What Are Your Financial Strengths and Weaknesses? Run a SWOT Analysis

by Ryan on February 23, 2010

One of the best ways to get a good idea of where you stand (in just about anything) is to run a SWOT Analysis. A SWOT Analysis is a strategic management tool that is often used in business to analyze a company, process, system, business opportunity, etc. But a SWOT Analysis can help you analyze other situations as well, including your financial situation, career, and more.

SWOT stands for Strengths, Weaknesses, Opportunities, and Threats, and running a basic SWOT Analysis is a good way to understand your current situation and help you create a plan that will account for weaknesses and threats and enable you to leverage your strengths and opportunities to help you reach your goals.

Example SWOT Matrix:

How to run a SWOT Analysis on your personal finances

Before you jump in, it’s important to define your financial goals; hopefully you did that as part of your financial mission statement. If not, now is as good a time as any. Defined goals are essential to measure progress and ensure you stay on the right path.

Once you have your goals and have started working on your financial plan, then you should take the time to run a SWOT Analysis to determine your areas for improvement and make sure you don’t start moving in the wrong direction. When doing the following exercise, consider Strengths and Weaknesses to be internal conditions and Opportunities and Threats to be external possibilities.

Note: This exercise does not need to take long; look at it like a brainstorming session and write down any and all possibilities that you come up with. You can reorganize them or scratch them from the list later. This exercise is also more helpful if you are tracking your income with a tool such as Quicken or an online money management tool.

Determine Financial Strengths

Look back at your financial mission statement and assess your current financial position to determine where you are strong and where you can stand to make improvements. A financial strength can be anything that positively reinforces your current financial situation or helps you get closer to achieving the goals you made in your financial mission statement. Areas to examine closely include not only income and debt, but positive monthly cash flow.

Helpful questions: What are the strong areas of your finances? Do you have a positive monthly cash flow? Are you paying extra on your debts? Are you debt free? Did your income recently increase?

Determine Financial Weaknesses

What is holding you back from reaching your financial goals? It could be debt, a lack of income or earning potential, or something else. Ask yourself these, and similar questions: Have you maxed out your income potential in your current job? Are you in debt? Are you upside down on a car or house loan? Are you living paycheck to paycheck?

Determine Financial Opportunities

Opportunities are actions that you haven’t yet taken, or at least haven’t yet maximized. There are almost always opportunities if you look for them, though sometimes they may not appear evident at first glance. Financial opportunities come in many flavors, including income opportunities, debt reduction, investments, reducing interest or fees, and more.

Example for income opportunities: Do you have a skill you can leverage into a paying gig, such as consulting, tax preparation, freelance writing? Do you have any hobbies that might bring in revenue? Some examples include arts & crafts, refereeing youth sports, writing, landscaping, woodworking, and more. Can you get a promotion at work or volunteer to work extra hours for overtime? What about investment opportunities?

Other financial opportunities: Opportunities aren’t just limited to more work, earning a promotion, or earning more money, it could also be selling items on Ebay or Craigslist, reducing your debt with a o% balance transfer or debt consolidation, eliminating exposure to poor investments, reducing investment fees, downsizing your house, buying a more fuel efficient car, etc.

Determine Financial Threats

You also need to list and address factors that threaten your financial situation. The economy often has a direct affect on the job market and housing prices and can often be a financial threat. Remember threats are external forces that you may not always be able to control. They key isn’t being able to control or eliminate each external factor (that would be impossible). The idea is to mitigate potential losses or external threats as much as possible. Because external factors aren’t always preventable, the idea is to create contingency plans to help you deal with unforeseen events. Some ideas to consider are a diversified investment portfolio or multiple income streams.

External factors to consider: Are you in danger of losing your job? Is your mortgage rate about to reset to a higher APR? What are the current economic factors that may affect your job/investments/income streams?

What to do with the SWOT Analysis

Running a SWOT Analysis is only half the battle; by itself a SWOT Analysis doesn’t accomplish anything. You need to use the SWOT Analysis to help improve your financial/career/business situation to better handle internal and external factors that could affect you. The key is finding a way to leverage your strengths and opportunities and mitigate weaknesses and threats to solidify your financial health, or even better, turn weaknesses and threats into strengths and opportunities.

Once you have some ideas, create some strategies to improve your overall financial plan and if necessary incorporate them into your financial mission statement.

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Writing a Financial Mission Statement

by Ryan on February 22, 2010

Do you struggle with financial decisions such as how much to invest, paying down debts, spending money on entertainment, or other items? Do you and your spouse have problems communicating what is important to you when it comes to your finances?

If this sounds familiar, then you need a financial mission statement.

What is a financial mission statement?

A financial mission statement is your household’s plan to help you reach your financial goals. At the minimum, it should reflect your goals, visions, and philosophies. A well-written financial mission statement will convey what is important to you and whoever helps you manage your money. It will act as a roadmap to help you quickly and easily make financial decisions that you previously may have wavered over or argued about. A good financial mission statement will state where you want to be, and how you will get there.

How to write your financial mission statement

Before you sit down in front  of a blank sheet of paper, it helps to have an idea of what you want to accomplish financially. You may have a hard time sitting down and writing a coherent document from scratch in one sitting, particularly if you manage your money with another person. I recommend having an open discussion about your finances, values, goals, hopes, and dreams before writing your mission statement. It will make your job much easier to accomplish.

On style and length. Before we go further, I should note that there is no right or wrong way to write a financial mission statement; write what is important to you, and in a format that works for you. However, it should also be noted that the most effective mission statements are concise. Your mission statement will have a greater impact and motivating factor if it is easy to remember and communicate to another person.

Put thought and discussion into your financial mission statement

It is important for everyone involved to be on the same page before you start writing your financial mission statement. What one person may consider trivial could be extremely important to another individual. Before putting pen to paper, talk about your goals, dreams, etc.

Keep in mind this important fact: we have a finite amount of money at our disposal. That means you need to make decisions based on your needs, wants, and priorities.

Do you want a huge house, or are more affordable house payments and more frequent vacations more important to you? Do you want a luxury car, or would you prefer to have more money in your retirement account?

You can’t have it all, but you can have a lot if you plan for it.

What should be included in your financial mission statement

Your mission statement should reflect your values and address the purpose, goals, and principles that guide your decisions. Most missions statements should address at minimum, these three topics:

  1. Purpose or opportunity
  2. Plan of action (how you will address the opportunity)
  3. Values that guide your actions

For example, if your goal is to build wealth you would want to create a mission statement with the “purpose of building wealth by maximizing our retirement plan through monthly contributions in investment opportunities that reflect our beliefs.”

If your goal is to get out of debt, you might consider writing something along the lines of “The Smith family goal is to completely eliminate our debt by the year 2013 by aggressively making extra payments to our creditors and still maintaining a strong quality of life.”

Obviously you can fill in the blanks by adding more detail or including the next stage goal as well, especially if it helps motivate you to continue with your present course of action. For example, “pay down our debts so we can begin aggressively saving for retirement/home purchase/vacation, etc.” Adding a timeline or other specific details is a great idea and can help you keep on track by giving you something to measure.

Write it down, but don’t be afraid to change it as your needs change

Your financial mission statement should be written down so you have a physical reminder of your goals and an agreed upon plan of action. Conversations are easily forgotten, and sometimes it is easier to make an empty agreement than it is to face difficult decisions head on. The physical reminder of your financial mission statement gives you a something to reference when you aren’t sure what to do and it helps make the decision making process easier because it will automatically eliminate many of the possibilities from consideration.

But a written document doesn’t mean it is written in stone. Your needs, wants, and priorities will change as your life changes. What was important to you a year ago may not seem as important to you or your spouse now. Major life events may dramatically change your situation. The birth of a child, job loss, an inheritance, starting a business, or other major events are all great reasons to take a fresh look at your financial mission statement and adjust it to your new situation.

This is your statement

Any guidelines and tips I offer here are just that – hints to make it a little easier to get started. And getting started is the hard part. But once you open those discussions and determine what is important to you, the rest is easy. Create a financial mission statement that meets your needs, and the rest will take care of itself.

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Beware of Job Hunting Scams

by Ryan on February 20, 2010

The FTC recently created a new section of their website to alert people to some of the job scams going on around the country. The folks over at the FTC want you to be aware of scam artists who promise a job, access to special job listings, interviews, or a way to make a big income working from home… all in exchange for paying a fee or sending them your credit or debit card information.  Many of these “opportunities” are nothing more than scams that will leave you with no job and a lighter wallet. I recommend this video, “Don’t Pay for a Promise,” for more information about safeguarding yourself.

In addition, the FTC and law enforcement officials are cracking down on these scams. You can find more information at ftc.gov/jobscams or their recent press release which details some of the recent actions by law enforcement officials and the scams they have shut down.

Job Scams Video via Federal Trade Commission

Another video and an interview

While we are on the topics of videos, I recommend checking out Lemonade: It’s Not A Pink Slip, It’s a Blank Page over at Bargaineering.com. This video covers the tough topic of losing your job. However, this video is different. It takes the view that being fired isn’t always a bad thing. It’s not always peaches and cream, but sometimes what you think is the worst day of your life can be a blessing in disguise.

An interview over at Your-Roth-IRA. Cash Money Life: An Interview with Ryan. One of Britt’s questions about military members led me to write an article about the advantages military members have when opening Roth IRAs. Consider this article essential reading if you are a military member and check out the interview for a little more information about me, the sites I run, and my thoughts on investing. And check out the rest of the site while you are there too. Britt runs a tight ship and there are dozens of great articles about Roth IRAs.

Recommended personal finance and career articles

This week’s carnivals

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Comparing 15 Year and 30 Year Mortgage Terms

by Ryan on February 19, 2010

A few years ago the real estate market was running wild and real estate brokers and investors did everything they could to get in on the action. That included using exotic mortgages with variable lending terms, interest only loans, and other unique arrangements, such as the commonly referred to “liar’s mortgage” where lenders didn’t actually verify borrower income. All of these exotic financial arrangements helped create a real estate bubble. Mortgage terms adjusted upward, people couldn’t sell their “investment” properties, and the real estate bubble burst, which led to depressed housing prices and hundreds of thousands of foreclosures.

Now we are seeing a return to the basics when it comes to mortgage lending: the 15 and 30 year mortgages. You can often get other terms if you ask, but right now most lenders prefer to offer a fixed rate 15 year or 30 year before offering other options. The purpose of this article is to show you the pros and cons of a 15 year and 30 year mortgage, hopefully giving you the information you need to choose the best loan for your situation.

Shorter terms equals lower interest, but monthly higher payments

Before we run any numbers let’s look at a basic principle of finance. Assuming you are borrowing the same amount of money at the same interest rate, the following will always be true: Longer terms equal lower monthly payments, and shorter terms equal higher monthly payments. But it also means more interest paid on longer terms and less interest paid on shorter terms.

Based on this principle, a 15 year mortgage means you will pay more per month, but you will pay off your loan off with less interest and in less time vs. a 30 year loan which comes with lower monthly payments, but longer terms and more interest paid over the life of the loan.

How much interest will you pay on your mortgage?

One of the first things we need to look at is how much you will spend on your house. Take the total amount borrowed and the interest rate and plug it into a mortgage calculator, such as this one from Bankrate.

This will give you the total monthly payment, excluding property tax and homeowners insurance. Note: Before you sign a loan, your lender is required by the Truth in Lending Act to provide you a statement that shows the total amount if money you will pay over the course of the loan if you make each payment as prescribed by the amortization schedule. (Take a look at how much of your money is going toward interest each month. The final number may be shocking!).

15 year vs. 30 year mortgage – Running the numbers

Looking at the final numbers on the amortization schedule, the 15 year mortgage is a clear winner over a 30 year mortgage. As an example, a $250,000 loan at 5% interest results in total payments of $355,857.13 on a 15 year mortgage and $483,139.46 on a 30 year mortgage – a difference of $127,282.33!

Example 15 year and 30 year mortgage payment comparison:

15 year mortgage ($250,000 borrowed @ 5%):

  • Monthly payment: $1976.98
  • Total interest paid: $105,857.13
  • Total amount paid over life of loan: $355,857.13

30 year mortgage ($250,000 borrowed @ 5%):

  • Monthly payment: $1,342.05
  • Total interest paid: $233,139.46
  • Total amount paid over life of loan: $483,139.46

The 15 year mortgage looks like the best option, however, the difference in the monthly payments is $634.93,which is large enough to make that loan unaffordable for many people. (again, these numbers do not include the property taxes or homeowners insurance, which should be the same, regardless of the duration of the loan).

When a 30 year mortgage beats a 15 year mortgage

In most cases, the interest rates on a 15 year mortgage will be slightly lower that that of a 30 year mortgage, giving yet another reason the 15 year mortgage can be a better option that a 30 year mortgage. But there are times when a 30 year mortgage is better than a 15 year mortgage, and it boils down to one word: flexibility.

A 15 year mortgage locks you into a higher monthly payment than a 30 year mortgage. Even if you can make the larger monthly payments that come with a 15 year mortgage, a longer term may offer your more financial flexibility.

Using the example above, the difference in the payments was $634.93 per month. That difference in cash flow may be enough to cripple you should something happen to your current financial situation – for example, job loss, major home repairs, major medical bills, or other unexpected expenses may arise that could cause short or long term financial difficulties.

The lower payments that come with a 30 year mortgage may increase your cash flow and help you with other financial goals, such as paying down debt, contributing toward retirement, saving for college, or just giving your more month to month financial flexibility.

Remember, you can always pay extra on your mortgage each month, but you can’t always pay less.

Which is better – 15 year or 30 year mortgage term?

If you would have asked me a couple years ago, I would have said that the 15 year mortgage term was better by far. The interest rates are often slightly lower and you end up paying less interest overall because you make fewer payments (sometimes hundreds of thousands less in interest).

But if I were to buy a house today, I would choose a 30 year mortgage and make larger payments if I could afford to pay the difference. That way I get the same effect of a 15 year mortgage and can pay it off in roughly the same amount of time, but I also have the option of scaling back my payments if I need the additional cash flow for other needs. The added flexibility is well worth the longer term and slightly higher interest rates.

What are your thoughts on mortgage terms? Do you prefer 15 or 30 year terms?

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What if You Contribute Too Much to a Roth IRA?

by Ryan on February 18, 2010

Roth IRAs are a great investment tool for retirement planning. But there are certain rules regarding Roth IRA contribution limits that you need to be aware of. For example, contributing too much to a Roth IRA may subject you to additional fees (and unwanted attention from the IRS).

A common example is contributing too much to a Roth IRA based on your income level; the ability to contribute to a Roth IRA begins to phase out at higher income levels. Contribution limits decrease once your Modified Adjusted Gross Income (MAGI) rises above $105,000 for single filers and $167,000 for joint tax filers. You can no longer make Roth IRA contributions once your MAGI rises above $120,000 or $176,000 for joint filers.

Many people can easily plan around these contribution limits because they have a good idea what their income will be from year to year. But sometimes situations arise that make planning Roth IRA contributions a little more difficult. A raise or bonus can easily change the income qualification for some people.

Planning is essential, however, because contributing too much to your Roth IRA may subject you to a 6% excise tax if you don’t take care of the situation in a timely manner. Let’s look at some situations that could cause excess Roth IRA contributions, how you can effectively plan Roth IRA contributions and what to do if you contribute too much to your Roth IRA.

Ways you can contribute too much to your Roth IRA

Earning too much money to be eligible for Roth IRA contributions isn’t the only way you can contribute too much to your Roth IRA. You might, for example, have less earned income than your Roth IRA contribution. Another example could be contributing too much money to your Roth IRA by miscalculating your contributions or contributing too much across more than one IRA account. The IRS treats all IRAs as one account, which means the IRA contribution limits apply to both Roth and Traditional IRAs. (More information about handling multiple retirement accounts).

Planning Roth IRA Contributions

Getting your money in the game early is usually a great idea when investing, and many people like to contribute to their Roth IRAs early in the year so they have a longer period for their money to work for them. Some people prefer to make Roth IRA contributions throughout the year via dollar cost averaging. Both are great ways to make sure you get your money working for you and max out your Roth IRA contributions, if you know you will qualify for a Roth IRA.

Unfortunately, it isn’t always possible to know how much you will make in the course of a year, and some people may find that their income level exceeds the limit which allows them to contribute to a Roth IRA – only they don’t find this out until after they have made their Roth IRA contributions for the year. It might not seem like a big deal, but contributing too much to a Roth IRA can subject you to a 6% excise tax each year the funds remain in your account. Ouch! But don’t pay that tax just yet. This is a relatively easy fix.

Correcting Excess Roth IRA Contributions

According to the IRS Form 590, the 6% excise tax that applies to excess Roth IRA contributions can be avoided by withdrawing excess contributions or recharacterizing them as Traditional IRA contributions. Either action must be completed before the tax deadline, including extensions. There is a third option for correcting excess contributions, assigning your contribution to a future tax year. However, you may have to pay the 6% tax for the tax year your excess contribution is in your Roth IRA. More information about each option is below:

  • Remove excess contributions. The 6% penalty tax can be avoided by withdrawing the excess contribution and any earnings or losses by the tax deadline, including tax filing extensions. Any earnings will be subjected to income taxes and a 10% early withdrawal penalty unless they are a qualified distribution (see Roth IRA withdrawal rules for more information).
  • Recharacterize excess contributions as Traditional IRA contributions. Recharacterize is a nice word for “reclassify.” Basically, you can tell the IRS you wish to change the excess Roth IRA contributions to Traditional IRA contributions, assuming you qualify for a Traditional IRA.
  • Apply excess contributions to a future tax year. You can apply excess Roth IRA contributions to a future tax year, provided the amount you apply to the future year is less than the maximum allowed for that year. The downside to this option is that you may have to pay the 6% tax for the current year.

Which option is best?

This is one situation where I recommend visiting a tax professional and working closely with your IRA custodian. Each individual will have a unique situation, so it is best to contact a tax professional who can offer you specific corrective actions based on your needs. In all cases you will want to resolve this problem before the tax filing deadline so you can hopefully avoid paying any fees or penalties.

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