background image

Creating Your 5-Year Financial Plan

Creating a 5-year financial plan might seem like a lot of work. It can feel overwhelming to consider such a long time period when you don’t even know what’s for dinner tomorrow night! You’ll also need to make an educated guess at what the future holds to create the best possible plan. But we think that creating a five-year financial plan is worth it for everyone.

Why A 5-Year Plan Makes Sense

How did we settle on five years as the right length of time for planning? First, five years is long enough to make you think about the big picture instead of the day-to-day. It’s also short enough that you can still estimate your future finances, or at least make an informed guess, without being too far off by the end.

Making A 5-Year Plan At Any Age Or Stage

You might think a five-year plan only makes sense for young people. Or maybe you feel you only need to worry about the next half decade if you’re working toward a specific financial goal. The reality is that everyone, no matter how old they are or what stage of life they’re in, could benefit from planning out their finances for the next five years!

  • As a young adult, five-year planning is challenging, but also extremely important. Young adults face constant change. This means it’s even more important to set goals and account for funds into the future as you manage student loans, build your credit, or even borrow money for your first car!
  • Planning gets a little easier as you settle in and become career-focused, with a steady income you can count on, and you might start saving for retirement. You might also be part of a couple, which creates a financial unit that simplifies some aspects of financial planning while complicating others.
  • The financial landscape changes again when you become a parent or a homebuyer, and you may not know what order those milestones will happen in!
  • By the time you have an empty nest, you’re often quite good at navigating income and debt, but retirement is on the horizon with a new set of financial unknowns.
  • When you reach retirement, expect your financial goals to shift yet again as you discover new freedoms and fresh challenges, including health concerns and asset management. Saving early for retirement is key - statistically people are not saving enough to fully retire because they are not starting early enough!

Making your five-year financial plan can have value no matter where you are in life. It’s never a bad time to set some goals and consider your income, savings, and debt.

Step 1: Setting Your Goals

Your five-year plan is a journey, and your goals are the milestones along the way. Examples of traditional financial goals might be to start an emergency fund, begin saving with a Health Savings Account, or put funds into a retirement account. Your goals can also include things like saving for a down payment on a home, getting a different car or truck (suv?), or financing your ongoing education. Maybe you even have a goal of starting a business or taking a vacation.

There are no right or wrong goals. Your goals will vary depending on what stage of life you’re in, making your five-year financial plan personalized to you. It can help to remember the word SMART when setting your goals. SMART goals are specific, measurable, achievable, realistic, and timely. By making sure that your goals are all five of these things, you will be much more likely to reach them.

We recommend setting five-year goals around saving, spending, and debts. It’s also good to consider income.

Step 2: 5-Year Income Planning

In our journey comparison, income is like the engine that moves you along the path of your financial plan. You might have regular income from a job, a retirement account, or another source that you can count on. Or your income might be less structured.

No matter what, it’s important to think about how your income might change in the next five years. What are your career prospects? Do you receive an annual wage adjustment or are you on a fixed income? Will you be graduating from college or continuing your education to increase your income? Are you thinking about starting a side hustle or business to earn extra income? Or are you planning to reduce your income to take care of family members or travel?

Income planning is vital to your five-year financial plan, so don’t skip this part!

Step 3: Saving & Spending In Your Plan

Saving and spending are two sides of the same coin. On your financial journey, saving can feel a little like making forward progress, and spending can feel like you’re moving backwards. But review your financial goals and you’ll see that both spending and saving are needed to reach your milestones.

One of the smartest financial goals is to save an emergency fund. An emergency fund is between three and six months of expenses, set aside in an account where you can easily access the money if you need it, but it’s out of sight and mind when you don’t. You’ll need to consider the right size for your emergency fund based on your other financial goals.

If you’ve filled up your emergency fund, there are plenty of other smart saving opportunities. Are you contributing to a retirement account? Are you eligible to save for medical expenses using a Health Savings Account? Maybe you’re saving for an upcoming spending goal like buying a car or making a down payment on a house. Saving and spending can work together to get you to that next milestone!

Step 4: Managing Debt In Your Plan

On your financial plan journey, debt could be likened to the weather. A home loan or a car loan can be vital for reaching your goal, acting as a tailwind to push you along your path on a sunny day. But if you don’t stay on top of your debts, they can become like bad weather, catching you in a cycle of borrowing that can feel like you’re spinning your wheels in the middle of a debt snowstorm. Managing debt is often a key financial challenge for everyone, from young adults with student loans to empty nesters taking on new debt to enjoy their post-children freedom.

Step 5: Sticking To Your 5-Year Financial Plan

While it’s important to review the big picture every five years, it’s also good to have yearly check-ins as your plan progresses. If you’ve set multiple goals as part of your five-year plan, you can use these annual reviews to measure how far you’ve come or see if your plan needs any adjustments to stay on course.

Hopefully after setting your five-year financial plan, you can also see the connection between your day-to-day money management choices and your plan. Will splashing out for a weekend getaway for your family mean a compromise on one of your other goals? Do you have room to keep some fun money in the budget for motivation while you set your sights on saving for a new house? By aligning your daily money management decisions with your five-year plan, you’ll be able to stick to it.

Even if you do get off track, having your annual check-in will help you make changes and revise your goals if needed. Let your five-year financial plan guide you confidently into the future!

Whatever your five-year financial plan holds, Royal Credit Union can help you reach your goals. We offer a full suite of deposit and loan accounts for all your saving and borrowing needs.

Need A Little Help With Your Plan?

Royal Credit Union offers all our Members free financial reviews and planning! You can work one-on-one with a Royal expert to review your situation and set your financial goals. If you'd like to set up a free financial review, please use the following link to visit our financial review page to learn more and get started! Learn about free financial reviews at Royal.