Your Ultimate Guide for Creating a 5-Year Financial Plan

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5-year financial plan

Planning for the future is vital to your well-being, yet 75% of Americans don’t have any formal plan in place.  Creating a 5-year financial plan is like devising a blueprint for success.  

The plan can help you establish and save for an emergency fund as well as set a timeline for paying off debt.  Do you have shorter term goals such as a vacation or home renovations?  The plan can and should incorporate those goals.  

Longer term objectives like retirement can never be met if you’re not focusing on them now, which is why they’re included as well.  

Below are specific steps for creating your 5-year financial plan and improving your personal finances.  

Table of Contents

What is a Financial Plan?

A financial plan is a ‘fluid’ document that contains your current financial situation as well as your monetary goals.  More importantly, your plan should outline ways to achieve those goals.  

Simply put, it’s an assessment of where your finances are at today, along with an outline of your future outlook.  

I highlighted the word ‘fluid’ because a financial plan is not like a rotisserie oven where you set it and forget it (a reference to those old infomercial commercials) …it’s a document that should be constantly reviewed and updated if necessary.  

Why Choose a 5-year Financial Plan?

Five years is a great choice for several reasons.  It forces you to think about the future, but not get too discouraged about such a long timeline resulting in failure.  

It’s enough time to execute and achieve your shorter-term goals, while staying on top of your longer term objectives.  

Too often, people want quick results and may choose to create a short-term financial plan.  It’s good that you want to improve your financial situation, but you really need to think further out for success.  Having a plan that extends past one year will make it easier to make slight adjustments if necessary.  If your plan ends after 12 months, you’ll need to create an entirely new plan which may be daunting and end up never getting completed.  

Thinking back 5 years about my own situation, I’ve purchased a home, got married, renovated my kitchen, installed a patio, had a child, paid off student debt, obtained my MBA, and changed jobs.  These weren’t all in my 5-year financial plan, but I couldn’t have accomplished all that I did without one.  

How to Make a 5-Year Plan

There’s a lot of information included to help you create your own financial plan.  Not everything will apply to your own situation, so think of this like an à la carte menu for you to choose what’s relevant for your finances.  

Below are items that MUST be included in any financial plan.  The items in the ‘goals’ section may or may not apply to your plan.  

Evaluate Your Finances

The first step for any financial plan is to thoroughly evaluate your current financial situation.  That means writing down all of your assets, as well as your liabilities, and determining your net worth.  It also requires that you understand and determine what your cash flow looks like.  

How to Calculate Your Net Worth

To help with this section, I’m including a net worth template you can use.  Once you download the attachment, choose the second tab titled “balance sheet.” 

The first step to determine your net worth is to write down all of your assets.  That will be the left column on the balance sheet tab, also conveniently titled “assets.”  Your assets might include cash, investments, retirement accounts, real estate, cars, and any other items that have value.  

Next, you’ll list all of your liabilities.  If you’re using the net worth template I provided, that will be the right column labeled “liabilities.”  Your liabilities may consist of credit card debt, car loans, student loans, and a mortgage.  

Finally, to calculate your net worth, you take your total assets and subtract all of your liabilities.  The total is your net worth.  

How to Calculate Your Cash Flow

Download a free budget template here to help determine your cash flow.  

In order to make a plan to increase savings or pay off debt, you have to know where all your money is going.  

The best way to do that is by completing a budget template.  A budget is really the same thing as an income statement, it takes your monthly income and subtracts all of your monthly obligations.  

Your income may include your salary or hourly wage, any side gigs or business income, possibly interest and or dividends from investments, pensions, rental income, social security, and any other forms of consistent income you receive.  

Below is a list of common monthly obligations.  These costs will be deducted from your income, resulting in your available cash flow (or excess cash flow if you use my 5-year financial plan printable).  

  • Credit Cards
  • Car Loans or Leases 
  • Car Maintenance and Transportation Costs (gas, parking, oil changes)
  • Mortgages and Home Equity Loans
  • Utility Bills
  • Groceries
  • Childcare/School
  • Medical Debt
  • Child or Spousal Support
  • Income Taxes
  • Property Taxes
  • Student Loans
  • Vacations
  • Insurance
  • Household Costs (upkeep costs such as lawn care and filters)
  • Personal costs for you and your family (clothing, alcohol, gifts, grooming)
  • Entertainment
  • Donations

Before you begin creating your goals, I’d strongly suggest using this calculator to see how your spending aligns with the 50/30/20 budget.  The idea is 50% of your after-tax income goes towards what you need (mortgage or lease, utilities, insurance, medical), 30% goes towards what you want (clothing, eating out, entertainment), and 20% goes towards savings.  

If your current spending is not closely aligned with this guideline, you should focus on goals that will help reallocate your spending.  

After completing your budget, you should figure out where you can reduce spending, freeing up cash flow.  This ‘excess cash flow’ will be used to increase your savings as well as for reducing debt.   

Choose Your Goals 

Now that you’ve evaluated your current financial situation, it’s time to set up goals for the future.  We’re going to stick to a five-year financial plan, but it will incorporate shorter term objectives along with longer term goals, as far out as 10 & 20 years along with retirement.  

Emergency Fund

One of your primary goals should be to have an emergency fund set aside.  This savings is strictly for unexpected expenses, such as a loss of job (funds are then used to pay your monthly bills), home & car repairs, and medical issues.  

How much should you have on hand? At least 3-6 months of bills.  Here’s a great calculator that you can use to determine what your emergency fund balance should be.  

Don’t get frustrated if you’re nowhere close to a fully funded emergency savings account.  Try to get started by saving $500 at first, then $1,000.  Money saving challenges are a great way to achieve success and build better saving habits.  

Debt Reduction

Reducing or eliminating debt should be your next priority.  Not all debt is necessarily bad, however.  There are a couple of ways to prioritize what debt you payoff first. 

Highest Interest Rate:  list all of your debts in order, starting with the highest interest rate and ending with the lowest.  Any extra cash flow you have in a month you’ll apply towards the highest rate debt.  

This option saves you the most on interest charges, period.  In my opinion, it’s the best option to choose.  Another term for this is the debt avalanche method.  

Lowest Balance: The other option is to pay off your smallest loan first.  Once that loan is paid off, you direct all of that cash flow towards your next smallest loan.  

This is called the debt snowball method, a phrase coined by Dave Ramsey.  It’s all about the psychological wins you achieve by paying off loans.  Getting those ‘wins’ and seeing the loans paid off helps keep you motivated.  

I get the logic here, but you WILL end up paying more in interest charges choosing the debt snowball method.  

Whatever method you choose, your 5-year financial plan will help guide you over the years.  You may or may not be debt free within your five-year plan, but you should include estimated balances for your debt each year within the plan.  

Here’s a great debt payoff tool you can use to estimate your balances.  It also lets you choose between the debt snowball and debt avalanche method. 

Additional Savings

Once you’ve set your goals for building an emergency fund and reducing your debt, you can add in saving for other larger expenses.  Below is a list of possible items.  

  • Down payment on a home
  • Vacation
  • Appliances
  • Home renovations
  • Vehicle(s)
  • College savings
  • Furniture

Here’s a great calculator you can use to figure out how much you’ll need to save each month to reach your goal.  Remember to prioritize your emergency fund and debt reduction first, then use excess cash flow to reach these savings goals. 

Retirement Savings

Saving for retirement is one of the primary reasons to complete a financial plan.  I’d honestly prefer to put this in line with saving for emergencies and debt reduction.  It’s so important to make sure you’re saving enough for retirement and your 5-year financial plan can help ensure you’re on track.  

If your company matches your 401k contributions, this should be the minimum amount you’re saving.  If they match 5%, you need to be saving 5%.  Try and make that a priority achieved in the first couple years of your plan.  

If you’re self-employed or your company doesn’t provide a retirement plan, you can set up an IRA.  

There are a few tools you can use to figure out how much you’ll need saved for retirement.  Both tools are free, which is perfect.  

Personal Capital offers a great retirement planning tool that will project your expected savings balance and income that could be generated when you retire. It will also forecast the likelihood of success based on how much you expect to spend during retirement.

For a more basic tool, try BankRate’s calculator here.

Investments

If you’re in a position that you have or will have a fully funded emergency account, little or no debt (or low-rate debt), funds set aside for vacations or other entertainment, and are fully funding your retirement account (check with your CPA on limits), then you might want to consider investing any surplus cash flow.  

Depending on how much you have to invest and how much experience you have, you can either open a brokerage account and manage yourself or hire an advisor.  There are advantages and disadvantages to either choice, so you’ll have to determine what makes sense for you.  These are funds that you have no need for and can ideally be invested for at least 2 years.  

Investment real estate might also be an option if you prefer a more tangible investment vehicle.  

Mortgage Debt

There are those who tell you to pay off your mortgage as quickly as possible, and those who say to keep it.  I’m a believer in the latter…it’s cheap debt with possible tax advantages.  You can always apply surplus cash towards your mortgage and it’s not a bad idea.  But, for me I prefer to invest excess cash and play more of an arbitrage game, meaning I hope to get a better return on my money than I pay in interest on my mortgage.  

Create a Timeline for Your Goals

After you’ve evaluated your finances and chosen your goals, it’s time to set up a timeline for each.  It isn’t enough to just include debt reduction or build an emergency fund in your plan, you need to be specific.  

I would suggest listing out your timeline by year.  For a 5-year financial plan, you’ll list out year 1, 2, 3, 4, and 5.  I’ve provided a 5 year plan example further down.  

5-Year Financial Plan Review

  • Evaluate your finances
    • Figure out your net worth (balance sheet)
    • Figure out your excess cash flow (income statement)
  • Choose your goals
    • Emergency savings
      1. Your goal should be to at least start an emergency fund with a goal of fully funding it within a few years
    • Debt reduction – choose which method is best for you
      1. Avalanche Method – you attack debt with the highest interest rate first and ultimately pay less interest.
      2. Debt Snowball Method – you pay debt starting with the smallest loan and work your way up, giving you ‘wins’ to help keep you motivated (you will pay more interest with this method)
    • Save money for larger expenses
      1. Vacations
      2. New car
      3. College
      4. Home renovations
      5. Furniture
      6. Appliances
    • Retirement savings – use retirement planning software to ensure you’re saving enough
      1. Start by maximizing any 401k employer match
      2. Add to IRAs
    • Investment savings
      1. Open a brokerage account or hire a financial advisor to invest excess savings
    • Mortgage debt
      1. Apply excess cash flow towards principal payments on your mortgage
  • Specify your goals and create a plan
    • Be specific and set up a timeline for each goal 

5-Year Financial Plan Example

  • Evaluation of your finances
    • Debt = $300,000 
    • $225,000 mortgage (3%)
    • $40,000 student loan (6%)
    • $25,000 car loan (4%)
    • $10,000 credit card debt (18%)
    • Net Worth = $100,000
    • Excess cash flow – $1,000 per month.  After reviewing your current cash flow and completing your budget, you should be focused on reducing your unnecessary spending.  The aim is to find every possible dollar you can that will then go towards completing your financial goals

  • Goals
    • Start an emergency fund and have it fully funded by year 5 ($18,000 goal)
    • Pay off all credit card debt in 2 years
    • Reduce student loan debt by an additional $10,000 in 5 years (this is in addition to normal monthly payments)
    • Save $200 every month for retirement 
    • Consistently save $100 every month into additional savings account for larger purchases/vacation

Year 1
  • Emergency fund: start fund and save $3,600
  • Credit card debt: pay $450 a month or $5,400 by the end of year 1
  • Retirement: save $200 per month with a goal of getting to 5% of income
  • Additional savings: add $50 a month into a vacation fund
Year 2
  • Emergency fund: keep saving $300 per month with an annual goal of $3,600 ($7,200 saved)
  • Credit card debt: pay $450 a month, paying off all credit card debt
  • Retirement: save $200 per month with a goal of getting to 5% of income
  • Additional savings: add $50 a month into a vacation fund
Year 3
  • Emergency fund: keep saving $300 per month with an annual goal of $3,600 ($10,800 saved)
  • Retirement: increase to $300 per month with a goal of getting to 5% of income
  • Student loans: start paying an additional $300 per month towards principal
  • Additional savings: add $100 a month into a vacation fund
Year 4
  • Emergency fund: keep saving $300 per month with an annual goal of $3,600 ($14,400 saved)
  • Retirement: increase to $300 per month with a goal of getting to 5% of income
  • Student loans: start paying an additional $300 per month towards principal
  • Additional savings: add $100 a month into a vacation fund
Year 5
  • Emergency fund: keep saving $300 per month with an annual goal of $3,600 ($18,000 saved)
  • Retirement: increase to $300 per month with a goal of getting to 5% of income
  • Student loans: start paying an additional $300 per month towards principal
  • Additional savings: add $100 a month into a vacation fund
Results
  • Emergency fund: fully funded with $18,000 by the end of year 5
  • Credit card debt: paid off in year 2
  • Retirement: over $15,000 saved 
  • Student loans: over $11,000 applied towards extra principal payments
  • Additional savings: $4,750 saved

That’s it!  You have now completed your 5-year financial plan.  But it doesn’t stop here, a financial plan should be reviewed often.  It’s common for a plan to need updating, so don’t feel frustrated if that happens.  

Maybe you get a raise at work.  A bigger bonus than you thought.  Or maybe an unexpected expense comes up and you need to use your newly established emergency fund.  Whatever the case, it’s ok to update your plan when necessary…as long as it’s not due to you frequently overspending! 

Paul W

Hello! I'm Paul, finance expert and founder of The Income Finder. With over 15 years experience in the finance industry, a bachelors from Benedictine University and MBA from DePaul, I'm well qualified and ready to share great insight and tips on money management. Read More