Creating a five year financial plan is a great way to map out your future and plan your life accordingly. We might not be able to look into a crystal ball to see how our lives play out 20 years or more down the line, but we can usually get a clear idea of what our fiscal future will look like in the next five years by drafting a simple plan. A five year plan will also help you set certain goals and help you meet them. Perhaps you would like to start a family and you want to know if you will be able to afford things, like a new house and all the other costs that go along with having kids.
Here are some ways you can create a 5 year financial plan:
For one, you want to know exactly how much money you make in a certain year, after taxes. You also want to add up all your regular expenses and forecasted expenses to give yourself a little bit of a cushion. By doing this you will get an accurate reading of how much money you will be able to save in a year. This way you can add up the savings for all five years to get a macro perspective of your savings, after taxes and after all your expenses.
Next, you want to add increases to your cost of living. Typically, the cost of living increases by 3% to 4%, so it is important to calculate this into your final tally. With mortgage or rent, you could be missing hundreds or thousands of dollars from your financial plan. Over a 5 year period this can really add up. Not adding your increases in living expenditures is one of the biggest mistakes people make when they are calculating their 5 year financial plan.
You also want to make sure that you forecast any increase in income from raises. Also, if you have been laid off as a result of the sluggish economy; make sure to account for loss of income, interest that builds up as a result of payday loans and more. There are a lot of things to consider when drafting your own personal financial forecast. If you are working at a law firm or a Wall Street trading firm, make sure that you also account for yearly bonuses and commissions. Often, when creating our financial plans, we don’t add miscellaneous increases in income.
Lastly, one of the most important things to include in your 5 year plan is major life goals and expectations. If you want to purchase a house at the five year mark, make sure that your plan is working toward that goal and not against it. It is also important to stay true to your financial plan and not make any large adjustments to accommodate defeat or acquiescence. If there are any financial hardships, the wisest thing you can do is get back on the horse and make the capital necessary to fill in the holes. It will undoubtedly be a rocky road, especially in this economy, but with enough ambition and commitment you will see all your dreams come true.
2 Comments
Great article Leon. Setting up a 5 year plan is defiantly something I need to do. With having a house and 3 kids I feel a plan like this could give us a lot of direction as to where we want to go.
For example, one thing we want to do in the next 3 years is take the kids to Disney Land, on top of that I would like to be able to attend a few conferences each year starting next year.
My question is what do you use to track all of this? Do you use a spreadsheet, or Mint, or something else. I would curious to know how you set up your plan.
Disney Land, cool! Sounds like fun. I once spoke with a woman who got her to kids to help out in saving to go to Disneyland. She had them doing odd jobs, etc. so they could all work together as a family to save. As for keeping track – I prefer to use Quicken, it provides a quick snapshot of where you’re at at any given time. I also use Excel spreadsheets for certain goals – like keeping track of my grocery budget, etc.