A roadmap to creating your first 5 year financial plan that will set you up for success
If you clicked through this link, it means that you must be at least somewhat ready to create a 5-year financial plan that you will want to stick with. This is great! Plans are always a fantastic place to start when you want to make a change that sticks.
This article is meant for “normal” people, and by that I mean people who earn a low or an average salary, and have to pay their bills without the safety net of having someone who can swoop in and inject some cash if shit hits the fan and you spend more than you earn. To be clear, there is nothing wrong with having someone that swoops in to cover one’s butt… but this article is for those who don’t have this luxury, or don’t want to rely on it.
Let me get one thing out of the way: your salary doesn’t need to be high or even above average for you to create a 5-year financial plan that will make you financially resilient. It might be low, but that doesn’t mean you can’t save and invest for the future. In fact, it’s even more important to do so because you need to make every penny count. Once you get paid, it’s up to you to make the right decisions that will set you up for success.
So, let’s get started.
What we’ll cover
- Set your financial goals
- Analyse your current finances
- Break down the 5 year financial plan into actions
- Where to seek financial advice in the UK
- Tips to stick to your financial plan
Disclosure: There are some affiliate links below and I may receive commissions for purchases made through links in this post, but these are all products I highly recommend. I won’t put anything on this page that I haven’t verified and/or personally used.
1. Set your 5 year plan goals
The first step is to set the financial goals that you want to have achieved in 5 years’ time. This is the foundation of your 5-year financial plan. What do you want to achieve financially in the next 5 years? Maybe you want to save for a down payment on a house, pay off your debt, or start investing for your retirement. Whatever your goals are, write them down.
When setting your goals, it’s important to be specific and realistic. Instead of saying “I want to save more money”, say “I want to save £10,000 towards my emergency fund“. By making your goals specific, you’ll have a clear idea of what you’re working towards.
It’s also important to make sure your goals are achievable. If you’re earning a low salary, it might not be realistic to save £10,000 in one year. Instead, break your goal down into smaller, achievable milestones. For example, you could aim to save £2,000 in the first year, £3,000 in the second year, and so on.
5 financial goals you can use as inspiration:
- Save 9 months’ worth of expenses
- Save £30,000 for a down payment
- Bring my credit score to ‘Excellent’
- Pay off my credit card debt
- Have £10,000 in investments
2. Analyse your current finances
Next up, you need to know what your starting point is. Gather as much information as possible on the following categories:
a) Your current income
Take a look at your income. How much are you making each month? Are you happy with your current job? Do you see any opportunities for growth or advancement? Can you take on a side hustle to make some extra cash? These are all important questions to ask yourself if you want to think strategically about how your situation can improve in the next 5 years.
Cutting costs is fantastic, but it will only get you so far over a certain amount of time. If you are determined to set ambitious goals to achieve in 5 years, you will need to seek alternative ways to increase your household income.
This may come through a promotion, doing some freelancing on the side, or setting up an Etsy store where you can sell your art. Start considering what you are willing to change to get to your goals faster.
b) Your current spending habits
Next, look at your expenses. This is where things can get ugly. Do you really need to be smoking? How about that gym membership you haven’t used in 3 months? And shall we address how much you’ve spent on takeout this year? No judgement here: I am absolutely guilty of having abused of the Deliveroo app, but I have learned to use it only if takeout spend is budgeted for, and in line with my objectives.
If you can, you should track your expenses for at least a month (ideally three). If you want the full experience of truly acknowledging what goes on in your bank account at a granular level, I recommend following my method of setting up a budget planner notebook and tracking your expenditure every single day. It takes much less time than you think, and it will really ground you in your knowledge of how you spend your money.
Alternatively, you can start using an app-based account that allows for tracking categories, such as Monzo or Revolut. Both of these have plenty of tools that can help you budget for your expenses, and track them month on month, running reports on how you spent your money and offering solutions to save more of it.
As you do this exercise, identify all the ways that you are spending money, that aren’t truly adding any value to your day, and see how much they add up at the end of the month. Believe me: they compound!
When tracking your expenses, it’s essential to be honest with yourself. This means tracking every penny you spend, even if it’s just a coffee or a snack. By doing this, you’ll have a clear idea of where your money is going and where you can make changes.
c) Your starting debt
Now, it’s time to tackle your debts. Do you have credit card debt? Student loans? Car payments? Did a friend lend you some cash when you were down on your luck? Write down how much you owe and what your interest rates are. Trust me, you’ll want to tackle this sooner rather than later.
If you do have debt, no matter how much you have of it, it should be one of your goals to get rid of it as fast as possible, and to do that, you will need to be absolutely aware of how much it amounts to.
d) Your assets
Finally, take a look at your assets. Assets are the things that you own that are of value, such as cash, property, and investments. Do you have any savings? A retirement account? A car or house that you own? These are all important things to consider when assessing your current financial situation. The more assets you have, the more your can plan around how to optimise them and use them to your advantage as you create your financial plan.
3. Break down the 5 year financial plan into actions
Now that you know where you are now and where you want to be in 5 years, you have to create a plan.
A plan is none else than a list of actions, right? It is a series of to-dos that make up the different phases of a plan, transforming it into a bunch of smaller steps that you can be accountable for every single day. The most straightforward way for you to set out these actions is to look at your goals and break them down into yearly and then monthly targets.
For example, if you want to save £2,000 in the first year, you’ll need to save £167 per month on average. Or, if you want to pay off £5,000 in debt by the second year, you will need to pay £2,500 towards it in the first two years, which means at least £209 per month.
One more example: if you want to improve your credit score, you will need to look at all the debt that you have, and tackle it using the snowball method, or the avalanche method (depending on your personal preference and the interest rates you are dealing with).
Where to seek investing advice in the UK
If one of your goals is to start investing, you will need to figure out the best strategy for this. If you’re not sure where to start, consider speaking with a financial advisor who can help you create a plan that’s tailored to your specific needs. They can help you choose investments that align with your goals and risk tolerance.
- Unbiased is a website that matches you with the best financial advisor or accountant according to your needs. They have fantastic customer service and have really established themselves as one of the most reliable resources for those who are seeking some help in understanding the next steps in their financial roadmap.
- Sunny Avenue is a financial adviser introduction platform based in the UK. They connect you with local and friendly advisers who can help them get on top of their finances. What I love about Sunny Avenue is its inclusivity: its advisers believe that financial advising should be accessible to everyone, regardless of their background or financial situation. They are committed to helping clients from all walks of life, and they take a holistic approach to financial advising that considers each client’s unique circumstances.
If you are uncertain about what investing strategies you should adopt (or what an investing strategy is) it might be worth investing in a conversation with a competent professional that can set you in the right direction.
If you’re not quite ready to speak to an advisor, a fantastic starting point is to read The Simple Path to Wealth by JL Collins. I wrote a review about this book, as I found it transformative, yet easily digestible and full of tangible advice on money, savings, and the pushing against consumerism.
Tips to stick to your 5 year financial plan
a) Automate your savings
I am willing to bet this laptop I’m typing this on that one of your goals will be to save more money, or a certain amount of money. If this is true, a no-brainer is to automate your savings. This means setting up a regular direct deposit from your current account into a savings account. This way, you won’t even have to think about saving money – it will happen automatically. If you have trouble saving money, this is a great way to make it a habit.
Set the amount to be in line with your 5 year goal: if you plan to save £5,000 per year, you should set up the direct debit to be £416 per month. If this seems too much to begin with, start with half: an initial £200 per month automatic transfer into your savings, and then increase it once you get the hang of things and/or when you receive a pay rise.
b) Set a budget for you/your household
This is one of the pillars I swear by: you have no financial future without a monthly budget. If you don’t create one, how do you know if you’re on track? And you’re not on track, a budget will show you why.
I keep mine in a notebook that I update by hand every single day, but you can draw one up on a spreadsheet using the same exact principles I described in my budget planner article.
Having a budget makes you accountable for how much you spend, and can motivate you to raise your income to increase your bottom line further. It also will build up some fantastic administrative and financial skills that you can surely apply to whatever job you are doing!
c) Keep your eyes on the prize
Creating a 5-year financial plan is a long-term commitment, so it’s important to always remind yourself of why you are introducing some discipline in your spending and saving habits. One way to do this is to celebrate small victories along the way. Maybe you hit a savings milestone or paid off a debt. Congratulate yourself on these victories (with budgeted-for celebrations!) and use them as motivation to keep going.
You can also go back to those 5-year goals, and remind yourself of why you set them, and what you were hoping to achieve when you wrote them down. Every single effort you put into getting there will compound, but it needs to be a consistent and grounded effort, founded on a true desire to improve your quality of life.
d) Prioritise, and tackle one thing at a time
You might have set out a number of goals to achieve in 5 years, however, you are unlikely to stay motivated if you try to tackle them all at once. If you do so, you will inevitably achieve very little very slowly, as your efforts will be diluted and weak instead of focused and effective.
Furthermore, it isn’t particularly wise to start investing your money before you pay off your debt. Instead, you should prioritise your goals according to what’s more urgent. Then, you can throw yourself at the goal that is at the top of that list, and work your way down.
As a general rule of thumb, you want to prioritise repaying your debt and having a little bit of emergency money, over investing. This is because the longer you are in debt, the worse your credit score is, and the more interest you pay on it. And if you don’t have at least a little bit of money saved for emergencies, you might be in trouble if – touch wood – your car breaks down and you need it for work.
e) Review and adjust the financial plan
Finally, it’s important to review your plan regularly and make adjustments as needed. Life is unpredictable, so it’s important to be flexible and adjust your plan as your circumstances change. Maybe you get a raise or have unexpected expenses. Whatever it is, make sure to review your plan regularly and adjust it according to your circumstances.
Make it a habit to review your budget and progress towards your goals on a regular basis: you should check your actual expenditure compared to budget every month, and review your overall budget every quarter to assess if there is anything that needs changing.
Remember, the goal of a 5-year financial plan is not to create a rigid set of rules that you must follow at all costs. Rather, it’s a roadmap to help you achieve your financial goals.
By being flexible and adjusting your plan as needed, you’ll be able to stay on track and achieve your goals over time.
Creating a 5-year financial plan might seem overwhelming, but it’s definitely doable – even if you have a low salary. You can achieve your financial goals and create a better future for yourself by creating goals and breaking them down into achievable steps. Remember, the key is to stay focused, stay flexible, and keep your eyes on the prize!
Other articles you may like:
- What is Financial Independence Retire Early (FIRE acronym)
- How to Save £10k in a Year
- How to Improve Your Credit Score