General, Personal Finance 

What’s Your Five Year Plan?

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Having a long range plan is critical to making correct financial decisions. Flexo at Consumerism Commentary has blogged about the latest buy vs. rent article to hit the streets, this time written by Liz Pulliam Weston. Flexo writes one interesting tidbit that I found troubling… not knowing if he’s staying in an area “is the main reason [he hasn’t] purchased a house yet.” He adds: “I don’t know where I’ll be, and frankly I’m not quite happy I’m still in the same place I was three years ago.” This underscores the importance of having a plan.

Neither easy to devise or certain to finish, a long term plan for what you want to do is necessary for any meaningful financial decisions in your life. Be it five years, three years, ten years, or two – you need to know where your going in order to steer the ship.

What is my long term plan? My current plan is 3 years long and it involves completing a part-time MBA program at Johns Hopkins University. In that time I hope to advance in my career in my full-time job, continue to grow and nurture this blog, and otherwise enjoy my personal life. That plan means I’ll be here for the next three years at a minimum which makes it stable enough for me (even if it’s short by the typical rent vs. buy rule of thumb) to confidently purchase a home. If I was in Flexo’s position of not knowing how long I intended to be here, then I would also made the same (correct) decision he did and not purchase a home at that time.

It’s difficult for someone who has just left the academic (such as myself) or military system to figure out what their long term plan without sitting down and actually thinking about it. You find yourself without clearly defined goal posts and it’s hard to make decisions. In academia, you look towards graduation. In the military (I assume because I have no experience in this), you look towards the end of your service in however many years. Now, you can’t possibly look forty years and have your goal be retirement… it’s simply too far off.

Find some intermediary goals such as X years to a promotion or Y years to starting a family. It can be as short as 1 year to figure out if your current job or location is where you want to be or do you want to sample another part of the country or the world. After you figure out your long term goal, which can evolve, you can decide whether you should buy a house or make some other large decision (financial or otherwise).

So what’s your long term plan?

{ 32 comments, please add your thoughts now! }

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32 Responses to “What’s Your Five Year Plan?”

  1. monkeyjoe says:

    Not owning a home can be part of your long term plan, especially if you are not sure where life will take you in the future. I have that same philosophy, I am not sure if I will be in this area a year from now, so I will not buy a house, because I will be held down to this area for a while, and what if I cannot sell it with equity, then I am stuck here and not free to move about. That makes perfect sense to me, and given I can rent for $500 with heat and water, I am going to go that route and save the extra $500 per month, yeah I have the potential to make great gains with the real estate, but given my nomadic tendencies, I will end up in the negative.

  2. jim says:

    I think sometimes people get into the mindset of believing that owning a home is “right” and renting is “wrong” when that isn’t the case. It all depends on your situation and for you, monkeyjoe, and Flexo (in my example above), buying a home would be the wrong decision.

  3. Lauren says:

    I don’t think it’s always so possible to figure out your long term plan. As for me, I love to plan, but I simply don’t have that option right now. I have no idea what my salary will be in three years or if that will be enough to afford anything more than a shack in the horrible market in the northeast.

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  5. yam says:

    this is a great idea; especially for younger people who tend to think of financial planning as something you do in middle age…which brings me to this new savings account i heard about that you may have heard of; if not it’d be great for your
    if offers a whopping 4.3% rate; now theres really no reason not to save!

    [edited: that URL was misspelled]

  6. SELF says:

    Lauren. That is why its called planning. Proper planning is always adjustable. Very similar to going to the grocery store.

  7. SELF says:

    jim. there are many of us that use our former homes and rent them and move into a rental. The reasons are obvious.

  8. jim says:

    How are they obvious?

  9. SELF says:

    monkeyjoe. real wealth can be developed with real property. negative valuation is not the result of nomidic tendencies but the result of not doing your homeowrk (got to run the numbers)

  10. SELF says:

    jim, positve cash flow.
    $1200 rental income – (300 mortgage, 250 incedentals) = 650
    rental unit is $550
    puts 100 in my pocket at the end of each month, and there is the plus equity
    applied for, approved and holding, but not using, a home equity line of credit of $60,000.
    that is like having $60k in the bank, well actually it is, if i leverage it properly

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  12. Amanda says:

    I agree to a certain extent with SELF – my future husband and I are considering buying a home, although we would like to do an overseas assignment in the next 2 years. If we do, we would turn our condo into a rental space, which my parents would manage, and would provide us with some passive income… I think it ultimately depends on your situation. Turning a condo or home into a rental property takes make take too much attention, careful planning and effort for some – while for others it may be the perfect solution: You get to build equity, but also be flexible.

    On another note, I completely agree with creating short and long term plans. I also believe that these plans are malleable, and open to reconsideration and edits as time passes. Its always good to have something that you’re working towards to help you stay motivated and reach your financial, personal and career goals.

  13. Miller says:

    SELF, you have a mortgage of $300 a month and can rent for $1200??? That’s an amazing situation! Unless I am interpreting what you are saying incorrectly, you are a very very lucky person! The whole buy-to-rent thing is a good long term strategy in the long term when appropriate. Your situation is definitely a great example of that. My mom also does that… owning two properties, one that she bought so long ago that the rent on it covers both her mortgages and a lot of her living expenses. But I feel (no facts to back this up right now) that with the recent home cost spikes of the last few years, such situations are much harder to find! I am in Maryland, and homes have gone up by 50% in the last five years. Rent, however, has not. So the mortgages are much much more, and the moderate increase in rent prices no longer cover that…

  14. SELF says:

    miller, situation very similar to your mom. house was paid off but took out another note and converted a protion to equity line of credit. the rental rate is low for the area. my short term goal is equity farming, with the hope to harvest soon.

    Imagine if she found a comfortabe condo to rent. then she could possibly have two sources of income. just got to do your due diligence

    You are on track about the spke. but that is why rents are where they are now. the market is cooling so lets see whats happens when we turn the corner

  15. Miller says:

    One more quick comment. I read that link, Jim, and noticed that it mentions buying vs renting a house. A house… Well, I’m happy living in an apartment with a couple roommates right now. My rent is $600 a month. Yes, that’s $600 a month I throw away, but $600 is simply not that much compared to mortgages, etc. I’ve done the online calculator thing before, and even if some of the numbers are fudged (like appreciation, etc), according to the calculator I should never buy (I won’t break even within 30 years).

    I guess my only point is that, since most people on this site are probably 20 somethings, don’t loose sight of renting an apartment versus renting a home. If you are paying low rent, keep in perspective that so much of the rent/buy talk is about houses, not apartments. Now, a couple years (talking about the 5 year plan), we might get spouses and… kids (!?!?), and everything changes all over again. And at that point, will the small house you bought be large enough anyway? Maybe you’ll have to sell before you planned on because Junior #2 is 9 months out! My sister is in a similar situation now…

    With that said, Jim. Does your 5 year plan include someone besides yourself? =P

  16. SELF says:

    amanda, congratulations on your engagement. you are right about situation dictating action. if i was 6’10 i might have been a basketball player instead of a fan. anyway dont forget, if it was easy everyone would be doing it.

    on the other note. i have retirement, 5 year, annual, monthly, weekly and daily plas that are flexible and adaptable. I even have a plan (list & item sale dates) when i go grocery shopping.

  17. Anonymous says:

    miller. never say never. renting is not bad, you are not throwing away anything. just not getting the maximum value of your cash. but you are getting value for your cash. its just like going to a movie. it just a slice of your life, not the complete story.

    consider getting your roomates together and purchasing a house as an investment. $1800 a month(at $600 each roomate + yourself) would get you a pretty nice property

  18. Miller says:

    Actually, I have done exactly that, but they aren’t game. I don’t blame them though — I don’t think they want to commit to that sort of situation, which is perfectly understandable!

    Also, I know my language was extreme — but I agree with what anonymous poster said. While the “all knowing” calculator said not buy, I don’t think I’ll want two other roommates in 15 years. =)

  19. SELF says:

    sorry, anon was me. forgot to list name. sorry that they are not “game”. but to win you gotta play, gotta get game.

    options can include: flipping property in 3 years for profits, buying out partners at a later date.

    also as a note: from my experience, judt like leding money, never rent to friends.

  20. Lauren says:

    If I stay where I live now, I’ll need close to $80,000 for a down payment. If I move, I may only need $40,000. If I choose to save x amount per month, I’ll hit that $80,000 and be able to stay here. If I move, all that extra cash could have been invested in something more profitable and I missed out. I’m not sure what the right answer is here when it comes to being flexible in my planning.

  21. SELF says:

    lauren, i am not a financial planner or advisor but i can offer opinion
    you have layed the only a small portion of the inforation you need to consider for plan a and plan b, the missing element is time.
    plan a stay there – how long would it take you to get the $80,000 down payment, do you want to commit the time? have you the cashflow to support the plan?

    plan b move – only need $40,000, again the time questions + would the move increase or decrease your cash flow?

    have you a plan c? less expensive starter home (a bad market is good for buyers, a buddy of mine purchased a fixxer upper in buffalo for only $36K, put down $3K has lived in it for 2 years and will be putting on the market in February – completely paid off ).

    There are no real right answers for planning, there are only right moves in the direction of your goal. By the way that is the first thing you need to start a plan.

  22. Lauren says:

    We aim to have a house in 5 years. This means that we could either save $80k in 5 years or save $40k…in 5 years. If we were to save less for the down payment, the rest would go to retirement. The move would reduce cash flow by 10%.

    The $80k is for a starter home. It will get us a piece of trash.

  23. SELF says:

    80K downpayment, assuming it is 20% down, doesn’t really sound like trash. Sounds like a 400,000 opportunity, assuming starter home. Keyword is starter.

    Also: 5 years to reserve 80K, assuming no changes in income, currently gives you 1334 a month disposable, hope you are putting that into some kind of liquid investment vehicle to hold in the while.

    Do you mean that a 10% reduction in cash flow is a 10% reduction in spending money or a 10% reduction in savings or a 10% reduction in retirement investment?

    If spending reduction then thats good thing. If savings or retirement reduction that can be part of your plan. Consider looking at the market value + equity as part of your retirement protfolio?

  24. SELF says:

    my apologies for taking up so much space but i am new to blogging (day 3) and am wondering who is the administrator of this site.

  25. Lauren says:

    “80K downpayment, assuming it is 20% down, doesn’t really sound like trash. Sounds like a 400,000 opportunity, assuming starter home. Keyword is starter.”

    400k is a starter home. We want 3 bedrooms because we plan to have kids in this house. That’s just the situation here, unless you want to live an area where you will be continually robbed and vandalized.

    “Also: 5 years to reserve 80K, assuming no changes in income, currently gives you 1334 a month disposable, hope you are putting that into some kind of liquid investment vehicle to hold in the while.”

    It’s in high-interest savings.

    “Do you mean that a 10% reduction in cash flow is a 10% reduction in spending money or a 10% reduction in savings or a 10% reduction in retirement investment?”

    I actually meant it’s a 10% reduction in income, but outgo will be lower for necessities. That’ll cause an increase in retirement savings.

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