M26 Planning Your Finances for the Medium Term Getting a Handle on Your Money

Planning Your Finances for the Medium Term: Getting a Handle on Your Money

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When setting out on a road trip, your GPS is normally the first thing you check (or, if you’re a dinosaur like myself, a piece of paper with squiggly lines on it that tells you where you are). While cooking dinner, you usually look up a recipe or risk the outcome not being what you hoped for. Before making a major purchase like a new PC, you probably spend hours researching different specifications so you can get the most bang for your buck. People have been known to take months organizing a week-long vacation.

In all of these examples, we understand that careful planning has clear benefits. Becoming financially comfortable instead of living paycheck to paycheck is most certainly more important than any of them. Why, then, do so many of us fail to organize our money according to some kind of rational blueprint? Instead, we prefer to stumble through life on autopilot, reacting to setbacks and opportunities without giving any real thought to our ultimate objectives.

Let’s face it, though: it is extremely unlikely that you will achieve these goals by accident. At the same time, most of your hopes – buying a house, retiring early, sending your kids to college, or whatever you dream about constantly – can be approached in distinct, sequential, planned steps. This is what makes a five-year financial roadmap so useful to have. Half a decade is a pretty reasonable horizon: far off enough to challenge you to achieve something meaningful, but not so distant that formulating a workable agenda is impossible.

Nobody really knows where they’ll be much later in life, nor whether they’ll still desire the same things. Once you have a five-year plan, however, you can use it to guide your major and minor decisions rather than relying on instinct or clichéd, outdated advice. The more consistent your choices about money are, the closer you’ll get to your dream lifestyle.

The Importance of Having a Budget

While half a decade is not that difficult a timeframe to wrap your head around, it’s still easier to implement your medium-term plan month by month. Much of financial prosperity still comes down to dollars and cents, after all, and we generally earn, save, and spend these on a monthly basis.

There’s no real secret to drawing up a personal or household budget. Basically, all you need to do is make a list of your typical income and expenses, then try to minimize the latter. You can do this in a notebook, on a spreadsheet, or using any of a variety of dedicated apps…the hard part, really, is just to find the discipline to stick to the numbers you’ve decided on.

There are a variety of life hacks you can utilize to practice this kind of self-control, but the best way to motivate yourself is probably to track your progress and keep reminding yourself how much saving just a little money regularly can net you at the end of five years. Here are some illustrative figures for monthly savings invested at 5% interest:

budget for savings as part of 5 year plan

Clearly, the more money you’re able to put away each month – preferably by automatically deducting it from your paycheck, so you’re never tempted to spend it instead – the better off you’ll be at the end of your five-year plan. Even if these savings, by themselves, aren’t enough to meet your goals, they can serve as a down payment on something you have your heart set on, making it easier to get a loan and reducing the amount of interest you’ll have to pay to the bank.

Deciding on Your Destination

The second step in drawing up your five-year financial plan is to realize exactly what you hope to achieve, then estimating what it will cost. Believe it or not, humans are actually pretty bad at defining their goals precisely. One reason for this is that we have trouble separating our real desires from their physical manifestations. You might, for instance, feel like owning a $100,000 car in five years. If you don’t actually like driving, though, but rather want to enjoy the social status that having an expensive vehicle brings, this could be a waste of money better spent elsewhere. Likewise, many people spend years saving up for their dream wedding – but spending a bundle on the ceremony actually has little effect on how the marriage turns out.

So, it’s important to keep emotion out of things when setting financial goals.  Otherwise, your plans may become too ambitious. Similarly, it’s important not to let fear limit you unnecessarily. You may think that you’ll never be able to run your own business, but you may be perfectly qualified as long as you don’t set your sights too high. Enjoying a comfortable retirement in only half a decade may seem out of the question, but it could be that this is indeed an option if you’re willing to move abroad.

five year financial roadmap

Making Sure Your Five-Year Goals Are SMART

Once you’ve come up with a goal that’s pleasing enough to motivate you to stick with whatever plan you’re about to come up with, it may be that you have to scale it back somewhat to conform with the resources available to you. Alternatively, you may have written down several goals and have to choose between them. How do you figure out which is most worth pursuing, or how you can tweak one to bring it within reach? One successful system that’s taught to schoolchildren, project managers, and everyone in between is called S*M*A*R*T. This forms a good reality check to your dreams; if your five-year objective passes the SMART test, all that remains is to figure out how to get there. The acronym stands for:


One common pet peeve among financial advisors is their many clients who simply want to be “wealthier” in some kind of abstract sense. This can mean any of a whole number of things: do they really want to increase their income, reduce their debt load, have more security in case something bad happens, afford more toys? If your goal statement doesn’t answer questions like what?, why?, when?, and where?, you won’t even know once you’ve succeeded or not.

Specific goals have another purpose, too: it’s fun to fantasize about achieving your dreams, even though this doesn’t get you any closer to success. Doing so can be a great motivator, though, and is more effective the more clearly you can state them.


For much the same reason, it’s important to be able to track your progress towards your goals, whether these are expressed in terms of a number or as the answer to a yes/no question. If you want to generate a second income, put a target dollar value on it. Buying a house, as another example, is fairly specific, but only becomes measurable when you’ve decided on the value of the property you want, the size of the down payment, and the interest rate you’re willing to accept.

A lack of measurable (or rather measured) goals played a major role in the failures of the Soviet five-year plans. Since Communist managers were rewarded if they met their quotas and punished if they didn’t, many of them simply cooked up figures that made them look good. This led to nobody knowing what was actually being produced and widespread chaos in the economy. Something similar occurs in China today: provinces typically report economic growth well over the national average, and that’s not how averages work. The moral of the story: it’s not enough for your goals to be measurable, you actually have to keep tabs on how well you’re doing.


It’s good to be optimistic, and in fact one of the functions of having a five-year financial plan is to push you to do better. You should be stretching your abilities, but wishing for something you’ll never be able to achieve will do you no favors whatsoever.

Take stock of what might limit your accomplishments, including non-monetary resources. If you have very little free time, taking on a second job is probably going to do your health and happiness more harm than an extra paycheck is worth. Also, don’t count on factors beyond your control going your way: you may expect (and even deserve) a pay raise at work, but the decision is ultimately up to somebody else.

five year financial plan using smart goals 1
Image by Dungdm93


Financial goals, and for that matter your finances in general, never exist in a vacuum. A lot of people joke about making money by selling one of their kidneys, but sacrificing your personal welfare for some quick cash seems like a bad idea. (For the record, it is also illegal almost everywhere in the world).

Your financial objectives for the next five years should therefore be relevant and attuned to your life plans in general: money can be the servant of your happiness but is rarely the only source of it. Moving to a region where wages are higher may not be worth it if you’re close to your family; while switching careers based only on the expected salary could leave you feeling trapped, burnt-out, and miserable. It’s also important to make sure your chosen goal is one you can get behind emotionally. Saving up $10,000 just for the sake of it is certainly useful, but will be much easier if you’re planning to use that money for something specific like a new car.


A goal without a deadline is a roadmap to nowhere. Anything worthwhile takes plenty of effort and sacrifice to achieve. If your plan for success is completely open-ended, there’s little reason to consistently work at getting closer to what you desire and you’re almost sure to abandon the project eventually.

It’s also an excellent idea to carve larger goals into smaller, more easily attainable, time-bound segments. Let’s say you want to get a professional certification that will boost your earning potential. It will cost $5,000 and require you to take two months off for coursework, during which you’ll have to support yourself without an income. If you think of all of this as one task, you’ll probably end up putting it off for years. If, on the other hand, you set a first sub-goal as getting the tuition fee together within six months, you’re committed and the rest won’t seem so hard.

Practical Tips for Drawing Up Your Five-Year Financial Plan

So far, we’ve touched on how important it is to have a budget to guide your spending every month and discussed the issue of setting reasonable goals in some depth. The latter is certainly important: if you don’t know where you want to go (and you should most certainly put this in writing as a kind of contract with yourself), it’s very likely you’ll get lost. You also don’t want to switch horses in midstream – if you’ve been saving to go back to school, you lose a lot of momentum by spending that money on a foreign vacation instead.

How do you translate these goals into actions, though? In principle, it’s really not that hard:

  • Calculate your net worth, meaning your current financial situation overall. Subtract your debts from the cash you have in the bank and any saleable assets you may own. This will give you a snapshot of where you can improve.
  • Figure out how much achieving each of your chosen goals will cost.
  • Decide on how much money you can apply towards meeting them each month.
  • Divide the total cost by the monthly amount to figure out a timeframe.

Of course, it’s never truly that simple. Everybody’s situation is different, and there’s almost always more than one way to skin a cat. Whatever you do, remember that the unexpected can always be expected to happen and try to follow the SMART principles above as closely as possible – they really do work. Aside from that, the following ideas, adapted to your particular circumstances, may be of help:

write five year money plan

Rationalize Your Banking and Investments

Though not part of your five-year plan as such, now is a great time to review your credit card, checking account, insurance policies, and all the other financial products you use. In fact, you probably should do this more often than twice a decade: financial institutions are always offering new deals to draw customers away from their competitors.

Some of the things you can look into include:

  • Finding better returns for your liquid savings. Many “savings” accounts offer interest rates of effectively zero, but you can easily get 2% at online-only banks and far more by investing in EFTs or mutual funds.
  • See if you can benefit from refinancing debt like your auto loan or mortgage on better terms.
  • Consider taking out a debt consolidation loan (as a deliberate part of your five-year plan to get debt-free).
  • Even if the above option won’t work for you, see if you can transfer your credit card balance to another bank offering a 0% introductory offer.

Any of the above can save you over a hundred dollars every month, even though you have to do the work involved only once. Along with using your budget to cut unnecessary spending, this may just kick loose enough cash for you to reach your financial goals that much sooner.

Set Clear Priorities

A few people are highly motivated and/or hyper-focused and can pursue a single goal at a time. This is usually the way to get results as soon as possible, but remember that you’re only human. You may, for example, be able to save money more quickly by getting rid of a gym membership you don’t really need. On the other hand, health, fitness, and self-care generally come with benefits beyond the purely financial – sacrificing one objective for another isn’t always worth it.

In general, though, it’s a good idea to prioritize money “fountains” over money “drains”, at least until you can afford the latter. What is the difference?

prioritize productive assets

A money fountain earns you money, directly or indirectly; a money drain costs you. Here are some examples:

Money Fountains:

  • Getting out of debt. The interest you have to pay on loans and credit card balances will no longer be sucked out of your pocket, which is almost as good as receiving cash. Pay off the debts with the highest interest rates first.
  • Improving your credit score, perhaps by boosting your asset/liability balance. It’s very likely that you’ll have to borrow money again in future; a good credit score makes this much easier and cheaper.
  • Something that helps you make more money. One good example of this is starting a side hustle of some kind, which makes you less dependent on your regular job and less exposed to layoffs. Another is education of almost any kind, whether it results in a diploma or not – reading books helps more than you may think.
  • Investments of any sort. You will probably be thinking of short-term securities as part of your five-year plan, but you shouldn’t neglect to invest for retirement. Once most people start thinking about this, it’s way too late.
  • Appreciating assets like a house. The gains are slow and may be offset by the interest you pay on your mortgage, but owning these will generally at least not cost you money.

Money Drains:

  • Depreciating assets like cars and appliances. You will never be able to sell them for more than you paid, meaning that they cost you money even while they’re just sitting in the garage. It’s almost always better to buy these second-hand.
  • Spending money on yourself as well as experiences like vacations. This is sometimes essential – money is supposed to serve your happiness, after all. Small indulgences are okay, but remember that the cash you spend on things like dining out and subscriptions you don’t really need will be worth much more in future if you save it instead.

By separating your goals into these two categories, you’ll get a much clearer idea of which are likely to lead to financial independence and which will hold you back. Also remember to include your partner or family in this process. You may be willing to live frugally for the next couple of years in order to support your long-term financial objectives, but the friction this will cause at home might make you think twice.

Don’t Ignore Time Costs

Time is money, we’re told, but it’s rarely possible to exchange one for the other directly. Most of your financial five-year plan will of course be expressed in terms of dollars. This is not, however, all that matters.

Say that one of your goals is to get promoted at work, and your plan for making this happen is to work tons of unpaid overtime. This may prove to be effective, but think about what you’ll be giving up in return for the possibility of a higher income. You’ll probably have less time to pursue other, equally valuable opportunities as well as simple relaxation and joy.

Planning in Reverse

One of the most useful pieces of planning advice I ever learned came from, of all things, a computer science class. As it turns out, it works well for things other than moving digital pieces around a chessboard, and it’s surprisingly easy to implement. If you have absolutely no idea where to start with drawing up a five-year financial plan, try the following:

  1. Visualize that you’ve already achieved your goal(s). This makes it easier to see the ramifications. If, for example, imaginary future you has managed to convert a side hustle into a home-based business, some of your expenses are going to be lower – travel and clothing come to mind.
  2. Now, think of your circumstances immediately before that and the step you had to take to make progress, then the one before, and so on. You will, of course, have to actually start the business; the logical preface to that may be to seek out cheap online training to gain the skills that will make this undertaking a success.

Before you know it, you’ll have worked backward to where you are now with a clear plan of action to follow.

The Barbell Strategy

Nassim Taleb is one incredibly smart guy who’s never afraid to speak his mind and has written several books well worth reading. As a mathematician and investment analyst, his specialty can be summed up as “risk and reward”.

Now, uncertainty and unforeseen hazards are always going to be part of life. Any five-year financial plan that doesn’t take this fact into account is probably a bad one. One way to minimize your exposure to danger is to ensure that your first priority is to build up an emergency fund of at least a few hundred dollars. This is the safety cushion you can call on in case your car breaks down or you need to pay an emergency visit to the dentist. Another planning principle, one of Taleb’s theories that can be applied in a variety of situations, is called the barbell strategy.

The basic idea is that you should invest the larger part of your money, effort, or other resource into safe, predictable avenues. To balance this non-risky approach, the rest goes into wildcard opportunities: those with a relatively slight chance of paying off hugely and which risk only the amount you invested.

five year financial plan with barbell strategy
Photo by Greg Westfall

In terms of generating an income, therefore, you should keep spending time working at your day job – your paycheck by itself is almost certainly not going to make you rich, but having steady pay is a lot more comfortable than the alternative. However, you should also devote perhaps 10% of your normal working hours trying something that will probably fail but may also succeed beyond your expectations. Examples of this include starting an internet business or trying to make money from your artistic ability.  Even if the time spent on your side project turns out to have been wasted, you’ll at least have learned something.

When it comes to investing, the equivalent would be to place most of your money in safe vehicles like mutual funds. You won’t see huge returns, but you’re not going to lose your shirt either. Then, with this safety buffer in place, you can risk perhaps 10% of your wealth on risky opportunities that will either take off like a rocket or simply fizzle out. New startups, junk bonds, and small businesses all come to mind in this regard.

If you’re lucky, you hit the jackpot; if not, you’ve lost only what you can afford (and in fact expected to). At the very least, the possibility of a big win will help you stay hopeful during bleak periods, and following the barbell strategy is a lot smarter than buying lottery tickets.

Think, then Do

One Japanese proverb goes: “Vision without action is a daydream; action without vision is a nightmare”. In other words, simply having a five-year financial plan does no good on its own, but trying to do the right things without any real blueprint to follow is likely to lead you down some costly dead ends.

This is why having a medium-term financial plan is so important. Right now, your crystal ball may have trouble seeing past your next paycheck and the bills it’s supposed to cover, but five years go by faster than you can imagine. With no roadmap in place, you’re likely to be in exactly the same position as today unless you’re struck by great good fortune.

Instead, be bold but realistic in your goals. Don’t limit yourself by dreaming too small, but don’t shoot for the moon by overestimating your willpower, abilities, and resources. Track your progress religiously and adapt your plans as the situation changes. There is always the chance that you will fail or, more likely, get only partway to where you want to be. One thing is certain, though: planning carefully and acting accordingly increase your chances of success tremendously.



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