CESI Personal Finance Guide – Chapter 1: Strategic Planning

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Chapter 1: Strategic Planning

The Importance of Strategic Planning

When it comes to your personal finances, having a strategic plan is important. Think of it like having a blueprint. A blueprint is a plan of action and a key component of every successful endeavor. Whether you are building a house or creating financial security, a good blueprint or strategic plan is essential.

The Power of a Dream Defined

A strategic financial plan is an outline of the steps you will follow to achieve a specific goal. If you do not have a good plan in place, you might waste your time and resources. Without financial goals to work towards, your dreams may remain just that -- dreams.

Have you ever looked at your year-to-date income on a pay stub and wondered where all the money went? Spending without a plan can silently chip away discretionary cash in a very short amount of time.

Here is a practical example of this concept. Consider Randy, a single man in his mid-30’s who earned roughly $300 each week. Randy was constantly complaining about how impossible it was to save money. “If I could just make another $200 a week, I would be able to save money and plan for the future,” he often fantasized. Randy decided to earn a certification in his field which enabled him to qualify for a higher paying job. His weekly earnings jumped to $700. An impressive increase in resources! The investment in the certification program was certainly worthwhile. He had more than doubled his income!

How much would Randy be able to save now that he was making more money?  Within 8 months of starting his new job, Randy had not saved anything. He admitted that he was so excited about having the extra cash that he failed to focus on saving or planning for the future. With more money than he was accustomed to in his pocket each month, he failed to take the time to develop a plan or to create a financial blueprint. Instead of saving the extra income, he did what many people do and adjusted his standard of living up and spent the extra money he earned.

As luck would have it, within a year of starting his new job, Randy’s car needed major repairs. With no savings to cover the unexpected expense, Randy felt like he was right back to earning $300 a week again with no way to make ends meet.

That’s when it kicked in that he needed a financial strategy to follow.  Randy immediately began to track his expenses, constructed a budget and set financial goals. He set up an automatic draft to transfer 10% of his paycheck to a savings account. He was motivated!

Several months later Randy was comfortable with his financial strategy and confident about his ability to prepare for the future.

Randy’s experience highlights the importance of a strategic financial plan regardless of your income level. Good intentions lack substance when there is no strategy for accomplishment. In addition to providing direction, a financial plan is inspirational. Embarking on a definite course of action toward a goal inspires those who once thought their dreams were not achievable.

How to Create Your Strategic Financial Plan

Devising a strategic financial plan involves several steps:

First, it is necessary to identify what you want to accomplish—your goals. Buying a vehicle, paying off credit cards, going on a cruise, establishing a retirement account, remodeling an existing home, or putting a down payment on a new home are examples of financial goals. Write them down. The act of writing out your goals helps with the discovery process. Review each idea for practicality. Make sure they fit your lifestyle and personality. It’s important that the goal is meaningful to you so that you are willing to work towards it.

Next, categorize your goals according to expected completion times—short term, mid-range, and long term goals are all important. A short term goal is one that can be completed in less than a year. A mid-range goal may take 1 to 5 years to accomplish. If the anticipated completion date is more than five years away, you are working on a long term goal. A comprehensive financial plan typically includes all three types of goals. Once the goals have been established, you must determine the amount of money required to reach the finish line.

Perhaps one of your goals is to take a vacation cruise. After determining your destination and finding out the cost, set a target date to begin your adventure. An accurate review of your income, expenses and lifestyle will help to determine a date that is realistic for you. For now, let’s assume that your financial assessment indicates that you can comfortably save about $1000 per year, and that the cruise will cost $1400. This makes the cruise a realistic mid-range goal. It will take approximately 18 months at a savings rate of $78 a month to accrue $1400. Based on this information, you can determine a definite date to set sail.

The next step towards your goal is to create an action plan to achieve it. In the case of your vacation cruise, you would need a plan to deposit the required amount of money into a “cruise” account each month. By following your savings strategy, your dream will be a reality by the target date.

It is helpful to insert checkpoints along the way to assess your progress. You may decide to check your status every three months. If your plan calls for you to deposit $78 into a special vacation savings account each month, then you should have at least $234 saved at the three-month check point. If you have more than the projected amount, it is cause for celebration! You are ahead of the game!

However, if your balance shows that you have not deposited the required $78 each month, this is the time to examine your recent financial decisions to find out how or why you veered off course. Emotional spending, buying on impulse and habitual purchases are some of the most common reasons for getting off track with your financial plan. A legitimate emergency can impede your progress, but more frequently we miss the mark due to lack of restraint. It is common for many of us to “treat” boredom, stress or a case of the blahs with a trip to the mall. Many are unable to resist the assortment of candy bars and trinkets on display at grocery store check-out lanes. Some of us habitually get a cup of coffee at the corner gas station every day on the way to work.

Evaluate Your Progress

Fine-tune behaviors that are not helping you meet your goals or plan. If you discover that you are prone to automatic spending behaviors that have caused you to come up short, make a firm decision to become a conscious consumer. Curb the inclination to go to the mall when anxious or upset. Perhaps talking to a friend or listening to music would elevate your mood.

Be creative. Keep your goals in view. Be willing to make adjustments to enjoy a more rewarding future. Subject your spending habits to close scrutiny and you will find ways to shift your strategy into high gear.

With a clear strategic spending plan in place, you are well on your way to financial success!

In This Chapter You Learned:

  • The importance of having a financial blueprint or strategic plan
  • How to identify your short-term, mid-range and long-term goals
  • How to estimate the financial resources you’ll need to reach each goal
  • How to set a target date and determine how much money you will need to save each month in order to reach your goal by that date
  • The importance of evaluating your progress regularly and making adjustments as needed

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