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When I think of financial independence, I imagine that scene from Disney’s DuckTales when Scrooge McDuck jumps into a giant vat of coins. I want to be that level of filthy rich — where I can literally swim in my money.
Okay, so that’s mostly a pipe dream, because keeping my wealth in coins means missing out on those sweet, sweet market gains. And physics isn’t on my side. But the principle remains, I want to be filthy rich.
And to do that, I need a roadmap. It can be intimidating to start out, especially if you’re like me, in my mid-20s, making about $40,000 a year, with some debt and student loans.
But that’s why tools like the SWOT analysis are so helpful. They help you take stock of where you are right now and create a long view of where you need to be going.
Creating a SWOT Analysis for Financial Independence
Before you create your SWOT analysis for financial independence, you’ll want to collect some information. You’ll need the following
- How much you make
- A good idea of what your spending habits are
- An accounting of the debt you have
- Your savings rate
- How much you have in savings
It can take some time to track down all your information, and you might have to comb through bank statements to ensure you have the numbers correct. Having this information upfront will allow you to fill out the SWOT analysis fairly easily.
I like to organize my SWOT analysis on a sheet of paper that’s been divided into four squares. Each square has a different heading: Strengths, Weaknesses, Opportunities, and Threats. But you can organize it however you see fit.
You want to focus on what you excel at for this part of the analysis. Since we’re looking at ourselves through the lens of financial independence, this is going to involve your money-growing habits.
You’ll want to focus on all the things that you do well or that you see as an asset for financial independence.
Maybe you’re doing great at your 9-to-5 job, and you see that as an asset. If so, that would go in the strengths column.
Maybe you’ve got a side hustle that’s crushing it; mark it in the Strengths column.
I’m a freelancer, so my ability to make money doing what I love goes in this column. I also have quite a bit in retirement savings. I count that as a strength as well.
And if you’ve made a habit of saving money, that’s a strength as well. You’ll want to put the actual amount you have saved in this column as well. That’s a huge building block toward financial freedom, and it’s definitely a strength. You worked hard to collect that cold, hard cash.
Basically, anything that propels you toward financial independence goes in this column.
You’ll want to take a moment and congratulate yourself on what you’ve been able to put in this column. It’s a big deal. These are things you already have going for you. You don’t need to focus on them, because you’re already doing them.
Weaknesses are internal barriers that keep you from achieving your financial dreams. You’ll want to think about where you can improve your finances, the pressure points between you and your budget, and other things that obstruct your path toward financial independence.
This is where having a good idea of your spending comes in handy. I suggest going over your last three bank statements — the last three months of transactions — to see what your spending is like.
If you’re an absolute nerd like I am, you can create a pie chart to visualize your spending. I find it gives me a very quick visual of what I’m spending the most on. But just having a general idea of categories works well too.
My weak points are my pets, clothing, and eating out. I love all three equally. That’s a lie; I love my pets the most. And while it’s not bad that I spend money on the things I love, I need to make sure it’s within my budget. If I notice I’m overspending in one category, that’s a weakness.
You’ll also want to categorize your debt in this section as well, because it’s hindering you from living your best life.
Itemize your credit card debt, car notes, student loans, and any other debt you might have. Some people include their mortgages in this category, and some leave their mortgages out of their SWOT analysis completely and treat it as a bill.
Overall, this section should look at your spending and debt and show you where you need to be careful.
The goal of this section is to put together a list of future-oriented things you can try to increase your cash flow. You can approach this category in two ways. But both start with moments in your life when you create opportunities for yourself, financially speaking.
On the one hand, this is a great time to run a fine-tooth comb through your budget. Look for areas where you can decrease your spending and increase your savings. Even $20 or $30 a month can start to add up over the years.
For me, I can make an effort to cook more and eat out less. The money I save can go toward my financial independence fund. I can also build a capsule wardrobe I adore, so I stop spending as much a month on clothing.
Look for small changes that are going to make a big difference, based on what your pressure points are.
On the other hand, think about money-making opportunities. Do you have any skills you can monetize? Starting a side hustle is a great way to add a little extra cash flow into your life.
I’m a writer, so for me, it’s easy to start pitching more clients and write more articles a month. Even one or two extra articles is $300-500 in my pocket.
But you could do almost anything. If you want something more flexible, you could be a TaskRabbit or drive for UberEats. Or, if you prefer set hours, picking up a part-time job doing something you love could give you extra income.
As important as it is to strategize opportunities, it’s just as important to identify obstacles that could crop up. Think about anything that could harm your finances or affect your growth.
You’ll want to identify both internal threats and external threats. It’s time to pull out your Sherlock Holmes magnifying glass and peer into your future.
Because I’m a freelancer, I know not every month will be successful. I need to plan for moments when the money isn’t flowing. Right now, I don’t have a great emergency fund.
If I have an exceptionally bad month, I might need to rely on credit cards, and that’s a threat. Therefore, a huge part of my plan right now should be building up my emergency fund to prepare for those downturns.
You might feel like you’re in a tenuous situation with your job, or you might be struggling to make ends meet and know you have a few rough months coming up.
The importance of identifying threats is to help you create a plan that accounts for them. Everyone has threats to their goals and dreams.
Don’t skip on this step because you feel you’re bulletproof. Hubris will only harm you.
Putting the SWOT Analysis Together
Once you’ve completed this exercise, you’ll have a good idea of the strengths, weaknesses, opportunities, and threats you’ll run into throughout your financial journey.
From there, you can start thinking about your next steps. The SWOT analysis pairs exceptionally well with another tool called SMART goals, because they both help you think through your future.
My SWOT analysis was pretty clear on what I need to do next. My next steps are to double down and pay off my high interest debt and save up a six-month emergency fund. I’ll use a SMART goal model to determine the specifics of these tasks. After that, I’ll return to my SWOT analysis to reassess and see what my next steps should be.
And that’s the beauty of this tool. You can come back to it again and again to create the life you want to lead.
Not sure if you can achieve financial freedom, even after a SWOT analysis? Check out our Financial Freedom in Uncertain Times course.