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Create a Five Year Plan

Sometimes, it makes sense to plan for more beyond just this year. New Years Resolutions [3] are fine, but what is your plan beyond this year? Creating a five year plan can help you figure out how to get on track with what’s most important to you over an intermediate stretch of time. Your five year plan keeps you on track for your more long term goals, like retirement.

Don’t limit yourself to thinking about what you want in the coming year and then not having any other goals beyond hitting your retirement number in 30 years. Think about what you want your life and finances to look like over the next five years, and start making solid changes.

Set Your Priorities

The first step, anytime you make any plan for your finances, whether it’s a budget [4] or a retirement strategy or a five year plan, is to set your priorities. Think about the most important things you want to accomplish financially in the next five years.

Do you want to go on a really great family vacation three years from now? Do you hope to be debt free in five years? Do you want to have developed a marketable skill in the next two years so you can get your career on the right track by then end of the next five years? Are you hoping to start a business? Think about the most important things you want to accomplish in the next five years.

Even if the end result that you are looking for isn’t achievable in the five year time span, you can still figure out what you are likely to accomplish in that five years, and how much further along you’ll be. Besides, one of the great things about the five year plan is that you can adjust it every year so that it remains a five year plan, helping you continue to keep it going over time. It’s like laddering your financial goals.

Create Your Five Year Plan

Next, you get down to the nitty gritty. Look over your tax returns for the past five years. Then, average your annual income over that time period. You can also figure out your average expenses. If you have been using personal finance software, you can break down your expenses more effectively. At the very least, look at the last year, and project ahead to this year, to get a general idea of where your money is going.

You can estimate likely inflation [5] in years to come by using figures issued by the government to get an idea. In 2011, that rate was 3.3%. So, if you plan for $20,000 in expenses this year, next year you will need to plan for an extra $660, so $20,660 in expenses. Unfortunately, for 2011, wages remained flat, so you really can’t factor in significant income growth. (Although if you do make more money this year, you can adjust future years when you revisit the plan next year.)

Your five year plan should include your efforts to build your emergency fund, retirement planning efforts, as well as debt reduction efforts. Looking to the future can help you save up for a down payment on a house, or even save up enough money to buy your next car without a loan. Think about what you want to accomplish, and how you can make it happen. Keep a slightly longer view, and you can see how today’s choices will affect you in five years — and how what you do in five years will impact your long term goals.

(Photo: crystalmartel [6])