Thursday, June 7, 2012

Using SWOT Analysis to Attain Your Financial Goals


I was recently invited to become part of "Project Be," a nonprofit organization based in Hong Kong that runs financial literacy programs for Filipino domestic workers. My first gig is on Sunday, June 10, where I'll talk about how to use the SWOT analysis tool to come up with personal finance strategies. To save time, I have decided to use this post to flesh out how I will approach the topic for the workshop.

"SWOT" stands for Strengths, Weaknesses, Opportunities, and Threats and is a commonly used tool for strategy formulation in businesses. It involves identifying the capabilities (i.e., strengths) and limitations (i.e., weaknesses) of the organization and determining how these capabilities may be used and limitations addressed to exploit opportunities and face threats from the firm's external environment.

This same analytical framework may also be used to arrive at strategies and specific courses of action that aim to achieve personal finance goals. The exercise thus starts with an articulation of "SMART"--Specific, Measurable, Attainable, Realistic, and Timely--financial objectives. This means "I want to be rich" is too vague and "I want to be a (US dollar) billionaire" may not be very realistic/attainable, and it would be better if you say "I want to amass 5 million pesos in assets in 5 years" or "I want to earn 20,000 pesos in passive income each month."

Once you have stated your financial goals, you would need to do a bit of introspection and identify personal strengths and weaknesses. Some examples of strengths include a good-paying, stable job, good communication skills, trustworthiness, an established network of contacts, and so on. Some examples of weaknesses are excessive buying compulsion and unfamiliarity with personal finance concepts.

Then take a look around you and identify emerging opportunities that you can exploit to achieve your goals and external threats that might make it more difficult for you to achieve your objectives. Some opportunities may be macroeconomic in nature, like the increasing confidence of global investors in the Philippines or low interest rates, or specific trends involving the supply and/or demand of/for particular products. In identifying threats, you can use Porter's Five Forces framework to identify the state of competition in your industry (if you're planning to put up a business, for example), possible threats from new entrants and substitutes, and how your business stands with respect to potential customers and suppliers.

Of course, the exercise does not end with just listing these SWOTs; you need to find a way to merge everything by coming up with specific courses of action to attain your objectives. As a guide, you can ask yourself the following questions:
  • How can I use my strengths to exploit available opportunities that would help me achieve my goals?
  • How can I use my strengths to face threats to achieving my goals?
  • How can I limit or address my weaknesses so that I can better exploit opportunities that would help me achieve my goals?
  • How can I limit or address my weaknesses so that I can better face threats to achieving my goals?
Please note that these guide questions all end with achieving your goal, which is the entire point of this exercise. Your answers to the questions should be in the form of "action statements" that lead directly or indirectly to achieving your financial objectives. For example:
  • I will save 10% of my monthly salary and invest these in equity UITFs.
  • Since I'm a good "people person," I'll try direct-selling XYZ Cosmetics, which are becoming really popular in our home town.
  • I will read more Investor Juan articles so that I'll learn more about how to manage my money.
Of course, these action statements are worthless unless you actually do them. I suggest you start with the third example, you can never go wrong with that. ;)

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