How to Build a 5-Year Financial Plan

While short term in duration, building a five-year financial plan gives you a structured approach from which you can manage your finances in pursuit of your chosen life goals. Whether it’s aiming to buy a house, saving for higher education, or building an emergency fund, a five-year financial plan can help you make financial decisions while keeping an eye on your long-term goals. Learning how to build a five-year financial plan involves accurately assessing your current financial situation, setting clear objectives and implementing a strategy that will get you to your financial goals.

If you’d like guidance or personalized recommendations when it comes to building your own five-year financial plan, consider reaching out to a financial advisor.

5 Steps to Building a 5-Year Financial Plan

The process of building a financial plan can not only help you determine how to reach your financial goals, but also better understand your current financial position and where you’re working from. The following steps serve as a starting point for building your own five-year financial plan.

Step 1: Determine Your Financial Goals

The first step in creating a five-year financial plan is determining your financial goals. This is a good time to think about what you want to achieve in the next five years, as well as how much money you’ll need to reach those goals. Maybe it’s buying a home, starting a business, saving for a child’s education, or having a sizeable emergency fund. Having clearly defined goals helps you plan out the rest of your steps and make more-informed financial decisions along the way. You can also break down your goals into smaller, more manageable milestones that are easier to reach and track.

Step 2: Assess Your Current Financial Situation

The next step is understanding your current financial situation. Take a comprehensive inventory of your assets, income, expenses, and liabilities. This means reviewing bank statements, credit card bills and any other financial documents. Once you understand your current cash flow and net worth, you’ll be able to identify areas where you can cut costs or increase savings, which will be key to achieving the financial goals you’ve set.

Step 3: Create a Budget and Track Expenses

Now that you know your financial situation, you can create a budget. This will help you allocate income towards your financial goals while continuing to pay for the essentials. Start by looking at your monthly income, and determine how much goes toward fixed expenses such as your rent or mortgage and loan payments. Then you’ll factor in variable expenses such as utilities and groceries. Once you know how much is going out for your essentials, you can determine how much you’ll allocate towards your financial goals.

Step 4: Invest for Your Goals

Once you know how much you have to allocate towards your financial goals, you’ll need to decide what to do with that amount, or how to invest it, in order to reach those goals. You have different investment options to choose from, such as stocks, bonds, and mutual funds, and will want to choose investments that align with your timeline and risk profile. Diversification can help you balance risk and potential returns. A financial advisor can help you tailor your investment strategy and maximize your growth.

Step 5: Review and Adjust Your Plan

A financial plan is not something you set and forget. Life events such as a job change, marriage, or the birth of a child mean you might need to adjust things, as will changes in the market or economic conditions. You’ll want to regularly review your five-year financial plan to ensure it remains relevant. Consistently monitoring your plan can also help you identify spending patterns and opportunities to save more money.

Strategies to Increase Income and Reduce Expenses

Part of reaching the goals of your 5-year financial plan is identifying ways to increase your income and reduce expenses.

Part of pursuing your financial goals, whether for a five-year financial plan or longer term, is likely going to involve finding ways to reduce your expenses and/or increase your income, so you can devote more funds to reaching those goals. The following are some of the strategies you might considering implementing, depending on your situation:

Advancing your career: Networking and seeking out professional development opportunities can open the doors to better opportunities and salary increases in your career. You might do this by seeking promotions, acquiring new certifications, or transitioning to a higher-paying industry.
Increasing income through side hustles: Another strategy people use to increase their income is pursuing a side hustle or part-time job. This could be in the form of freelance work, such as writing, graphic design, or tutoring, or utilizing platforms like Upwork or Fiverr to monetize your skills and interests.
Refinancing debt: Refinancing debt, such as mortgages or student loans, can reduce monthly payments and interest, freeing up funds to invest toward your five-year financial plan. You can shop around for lower interest rates and better terms, as well as consolidate high-interest debt into a single, lower-interest loan, for example.
Automating savings: Automating savings can also help you make consistent contributions toward your financial goals. Try setting up automatic savings account or investment fund transfers from your checking account to reduce the temptation to spend.

Tools and Resources for Creating a 5-Year Financial Plan

Leveraging the right tools and resources can aid your financial planning process, such as:

Budgeting applications: Budgeting apps like Mint and You Need A Budget are excellent tools for tracking income and expenses. These applications categorize spending, provide insights into your financial habits, and help you set a monthly budget.
Investment platforms: Investment platforms such as Vanguard, Fidelity and Betterment offer resources you can use to grow your wealth. Users gain access to a variety of investment options, including stocks, bonds and mutual funds, along with educational resources. Automated investment services, like robo-advisors, can also help you manage your portfolio according to your risk tolerance and financial goals.
Retirement calculators: Retirement calculators are another valuable tool for financial planning. They allow users to input various parameters, such as current savings, or expected retirement age, to project progress toward a certain goal.

Bottom Line

A couple meets with a financial advisor to optimize their 5-year financial plan.

A five-year financial plan can not only help you achieve short-term financial goals, but also lays the groundwork for long-term financial stability. This involves setting goals, assessing your current situation, creating a budget and investing to reach those goals. Implementing the right strategies to reduce expenses and increase income can give you more funds to work with, and leveraging the right tools and resources can help on the path.

Financial Planning Tips

If you’re creating a financial plan, a financial advisor can help. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Setting up automatic deposits into your emergency fund is one of the best ways to increase your savings. These recurring deposits build your balance and increase your interest income. SmartAsset’s savings calculator could show you how much your money will grow over time based on current rates.