5 Questions to Ask When Creating Your Five-Year Financial Plan
by Scott K. Schmidt, Chief Financial Officer, U.S. Money Reserve
It’s about much more than you think.
When creating a financial plan, it’s vital to take into account both your needs and wants. Do you want to buy your first house? Move to another country? What about aiming to be totally debt-free? Perhaps you want to buy a special car or be able to finance your child’s education? Maybe you plan to start saving for retirement or reach a specific balance in your retirement account?
Whatever your financial goals may be, it’s essential to narrow down your wants and needs to specific, measurable goals that you and your family agree upon and can work toward. Even if you don’t have a clear idea of where you might be working or living in five years, it’s always good to have a plan in place and know that your plan can and will likely change as time marches on. A plan is simply an overarching roadmap that helps you recognize the directions you want to head in with your finances. While most financial plans often focus on goals like those I mentioned above, a crucial aspect of the planning process is to figure out what your long-term financial goals are — not just your immediate financial goals. Long-term financial goals are generally those that you envision for 10 and 20 years away. Five-year goals are short-term and help you move comprehensively toward your 10- and 20-year goals. Building up a nest egg, saving for your next large purchase or retirement, or just creating an emergency fund can take time and discipline. Without knowing where you’d like to go, you can’t make a map to get there. To get there, you need to ask yourself some rather specific questions that will help you better understand where your financial priorities lie.
Here are five questions to ask yourself when creating your five-year financial plan.
What Are Your Parameters for Success?
First, it’s important to understand why most financial planners recommend five years as the right length of time to reach some of your financial goals. Five years is not quite long enough to, say, save up a down payment for a home, but it’s enough time to see progress toward a goal, and it’s a tangible period of time. As many of us know, plenty of things can change in 10 years. I think of a five-year time horizon as the “Baby Bear” length of time (just right) that can help you both envision your financial life and give you tangible feedback as you proceed. It offers the perfect balance of discipline and progress.
While you may not be able to save all the money you need for your retirement during five years, you can make progress on things like setting up an emergency fund, rebuilding your credit, or getting out of debt. Many financial goals are much more suited to a five-year timeline than a long term like 10 or 20 years.
In addition, it’s essential to acknowledge that it’s perfectly normal to feel a bit lost or overwhelmed when you first start working on financial goals. There are so many to choose from; how do you even know where to begin? Never fear — here’s an easy trick to apply to get past this point of indecision:
Ask yourself what success looks like to you. Does it mean being able to buy anything you want at any time? Does it mean being able to take your family on a luxury trip around the world? Does it mean not stressing (or at least stressing less) about finances? If you close your eyes and imagine what success looks like, what images and thoughts come up?
You can be as detailed or as general as you like when imagining success. Perhaps you see yourself wearing specific clothing or visiting or living in a particular place. As you imagine your success, notice what surrounds you — are there nice cars? Nice homes? What occupies your success goal space? These images can give you clues as to what you should be focusing your energy on and can help you begin to construct a comprehensive five-year financial plan that truly speaks to you.
One crucial point I’d like to drive home, as it pertains to five-year goals — and really any goal you set yourself — is that just setting the goals isn’t enough. You have to work toward them, revisit and revise them as time marches on, and check in with them regularly to ensure that you are making the progress you want to make. Setting goals is excellent but executing them is even more rewarding. It takes hard work and discipline to achieve your goals, but if the goals truly speak to you, you’re sure to succeed.
Once you’ve determined the answer to the question of what financial success looks like for you, you can start to dig a bit deeper on what exactly it might take to reach those ideals of success.
What Motivates You?
Once you’ve honed in on what exactly success looks like to you, you can start to dig a bit deeper into what motivates you to move toward that definition of success. This is where you need to dig into the why. Why do you want to own a home on the beach? Why do you want to be able to take your family around the world?
Instead of just making a goal, attach some personal meaning to it. For example, you could say that you want to own a home on the beach someday as a goal. A better way to frame a goal like that might be something like, “I want to own a home on a beach someday because I want to be able to wake up with the sun and walk out my back door to take a swim in the ocean every single morning.” Framing a goal in this way helps you find the motivation behind it and stay focused on why the goal matters to you, not just what the goal is.
It’s also important to recognize (and normalize) that motivation can be a slippery thing and often mutable. Some days we feel really committed to making progress on our goals, while others it may be tough to even get out of bed. That’s a natural part of the ebb and flow of motivation and a totally normal part of successful goal setting. Just because you slip up or don’t quite save enough one month doesn’t mean you’ve totally abandoned your goals; it just means you are human. Cut yourself some slack when your motivation wanes. It will come back as long as your goal is essential to you, and you really understand why you want to achieve that goal.
What is Your Current Financial Standing?
Before you can begin to progress toward achieving your goal, you must first assess where you are and understand your current situation. Do you have bad credit? Are you paying to maintain a considerable debt load? Do you have savings for an emergency? These are all critical questions to ask yourself before you begin to move toward your goals. Without knowing where we are, we can’t plan for where we want to go.
The best place to start when it comes to figuring out where you are is to look at your income and spending. What does your monthly budget look like? What does your yearly budget look like? How much do you have to spend on taxes? What is your net worth?
Doing this kind of accounting can help you get a better idea of where you are at this moment and thus give you a better sense of how much more you might need to stash to achieve your heartfelt goals. Perhaps you need to address some outstanding debts before tackling your dream of living by the beach. Maybe you need to save more for an emergency fund or your children’s schooling. Either way, this exercise will give you a good idea of where you currently stand financially and what types of realistic five-year goals you will be able to set and achieve.
Are Your Goals SMART Goals?
If you work in corporate America, you’re probably intimately familiar with SMART goals. The acronym SMART helps you assess the clarity and construction of your goals. SMART stands for:
● Specific: Having nebulous goals that may or may not happen at some unspecified time in the future doesn’t do anyone any good. Get specific about what you want in your life.
● Measurable: How will you measure your progress against your goals? Do you have a specific number in mind that you want to see in your account? Do you have a time frame that you need to reach your goals by? These constraints make goals measurable.
● Achievable: For the average person, it is probably not realistic to set a goal of saving $1 million in five years. Perhaps a more realistic goal might be to save $250,000 in five years, depending on your income and expenses. Financial goals are all very personal — so make sure that the goal you choose is achievable based on where you are right now. Making a goal achievable is one way to double-check that you’re not setting yourself up for failure by deciding on some arbitrary and astronomical goal you won’t be able to realistically achieve in the time frame you set for yourself.
● Realistic: This seems a bit redundant given that your goal should be achievable in the time frame you set, but it’s worth noting that “realistic” in this context means that your goal exists within the realm of possibility. An example of an unrealistic goal might be something like deciding that you want to be an Olympic swimmer in five years when you don’t know how to swim today.
● Timebound: Having a goal without a deadline negates the point of having a goal. Your ambitions must have a time frame. Otherwise, they risk languishing into oblivion and becoming mere wishes, not goals.
Once you have crafted SMART goals that are well-defined, clear, and timebound, you should write them down so that you can revisit them in the future. Sometimes we get distracted by life and forget about the details of the goals we set. It’s essential to keep a record of your goals so you can allow yourself to return and double- and triple-check what exactly it is that you’re striving for.
Are You Reaching Your Goals? Celebrate the Wins!
Once you’ve crafted your SMART goals and written them down, it’s time to start making a plan to achieve them. Do your goals require that you put aside a set amount of money each month or week? Check in to see that you are on track with those goals as time goes forward. Are you struggling to meet the goals along the way? Are you knocking each one down without a second thought? Use these indicators to determine whether your goals are working for you, then make sure you celebrate the wins, even the small ones! Maybe you were able to meet your monthly savings goal — cheer yourself on! It’s important to positively reinforce your successes so that you continue to maintain your motivation as time goes on.
Additionally, it’s essential to recognize that you may need to adjust your goals based on events and circumstances in your life. You should know that no goal is set in stone. Life happens, and if you need to shift a goal midway through, that’s fine. It’s important to understand that tweaking a goal is not failing, either. It’s merely an adjustment. Celebrate the fact that you can continue to be flexible in the face of changing circumstances because that in and of itself can be a tremendous boon.
Asking the Hard Questions
When it comes to setting any kind of goals, whether financial, personal, or physical, the process takes a lot of work and self-inquiry. Goal setting requires that you continually ask hard questions about yourself and your circumstances. At the same time, goal setting also requires you to be gentle with yourself when necessary. Goals are not something you should use to beat yourself up with. Goals are tools you can use to support your long-term health and the financial well-being of both yourself and your loved ones well into the future. Setting five-year financial goals can be a great first step in securing your future. When you start with the right questions, you can get closer to reaching your goals and truly find a sense of peace and well-being knowing that you are financially secure.
