
Put Your Goals on Paper
The first step in this process is to sit down and give some hard thought to the financial goals and tasks you want to accomplish over the next 5 years. These aren’t meant to be grand financial plans that would take a miracle to accomplish – they should be things that can help you to achieve the standing you want in life.
Start by making a list of your goals and prioritize them. This can help to give you a clearer idea of what will really move the needle for you over the next few years. If you need some direction when it comes to putting together your list of goals for your 5 year financial plan, make sure your goals can all be classified as:
Do you recognize these points? If so, you may have already heard of S.M.A.R.T. goals before. The general idea here is that you should always have something specific, achievable, and measurable that you’re aiming at when listing out your goals, financial or otherwise. This can help to guide you to success within whatever time frame you’ve set for yourself.
When you’re listing out your goals for your 5 year financial plan, try to really focus on what you think is achievable over this period of time. By making sure you’re setting realistic goals that are based on your particular financial situation, you may have an easier time avoiding the frustration that may come along with the pursuit of an unrealistic goal. While there’ll likely be challenges and hurdles to overcome, when you set achievable goals, you may have an easier time motivating yourself to see this process through till the end, particularly when you can see the progress you’re making along the way.
Ask Yourself the Right Questions
When you’re making any plans for your finances, it’s important to remember that they’re specific to you and your situation. There’s no one-size-fits-all personal financial plan template that you can refer to and get all the answers from. Your 5 year financial plan is going to have to be geared to you.
Having said that, if you’re having trouble getting started, there are some general questions you should be asking yourself that can give you some direction. Let’s take a look at some of these.
1. Will You Need to Pay Off Debt?
When you have a mountain of debt to deal with, you might feel the need to get it out of the way as soon as possible. While debt can be a necessary part of life, it can sometimes feel like a dark cloud hovering over your head that may discourage you on your quest to improve your financial situation.
But when putting together a 5 year financial plan, you’re going to have to really consider the amount of debt that you’ll be able to handle paying off during this time. You’ll also have to consider which debt you really feel the need to get rid of, and how you’re going to go about doing it.
There are different debt repayment strategies out there that are suited to different personal and financial situations. You’ll need to do your research and figure out what works best for you. Maybe you’ll want to start by focusing on your debt with the lowest balance first, or maybe you’ll want to start with your highest interest accounts. Both ways can work, but you’ll need to see what makes the most sense given your current financial standing.
2. Will You be Building up More Debt?
On top of figuring out how you’re going to pay off the debt you already have, you’ll also need to think about whether you’re going to be adding debt onto the pile over the next few years. For example, maybe you want to buy a car over this period and need to apply for an auto loan. Or maybe you have plans to buy a house and will need to take out a mortgage.
You may not want to put these things on hold until you manage to pay off every bit of debt you have, so you’ll need to find a way to balance these two things within your 5 year financial plan. Maybe you’ll need to make some cuts to certain areas of your budget, or maybe you want to look for ways to earn money from home. Either way, this is an important thing for you to consider.
3. Will Your Income Change During This Period?
While this may not be a clear-cut thing for everyone to predict, hopefully the amount of income you’re bringing in will go up at some point in the next 5 years. This could be through scheduled raises in your pay, a promotion, some sort of side hustle you take up to make extra cash, or by getting a new job that pays more.
The positives of this are clear; you’ll have more money to pay off your debt, contribute to your savings, and put towards long-term financial goals. But the other side of that coin is that with this extra money, you may be tempted to spend it on things that may be less productive.
Trying to account for increase in income over the next several years can help you focus that additional money on things that’ll help to improve your financial situation. Make sure to review your budget regularly to keep track of your expenses. If you feel like your spending is going towards things like entertainment and shopping, make the necessary adjustments to divert that money back into more productive areas of your budget.
Track Your Progress and Break Down Your Goals
You can write your goals down and do what’s necessary to work towards them, but if you don’t measure your progress, you’ll likely have a harder time knowing how far you are from the finish line. That’s why it’s so important to keep track of your progress throughout these 5 years.
When you set yourself large scale goals for your 5 year financial plan, it can be easy to get lost along the way. One thing you can do that may help you track your progress and get you to where you need to be is to break these goals down into smaller pieces.
For example, maybe you’re looking to put aside $60,000 for a down payment on a house. You can start by breaking this down to $12,000 a year, but you don’t need to leave it at that. Now that you know how much you need to save annually, break this down to monthly. In this example, you’d need to save $1,000 a month. What can you do to hit that number?
Dive into your budget and figure out what changes you may need to make each week to help you find the necessary savings. Without breaking your goal down into smaller targets, you may have a harder time reaching that big goal in the end.
Conquer Your Fear
The idea of putting together a 5 year financial plan and actually seeing it through can be a scary thought. After all, 5 years can seem like an eternity when it’s laid out in front of you. But once you’re able to move past this feeling and focus on the work ahead, you’ll be in a better space to accomplish your goals.
Make sure that before you embark on this journey, you do the research, ask yourself the right questions, and put together a thorough plan. There’s no shame in being scared or uncertain about what the future holds, but just do your best to face it head on!