If I were to tell you that you can apply the same strategic planning tool used by the world’s most successful corporations to your most importantmoneygoals, would you be interested?Well, you can, and whether it’s paying down a pile of debt, building an emergency fund or planning for an early retirement, you’ve come to the right place!
The tool I’m referring to is the SWOT analysis, which is actually an acronym for Strengths, Weaknesses, OpportunitiesandThreats. And in this post, I’ll show you how toapply it to your personal finances.
BEAUTY IN SIMPLICITY
Determining a financial objective or goalis the easy part for most people. What’s more difficult is coming up with a winningplanthat will get them to the finish line. That’s the beauty of the the SWOT. It’s incredibly simple to use, yet highly effective.
If you’ve spent any time working for a large corporation, particularly in a leadership role, there’s a good chance you’ve been involved in creating aSWOT before. But have you ever considered applying it to your personal finances?
NOTE: If you’re interested in seeing how a SWOT has been used in a business environment, here’s a link to some examples of SWOT’s completed for major corporations, brands that you’ll be very familiar with.
FIRST THINGS FIRST
With any SWOT, it’s best to start by deciding on a financial goal.
As I mentioned previously, this could be debt repayment, a short or long term savings goal, even starting a side hustle!
From there, you’ll use the SWOT analysis to identify the characteristics that could either help or hinder your ability to reach your goal.
Let’s take a look at the makeup of the SWOT in it’s most basic form. Notice that there are 4 components: Strengths, Weaknesses, Opportunities and Threats.
These factors will come to life as you consider characteristics that are related to each one.
But first, let’s takea closer look.
As you’ll see in the more detailed diagram below, the four categories are not entirely independent of each other, with some level of connection occurring between them.
POSITIVE & NEGATIVE FACTORS
Strengths and Opportunities are both positive factors, characteristics that will help you achieve your goals.
Weaknesses and Threats are considered to be negative factors, which could potentially hinder your progress.
INTERNAL & EXTERNAL FACTORS
Strengths and Weaknesses are internal factors. These are the personal characteristics you possess that will influence your outcome in either direction. Let’s say, for example, that you are a young lawyer, and your financial goal is to save $50,000 over the next two years for the downpayment on a house. Your high income earning potential would be considered a personal strength, somethingyou possess that will make it easier to reach your goal.
Opportunities and Threats are external factors. These are environmental elements that you could either use to your advantage, or could turn against you as you implement your financial plan. These tend to be outside of your control.
Here’s an example of a threat. If your financial goal is to pay your mortgage off 10 years ahead of schedule, a rising interest rate environment would threaten your ability to do just that.
Now that you have an understanding of the 4 components of the SWOT, the best way to demonstrate its usefulness is to see it in action. This is where things get interesting!
To do this, I’ve created the following case study. I’m going to provide you with some background on a typical young family. I’ll provide you with some details of their lifestyle and financial situation, without going into too much detail. I’ll also provide you with a financial goal for this family, and we’ll use the information provided to draft a SWOT analysis.
PERSONAL FINANCESWOT CASE STUDY: THE MILLER FAMILY
Meet Matt and Sarah Miller. Matt and Sarah are both thirty two. They’ve been married for four years, and have a beautiful 2 year old daughter named Abigail. They own their own home, which Sarah purchased a couple of years before she and Matt met. Matt is an elementary school teacher, while Sarah has been a stay at home mom since Abigail was born. Prior to that she worked full time as a health care aide at an old folks home in their community. In their spare time, Matt enjoys woodworking, a skill he learned from his father while he was growing up. Sarah is a runner, and manages to find time a few days a week to pound the pavement.
Matt and Sarah consider themselves blessed. They have a healthy marriage, a strong support system of family and friends, and what they consider to be a great life. But they do have some concerns about their financial situation.
More specifically, they’ve accumulated a large amount of consumer debt since they were married 4 years ago. This worries them, as they are finding it near impossible to pay it down while living on a single income. Their home is modest and the mortgage is relatively small, with $125,000 remaining. While housing values have risen somewhat since Sarah purchased it 4 years ago, it’sa starter home and is not centrally located, which has limited it’s appreciation.
Their consumer debt accumulated over time. When they got married, Matt had student loans of $30,000 that he had just begun to pay off. He’s since paid down the balance to $20,000, but it seems as though it’s only getting harder. When Abigail was born, they decided to sell their 10 year old Honda Civic, and purchase a new Dodge Caravan. In doing so, they took out a car loan for $28,000. What seemed like a reasonable decision a the time has really made budgeting difficult.The payments have limited their cash flow,not to mention their ability to save. They’ve given thought to selling the van, but it’s value has already fallen to $16,000, while they still owe over $20,000 on the loan.
Last summer, they noticed a leak in their roof after a powerful thunderstorm. They felt as though they had no choice but to replace the shingles immediately. Because it was a large expense they weren’t prepared for, they had to use their credit card to cover the $4000 bill. The balance is still on the card, and they’ve only been making minimum payments.
This experience made them realize that they were not well equipped to handle financial emergencies that can arise.
Since then, they’ve wondered how on earth they can pay down all of this debt, and also set aside enough money to deal with emergencies.
To be clear, for the most part, Matt and Sarah have been responsiblewith their money. They live in a modest home, don’t overspend on things like eating out, or entertainment, yet they are in a tough financial position. They know what they want to get rid of their consumer debt, and establish an emergency savings fund, but they really don’t know where to start.
Does this sound familiar?
Thankfully, Matt and Sarah are Mystery Money Man readers, and have learned about usinga SWOT analysis to develop an effective financial plan,and they’ve decided to give it a try.Ok, ok, so I may have jumped the gun on that last statement. 😉
Here is the process Matt and Sarah followed, in 4 simple steps:
STEP 1: ESTABLISH MONEY GOAL
They begin by determining the main problem they are trying to solve, and settle on a goal they want to achieve.
Problem to solve – Large consumer debt load ($44,000), and the lack of an emergency fund.
Money Goal – Payoff all consumer debt, establish an emergency savings fund of $5000
STEP 2: BE HONEST. MAKE A LIST OF THE TOUGH QUESTIONS
As they go through each category in the SWOT Analysis, they write down a number of questions to help guide them through the thought process.
Here’s what they came up with:
Strengths (internal)
Do we possess unique skill sets that could place us in high demand, increasing our income earning opportunities?
What personal assets can we draw on?
Which ones are the most liquid?
What do other people think I/we are good at?
Do we have experience achieving similar goals to the ones we’ve set?
Weaknesses (internal)
Are there areas we are overspending?
Do we lack any knowledge required to achieve our goal?
Do we have the time/capacity required to achieve our goal?
Opportunities (external)
What opportunities if any, do we have to increase our income?
Is there a need within our community for a service that we can provide?
Are there products/services we can utilize that will save us money?
What is the cost of living like where we live? Is that something we can change?
Can we obtain help from our support network? Family or friends?
Threats (external)
What are the obstacles currently standing in our way?
Do we face any upcoming expenses which may throw us off track?
What are the chances that an economic down turn could set us back financially?
How protected are we from rising interest rates?
Do we have ample insurance protection?
STEP 3: COMPLETE THE SWOT ANALYSIS
Using the questions above, Matt and Sarah create the following list:
Strengths
- Matt’s job & income stability. Salary should steadily increase.
- Matt has work pension, but also contributes to retirement savings.
- Modest equity in home (50K)
- woodworking/carpentry skills (Matt)
- personal health (ability to work and earn income)
- Sarah has bookkeeping experience from a previous job.
Weaknesses
- current cashflow is poor.
- Interest rate on credit card is very high, 19.99%
- vehicle amortization has 5 years remaining
- both Matt & Sarah feel as though they lack investment knowledge
- vehicle depreciation. Owe more than van is worth.
Opportunities
- time (Matt has summer months off, capacity to take on a side gig.)
- Strong credit scores (may help with favourable lending conditions if consolidating)
- Family support. Parents are available and willing to watch Abigail part time if needed, at no cost.
- Their financial advisor can assist them with savings strategies.
- Matt has a strong benefits package through his work.
Threats
- with an older home, other expensive repairs may arise.
- Plan to have another child in the coming year. Will impact future income earning potential.
- Mortgage matures in 12 months. If interest rates rise, payments may increase also.
- Both Matt and Sarah have minimal life insurance coverage.
TheSWOT is complete, what’s next?
As you can see, Matt and Sarah completed the SWOT, and came up with an impressive list of factors to consider. However, their journey doesn’t end there. In fact, the hard work usually begins after the SWOT is complete.
If this was you, now would be the timeto ask yourself more questions, for example:
What was identified in the SWOT?
Do you feel confident that you have the strengths necessary, combined with the opportunities, to succeed in reaching your goal?
Do your weaknesses or threats seem insurmountable?
If so, it doesn’t mean you should abandon your goal. But you’ve identified a problem, one that needs a solution!
STEP 4: SOLVE PROBLEMS IDENTIFIED BY SWOT
Take a step back and review the characteristics of the SWOT. From here, look for ways to use increase your strengths and opportunities, and in doing so reduce or eliminate weaknesses or threats.
In the case of Matt and Sarah, they realized that their lack of investment knowledge may be a weakness. They weren’t confident in their ability to create an effective savings strategy for an emergency fund.
Sarah remembered that the financial advisor who assisted her with her mortgage is a Certified Financial Planner, and had also offered to help her with her investments in the past.
This is an example of how identifying and utilizing an opportunity can reduce a weakness!
Here’s another thing Matt and Sarah discovered. They want to be aggressive to reduce their debt. While their primary employment income won’t increase dramatically over the next few years, they identified additional skill sets that they both have, namely carpentry and bookkeeping.
They also realized that they have some flexibility with their schedules. Being a teacher, Matt has the summer months off of work. Sarah is a busy stay at home mom, but does have some flexibility in her day. Also, her parents live nearby and love the opportunity to spend time with Abigail any chance they get.
Matt and Sarah did some brainstorming, and decided that they can use these strengths and opportunities to increase their income significantly, through side hustles. Had they not gone through the SWOT together, these are things they may not have given thought to.
As a result, Matt plans to take on carpentry projects during the summer months, like building decks or fences. Sarah, in the meantime, is planning toput her previous bookkeeping experience to work by offering her services to a couple of small businesses in the neighborhood.
What a SWOT is NOT…(sounds like a great Dr. Seuss book title 😉 )
Be mindful that a SWOT analysis does have some limitations, both in business and in your personal finances. Here are a few to keep in mind:
- It can be highly subjective.Remember that YOU are the one creating your SWOT, and it has to do with YOUR finances, which carries an emotional attachment. The characteristics that you come up with can be easily influenced by your biases and preconceived notions. A friend or someone you can confide in will have a more independent mindset, consider including them in the process.
- Not all factors are created equal. Some characteristics have more impact on your financial goals than others, and the SWOT does not weight them accordingly. Keep this in mind.
- It can oversimplify complex problems. One of the SWOT’s greatest characteristics, it’s simplicity and ease of use, can also be a limitation in that it may be less effective in analyzing very complex financial objectives.
A FINAL WORD
You may be thinking that I kind of left things hanging with the Millers, and I did so intentionally. The purpose of this article was not to solve all of their problems, or detail each and every action item they came up with to tackle their money issues.
It was to demonstrate how anyone can use a SWOT analysis to achieve their personal financegoals, large or small.
With the SWOT completed, the Miller’s worked together to create actionable SMART goals, and set out on their path towards debt freedom and a life of savings.
Maybe we’ll hear from them again…you never know. 😉
If you decide to give the SWOT analysis a try with your own moneygoals, don’t hesitate to leave a comment or send me an email. I’d love to know how it goes!
