Strategic planning is commonly used in business to great effect. A 5-year strategic plan can work wonders for your personal finances. I explain why and how, with personal examples.
I’m sure you are familiar with this quote by Benjamin Franklin: “If you fail to plan, you are planning to fail” A remarkably simple but powerful message that will have you nodding in agreement. I don’t think there’s a single person I’ve met who doesn’t know how to plan for something they’re interested in: a holiday, a date, career e.tc but the key words I want to hone in on are ‘5 years’ and ‘Strategic’ These two additions make planning a bit more challenging, particularly when applied to a subject that many people find boring – personal finances.
The irony is that personal finance encroaches on almost every other area of life (e.g career, relationships, health) and therefore strategically planning our personal finances should be prioritised in order to maximise other areas of life. What do you want to achieve?
Save enough money to educate yourself and change career?
Save for your kid’s private school education?
Have enough money to free your time to care for a relative?
Eliminate all your debt in 5 years?
Buy a house?
Get married and have kids ?
Become financially independent?
Have enough passive income so that you can work part time?
Save enough to travel the world for a year?
Before I continue, I want to make a plea for you to start minding your business if you aren’t already……
Pretty Please – Mind Your Own Business
I’ve observed something over the years that seems absolutely bonkers to me. Super intelligent people will use their skills and knowledge to do amazing things at work and then for some strange reason won’t use just 10% of those skills to improve their personal finances at home. Like the economist that spends months building the perfect economic model for a company, but can’t be bothered to create a simple spreadsheet tracking income and expenditure in order to help save the deposit for a home purchase. Another example would be a group of employees engaged in strategic planning for a company – using tools such as PESTEL, SWOT e.tc (more on these later) but won’t use any of that when it comes to their personal finances. These are real examples by the way.
One common excuse I hear is that “I don’t care about money”. Yeah right. If this is the case, then I challenge you to give all of your next pay rise to a charity you care about. By the way, it’s the same people that start stressing and getting upset about not receiving a bonus or a £100 recognition award. Of course, they’ll tell you it’s not about the money – that they just want the recognition. Maybe money is such a dirty word and we are so delusional that it’s better to frame it as ‘strategic planning to increase your CHOICES’ For example, a strategic plan to have a quarter of your current income from passive sources within 5 years so that you have the choice to work part time in your job and part time for a cause you care about.
Another excuse is that “I’m too busy at work” Think about this statement for a second. You are SOOOO busy making your employer and shareholders rich that you won’t commit time to planning your own finances? Now don’t get me wrong: I’m not saying don’t give your best at work. That’s not what I’m saying. In fact I’ve made it my mission to strive to over-deliver in any work I do for clients and most will testify to this.
The magic of having a strategic 5-year personal finance plan is that it actually makes you more productive at work. It does something to your motivation: you’re no longer just coasting. I think this magic is even more powerful when the strategic plan is aligned to a PURPOSE that’s dear to you. I’d like to encourage you to move beyond minding your employer’s business and to start minding your own business AS WELL.
What is a strategic plan?
A strategic plan is just like any other plan you might have created. Except that this time you have to weigh all manner of UNCERTAIN internal and external factors and apply them to your plan. Having this plan then dramatically increases your chances of achieving it and even if you don’t achieve it you’ll most likely have gone a lot further than you would have if you didn’t have the plan. It’s great if you write down your plan and it’s great if that plan aligns with a bigger long-term dream. However, it doesn’t have to be fancy, particularly if it’s your first time developing one. Start with something simple.
For example, at the age of 19, I made a plan to buy my council flat. I didn’t have any money at the time as I’d just been rehoused having been recently cared for by a young persons homeless charity. The plan seemed very AMBITIOUS to me and I spent a long time thinking about it and talking to a few experienced people. I was aware of a few external factors. Tony Blair’s Labour government had reduced the maximum discount available to tenants under the Right to Buy scheme and further policy changes were on the horizon. I wanted to study pharmacy at Brighton university, but this would have meant giving up my council flat and so I went to a London university. Then there was the money issue.
How did I solve the money issue? I worked all the hours that I could find as night time security subcontracted to a large advisory accounting firm (PWC). 12 hours a night. I tried working at night and going to uni during the day but only lasted a week before I had to stop as I couldn’t cope and so I worked some weekends and ALL holidays including Christmas day. I’ve covered some of my strategies for living frugally here. In the end I saved up practically all of my student loan and used it as the deposit to purchase my council flat. Could I have done all of this if I didn’t have a plan in my mind? Possibly … but I’d like to think that the plan gave me the drive to see it through.
Why 5 years?
I suppose the planning time horizon could be longer or shorter than 5 years, but 5 years seems to be a happy medium between a long term future laden with uncertainty and a shorter term horizon, over which it might be challenging to plan and achieve something big. For example, many jurisdictions have governments with 4-year terms and so the policy leanings of the government could be factored into a 5-year plan. When investing in the stock-market, advisors typically recommend an investment time horizon of at least 5 years.
Having said that, I don’t think there’s anything wrong in having say a 3, 4, 6, or 7-year strategic plan so long as you have a plan for your personal finances that is in-line with your DREAMs.
Now I’m going to walk you through 8 steps to creating a 5-year Strategic plan
1. Reflect On Your Dream(s) and Visualise
…It was all a dream, I used to read Word-Up! magazine, Salt-n-Peppa and Heavy D up in the limousine….that’s a rap line from Juicy by Biggie Smalls (aka the Notorious B.I.G) I particularly like the chorus… “You know very well, Who you are, Don’t let ‘em hold you down, Reach for the stars……..
You see where this is going right? and I’m sure you’ve heard it before. The starting point is reflecting on your dreams and trying to visualise it as much as possible. It has to seem exciting to you and make you really want it. Click here to read an article I wrote to help with this reflection exercise. When reflecting on your dreams, you may also begin to think about your PURPOSE. This is a heavy subject, which I don’t know enough about but if you are lucky enough to have found your purpose, then aligning your dreams to it will probably make you unstoppable.
Once you’ve reflected on your dreams, you can then begin to work out how money can be used as a TOOL to support elements of the dream. This can then be worked into 5-year planning cycles to bring various aspects of your dreams into reality.
2. Identify Your 5-Year Objectives
Now that you’ve reflected on the bigger dream(s) and thought about how your personal finances can contribute to it, the next step is to identify objectives to work on over the next 5 years. You could start by asking three questions:
Where are you now?
This involves being very open and honest with yourself about your current financial situation. For example, if you are in debt, total up exactly how much you owe and write it down. If you are saving to buy a house, write down how long it will take you to save a deposit based on how you’ve been saving to date. If you’re thinking of investing in the stock market, assess your current level of understanding of how to invest.
Where do you want to be?
Consider what you’d like your life to look like in 5 years. Is there a car that you’ve coveted for a long time that you’d like to buy within 5 years? Are you tired of your current job/career and are hoping to have re-trained and started a new career? Would you like to get married and have a wedding within 5 years? Do you want to own 3 Buy to let properties in 5 years? Do you want to have moved to another country in that time? Do you want to save up for an expensive MBA degree in that time? Once you start thinking about your personal finance needs/wants, you’ll soon find that there’s a big list. Please write everything down and then begin to prioritise the list in order of what’s most important to you. Later I’ll explain how to frame these objectives in a way that’ll make you more likely to achieve them.
What do you need to do to get you there?
If your present self could talk to your 5-year future self, what would they say to each other? What specific changes would your future self ask your current self to make? You may also want to consider your current strengths and weaknesses (the SW of SWOT) to see if they align with the objectives you’ve jotted down. For example, say your current career is making you miserable and consuming all your time and one of your objectives is to transition to a different career within 5 years. Reflecting on your strengths and weaknesses may help you to work out what gaps in your skillset you need to plug to make this a reality in 5 years.
3. Use PESTEL to Make it Strategic
There are various business tools for strategic planning including SWOT (strength, weakness, opportunities and threats), Porter’s 5 forces and PESTEL analysis. I’ll focus on PESTEL analysis as I think it’s a really useful tool for thinking about how changes in the external environment might affect your plans. PESTEL stands for Political, Economic, Social, Technological, Environmental and Legal changes. I’ll take each one in turn:
The government we elect make decisions on behalf of the whole country and their policy leanings are influenced by their base. It’s important not to switch-off just because your preferred political party is not in office. Like it or not, your personal finances will be affected to some degree by the politics of the day and since political parties can stay in power for decades, you need to keep your eyes and ears open to what they’re proposing and how they might shape your 5-year strategic plan.
Income tax, corporation tax, monetary policy, grants, industrial policy, education and training, ISA savings thresholds, pension rules and allowances e.tc. These are all shaped by government. For example the Budget of 2021 revealed a mortgage guarantee scheme to enable all UK homebuyers to secure a mortgage up to £600k with a 5% deposit, a freezing of income tax personal allowance and higher rate thresholds until 2026, corporation tax increases to 25% for businesses with profits over £250k from 2023 and a host of other measures.
There’s a lot more detail in the budget and it’s a case of eyeballing the link above (just 3-4 pages long) and reading between the lines to understand the direction of travel and what this means for your 5-year plan. Say you were drafting your 5-year plan just when a political party was coming to the end of their term and you weren’t sure if they’d win the next election. You could have a look at the different parties’ manifestos to get a SENSE (nb – don’t be naïve to think they’ll actually deliver) of their likely direction of travel once they are in office. All parties will usually have a one-page summary on their website, which you could read at the very least. Here are three examples of times when I’ve had to factor the political environment into my plans:
Earlier I mentioned having to set a deadline for executing the Right to Buy my council flat due to restrictive changes on the horizon. Reading it on paper may give you the impression that it was an easy decision but it really wasn’t. I had two friends who I tried desperately to convince to execute at the same time I did. The good news is that both eventually did and are super happy with the results, but they missed an even bigger discount.
Early in my career as a pharmacist, I had plans to open up a chain of high street pharmacies with a focus on delivering clinical services traditionally delivered in other settings. However when I investigated further, I realised that the wind of change was moving towards deeper and deeper government cuts to the pharmacy budget. Fast forward over 10 years later and the cuts have become such a problem that many pharmacies have had to close
George Osborne was Chancellor during the David Cameron government of 2010 to 2016. He embarked on an austerity drive to try to balance the books after the financial crisis of 2008. This meant a policy of cuts to various services. Furthermore, he introduced a raft of anti-landlord changes. I had to make quite significant changes to my plans as a result. I often joked about doing a Cameron on my personal finances – meaning really cutting back.
As your estate gets bigger and bigger, you’ll find that you’d need to pay more attention to the impact of politics on your plans.
This involves considering the current and future state of the economy. You can look at specific metrics such as Gross Domestic Product (GDP), inflation, interest rates, unemployment levels as well as a general sense of where we are in the economic cycle and stock market trends. An example would be the impact of runaway house price inflation on the size of the deposit one needs to save. This would mean having to adjust the savings target upwards if saving for a deposit for a house.
Another example is making a decision on whether to fix your mortgage for 2, 3 or 5 years. Your decision might be guided by anticipated income changes, your need for certainty over the fixed period and how you think the Bank of England base rate might change in that time.
Think about the social and cultural changes over the last 10 decades. The 1960s for example were quite different to the 70s and 80s and the 2000s are different to the current decade. The differences are visualised in the fashion of the period and can be heard in the music. Social trends are influenced by a variety of the other PESTEL factors including politics, the media, cultural diversity and technology.
An obvious example would be if I was planning on starting a lifestyle business (i.e. a side hustle to generate more income over the next 5-years). Looking at social trends and how people live could help me to discover their unmet needs/dissatisfactions and to consider how I could develop a service to meet those needs. In the property investment community, there’s been the question of whether changes in work patterns brought on by the Covid-19 pandemic will have a temporary or permanent shift in demand for houses with gardens and work-from-home spaces. These types of questions might factor into a financial plan to purchase a Buy to let property within the next 5 years.
As part of the move towards a sharing economy, facilitated by tech and apps, there could very well be a future in which fewer and fewer individuals own certain items and resources are shared by groups of people e.g. one lawnmower shared by 10 households.
The pace of technological change over the last 50 years has been insane, when compared to the previous 1000 years. Current signs are that this pace of change is set to continue and therefore it’s good to factor potential emerging technologies into your financial plans. For example, one could draw up a plan to invest £500 a year into the stock market via an ISA for 5 years and decide to invest in a basket of leading technology stocks. There seems to be an app for everything nowadays and so a side hustle business plan could include plans to leverage this technology to improve customer experience.
Technology can also wreak havoc on your personal finances and a good example is the impact of technological changes on traditional jobs. An app or computer program or artificial intelligence can quickly make your role redundant or reduce the demand for your services. Think UBER and driverless cars vs cab drivers; think Amazon vs high street retailers. I’m sure you can think of other examples. It’s really important to stay nimble and build a career change into your plans if necessary.
Earlier, I mentioned that high street pharmacies have been facing government cuts for over a decade. Well, another threat to the traditional business model is the entry of Amazon, which recently secured ‘Amazon Pharmacy’ trademark in the UK. What does this mean for high street pharmacies and the staff that work there? Would new job opportunities emerge or is it time to plan a move to another sector of pharmacy practice?
We love planet Earth don’t we? It’s our only home at the moment pending country alliance or billionaire (Elon Musk, Jeff Bezos, Richard Branson e.tc) space explorations and so we need to take care of it. Environmental considerations should also be factored into your strategic personal finance plan. Say you planned to save up to buy a car. You might consider what government grants are available for electric cars and when they expire. You might consider when the government plans to ban diesel and petrol cars and the impact on the resale value of your car if you were to buy it. You might even consider the likelihood of driverless cars coming to the market anytime soon.
A similar thought process could go into plans to refurbish your main home or investment property, checking to see if there are any current or planned Green Homes Grants by the government. Ethical investing in green stocks seems to be on the rise and this is something that you might factor into your plans to invest in the stock market
Making your financial plan strategic also includes considerations around legal changes on the horizon. An example is the raft of legislative changes made to residential lettings, which Buy 2 let landlords need to have gotten on top of – with further proposed changes afoot.
4. Scenario Plan
Having prioritised your objectives and done a bit of strategising using the PESTEL tool, it’s time to scenario plan various options for meeting those objectives. Kind of like a game of chess, think about:
The best way of meeting your objectives given the resources you have
Things you are certain about and those you are uncertain about
The risks associated with your plans and how to mitigate those risks
Back up options and back ups for your back ups
One common risk in all financial plans is the risk of death. Sorry to be morbid but this is the sad reality of life. Therefore it’s important to put in place the right insurances such as life insurance and/or income protection insurance so that loved ones are taken care of if something was to happen to you.
5. Make it SMART
I can’t emphasise enough how important it is to set GOALs for yourself in order to achieve your personal finance plans. Goals are super important for giving you a sense of direction and clear focus. Goals also increase your motivation. I recommend reading Arnold Schawarzenegger’s book (Total Recall: My Unbelievably True Life Story) to see the power of goal setting.
Smart people have done a lot of research over the years and shown that setting S.M.A.R.T GOALs will help you focus your effort and increase your chances of achieving your goals. Here’s an example of a goal to meet the objective of saving £10,000 towards nursery fees in preparation for having a baby in the next 5 years:
SPECIFIC: I will invest £2,000 into my stocks and shares ISA every year for 5 years.
MEASURABLE: I will invest £167 a month. I will check my progress every quarter.
ACHIEVABLE: I earn £30,000 a year and £167 a month is not too painful for me to invest every month.
REALISTIC: My job is relatively secure and I don’t foresee any problems over the next 5 years. I don’t envisage any changes to my lifestyle.
TIMELY: I will research which stocks and shares ISA to invest in during the first two weeks of April and make a decision. I will set up my stocks and shares ISA on Friday 23rd April. I will set up my direct debit on Saturday 24th April 2021 and £167 will come out of my account every first Monday of the month
6. Put it in Writing
THINKING about all of this stuff is a great start and would probably get you much further ahead than you would have gone without the thinking. However, if you’d like to take it a step further and increase your chances of success, it’s a great idea to WRITE it down as well. You can choose if you want to use pen and paper or a word document or something else. It can be on your tablet, computer or phone. There’s something about writing things down that makes it more real. Also, I’m sure you’ll agree that it’ll be very difficult to do all the thinking recommended above and to hold all the ideas and thoughts in your mind at the same time. Writing it down allows you to use tools like mind maps to organise your thoughts.
I’m amazed at how quickly I forget things. Writing your thoughts down allows you to effortlessly re-visit your ideas and goals at a later date without having to use your brain to recall everything.
7. Tell One or Two TRUSTED People About it for Accountability
I might write a blog article on why I think that most of us actually NEED a boss at home. I think part of the reason why we are more likely to deliver on goals set at work is that we are held to account by our bosses and/or work colleagues. The same goes for education – no one likes the feeling of failing so it pushes us to study for exams. I know it may not be within your comfort zone to tell a close friend about your plans, particularly since it’s a subject that few people find comfortable talking openly about. But I implore you to try it at least once. You don’t have to go into the detail with your trusted friend/partner. It could just be topline – like I’m going to buy one property every year for 5 years
8. Monitor Your Progress
Your strategic plan should include time for reflection on your progress. This could be once a year. This would involve reviewing your performance to date. Have you done what you said you were going to do? Review the objectives and goals you previously wrote down. Do you need to make any tweaks based on new information?
“Life is what happens to you while you’re busy making other plans…” is a line from John Lennon’s song Beautiful Boy (Darling Boy). You’ll need to be prepared to adapt your plans to unanticipated major life events.
From personal experience, I know that a 5-year strategic plan really can get you to where you want to be faster. I’ve outlined how to set objectives and how to make your plan strategic but your plan doesn’t have to be that elaborate. Even the simplest plan is better than nothing.
So… go ahead and start your plan