The great thing about looking forward three years is it’s enough time to make significant changes in your life. This could mean preparing for and starting a new career or business, having one (or two!) children or buying a house. At the same time, it’s not so far ahead that you will lose motivation or not have clarity about what you need to do each year.
Creating a simple three-year plan has really inspired me because I can see how the actions I take now will also set the foundation for life-changing events in the future, like early retirement. By the same token, having a clear plan also liberates me and allows me to live in the moment more. This is because once I’ve clarified what I need to do and when, I can then schedule these actions in and focus on enjoying the present.
These are the simple steps I took to create my own plan. I hope they work for you.
Step 1 – Imagine life in three years
Think about what you want your life to look like in 3 years from now. Then work out the actions you need to take to achieve this. When you think about your life in three years, really imagine what your daily routine will look like. What would you like to be able to do? Is it travel more, work different hours, change your living situation?
For me, my medium-term priority is more flexibility at work so that I can spend more time with my children while still covering our living costs and future investment plans. I imagine being able to work at home while my kids are at nursery/primary school and then shutting down in time to pick them up and spend the rest of the day with them. So my financial actions are to start building additional income streams and put money aside to invest in training if needed.
Step 2 – Clarify long term goals
Then think about your longer term goals, including when you hope to retire and what needs to happen to get there.
We would like to have our rental and main home paid off by the time we are 58 so that early retirement is an option. So, our actions in the next few years are to be in a position to shorten our mortgage terms and overpay the mortgages to have them paid off in time. I used this mortgage overpayment calculator to work out how much I need to overpay by to pay the mortgages off in a certain number of years.
Step 3 – Plot out known events
The next step is to plot out the known events coming up in the coming years that will mean increased or lower costs and incomes.
This might mean:
- Income going down due to maternity leave
- Childcare costs going up or down
- Any expected salary increases (or decreases if changing career)
- Mortgage deals ending
For us, the key events coming up are:
- Our childcare costs decreasing when our youngest qualifies for pre-school funding in 1.5 years. An action related to this is clarifying where this additional income will go.
- Our rental mortgage deal expiring this year, so we need to think through whether we will change the time of mortgage, whether we will shorten the mortgage therm and how long the deal will be more.
- Our main residence mortgage expiring in 2022. As above.
- The window to being able to change our pension contributions at work and employer pension contributions due to increase after 3 years of “service”. The action here is defining how the pension contribution will change.
Step 4: Put actions into each year
Take each of the actions and slot them into the logical year. You might want to cover ways you will increase your income, how much you will be saving and investing as well as any other goals including giving to charity or supporting family.
Our final plan worked out like this:
Year one (2020):
- Overpay mortgage by £250 a month so we are at 60% Loan-to-Value ratio when we remortgage in 2022
- Remortgage Buy-to-Let: hoping to save £150 a month based on the interest rate being 0.5 lower
- Put any extra money into Stock and Shares ISA
- Start building additional revenue streams, pick up skills and experience to work more flexibility
Year two (2021):
- Increase pension to 10% (employer will also pay 10% at that point)
- Aim to max out investment ISA (up to £20k a year)
- Put any extra income (over ISA threshold) into residential mortgage overpayments
- Continue to pay down Buy-to -Let (part of early retirement plan)
Year three (2022):
- Get 5 year 60% LTV mortgage deal on residential property and shorten term from 20 to 15 years – this will mean we can pay it off when we are 57
- In April 2022, when the youngest gets pre-school funding put money saved (about £1500 pcm) into investment ISA
- Start working more flexibly so I can work around pre-school and primary school hours.
Where there is a specific event with a date, I put that into my diary. For example, you are usually able to secure a new mortgage deal about three months before the end of the existing one, so that date is set as a reminder for me to start looking.
Of course, this is a really high-level approach and there are elements of planning that will need to be covered in more detail. For example, the investment approach, how to increase income or whether additional insurance would be beneficial. However, having a few bullet points per year as a starting point has helped me to clarify my focus areas and what I need to learn more to be successful in those areas.