CFO of Life #34: How to Make a Killer Action Plan for Your Financial Goals

To do and what to do, that is the question!

It is always important to take action, but you need to have an idea of what you are going to do. Otherwise, you will be lost in the vast nothingness of all the possibilities. Don't get me wrong, you can always start with an action and then develop a plan, but that is not the optimal way to go about your long-term goals. To do so efficiently, you should establish a great action plan from the get go.

But what is an action plan? Well, it’s a plan of all the actions that you want to take in order to achieve a certain goal. It can be extremely descriptive or it could be simply prescriptive. Regardless of the type, it is going to serve as your guidance and reminder of what to do and what is next. Think about it as a vague to-do list with set timeframes and well-defined KPIs.

I hear you saying "Why do I need an exact plan?". Well, failing to prepare, would definitely prepare you to fail. Still, we must admit that having a plan doesn't guarantee that you will succeed 100%, but it makes your success significantly more likely! In fact, it is up to 10 times more likely for you to achieve your goal in this way.

Before you start planning, you must determine a few things:

1. Your “North Star” / End Goal
2. Your Starting point
3. What timeframe do you have to achieve this
4. And what approach do you want to take
5. How much do you want to save from your income

While we have explored all the other parts, we never looked at the “approach” towards setting up financial goals. Essentially, there are two ways to look at this, using the Equal progression or the Rapid progression of the Hockey Stick Approach.

Equal progression is simply dividing the end goal into equal proportions for each period and not accounting for ups and downs. This is extremely helpful for repeated tasks/projects that have clearly defined boundaries.

Where the rapid progression is the one that expects the least amount of success in the beginning it comes with compounded growth towards the last periods. This makes it ideal for any financial goal that you want to pursue. And that is why we would use this for our example.

Now, let’s get the rest of the requirements settled before we start drawing up a plan.

Assuming a 5% dividend yield, you will need to accumulate $2.4 million in assets to generate $120,000 in dividend income annually. To achieve this goal in 20 years, you will need to save approximately $80,000 per year or $6,667 per month if you are aiming for an “equal approach”.

But since we start from 0$ and with only $2,000 of salary, that would be really hard to do. Just imagine, if you save 20% of that salary for the next 20 years, you will have only $48,000 at the end of your goal. That accounts for just 2% of your goal.

Now, if you do invest that money at the reasonable 5% expected investment return, you will have $82,207 at the end of the 20 years. This is another $34,207 extra towards your goal which is now 3.4% of your goal. It’s not a lot, but it is significantly better than what you can expect by just saving. I shouldn’t forget to mention that even if you save and invest all your money, you will get to $822,067 in 20 years or just shy of over 34% of your goal.

That should show you how big the goal is and simultaneously, how any small change can make a huge impact on your financial goals. Let’s start planning and then doing it!

First 5 years or the Forming stage for your goal

This is when you set up your first steps like learning how to budget, when and how to invest and sticking to your savings goal. This is also when you can experiment and try new things. Also it is the best time to learn as much as you can and earn as much as you can.

Personally, I am at the tail end of this journey. And it has been really hard, but quite rewarding. The toughest part was actually understanding all of those moving parts and how they work.

Now, almost at the end of the 5th year, I have managed to set up a great support structure for myself and I am happy with my progress. Although I have managed to get only 1.5% towards my goal, that is still a huge success. Given that I started at ￡0 at the beginning of the period.

Here, it is all about balancing everything. You should focus on achieving your yearly milestones, as those would be the bedrock of your future success. To make this clear, let me show you a few of my milestones:

By year 1, I learn to save 20% of my salary

By year 2, I should learn to budget

By year 2, I start building up a 6-month emergency fund

By year 3, I have a 6 months emergency fund

By year 5, I should be able to stick with a budget

By year 5, I should regularly save at least 20% of my salary

By year 5, I should have 12 months of emergency funds saved

Still, if you think that it would all be rosy, that’s not attainable. There would be major unplanned things that will happen and try to keep you away from your goals. They will throw a monkey wrench into your future, but you should use that to learn and improve. Examples of major setbacks are unexpected medical problems, layoffs, changes in economic cycles, military conflicts or any event that interferes with your plan.

During stage 1 you should:

1) Set up a budget

2) Learn to save 10-20% of your budget

3) Create some milestones and track your progress towards them

4) Start investing

5) Embrace the setbacks and learn from them

The Second 5 years or the Storming stage?

This will be the time to get yourself even better grounded and motivated to achieve your goal. You should keep on pushing to surpass all the milestones from the last stage, but you should also try to improve them. In this stage, it is vital to focus on increasing your earning potential and on keeping up your spending well within your plan.

Focusing on increasing your earning potential is vital, as this would make or break your success. So for those 5 years, and the following 10, the biggest impact you can have on how “quickly” you will get to that goal is by how much you earn. Look at it as adding fuel to the fire. Adding another $100 to your investments every month will net you a potential return of $26,729 in 20 years. And it is crazy how quickly all those small sums would add up.

And if that is 20% of your total income, all you need to do is increase your salary by another $500 a month. Now it might not be that easy, but it is not unattainable. In fact, the more your salary grows, the easier it would be to get those additional $500 a month. Even if we are conservative, you can easily get from $2,000 to $4,000, or even $5,000 a month in 5 years.

Another important factor is to keep up your spending in check and this is going to ring true throughout the length of your goal for a multitude of reasons. One of them is to enable you to stick to that 20% monthly investment, and another one is to prevent you from lifestyle inflation. Having great control over this will enable you to prevent yourself from overspending.

And that is important, as the increase in your salary doesn’t have to necessarily correlate with a proportional increase in all your spending (i.e. lifestyle inflation). Just let the numbers convince you of how important this is.

If every year during those 5 years, you save an additional lump sum of $500, in 15 years you will have $1,039 more towards your goal. It’s not a lot, I know, but it will add up with all the other savings.

During stage 2 you should:

1) Continue to budget and control your spending

2) Work on increasing your income

3) Persist with your monthly investments

4) Keep on using milestones to track your progress

5) Work through any setbacks and learn from them

The Norming stage is the penultimate stage to your goal

While you should keep up budgeting and saving, it is key to also continue building up your income. With more experience, it will become easier to negotiate a higher salary and build upon your previous promotions.??

But one key thing that you should start doing at this time is to reinvest your dividends.

One of the best ways to accelerate your dividend income is to reinvest your dividends. By reinvesting your dividends, you can take advantage of compound interest and earn more dividends over time. Which would further speed up how quickly you get to your goal.?

Now, it would be unwise for me not to mention that this might be subject to some taxes. But that would be all dependent on where you live and how much you make from dividend payments.?

Another key thing to do is to frequently review your investment portfolio.?

Monitor your portfolio's performance and adjust your strategy as needed. Review your portfolio's performance regularly and make adjustments to ensure that it aligns with your investment goals and risk tolerance. As there are a lot of things that can quickly shift and drastically change your portfolio's performance.?

Regardless of that, the longer you have in the market, the better your returns will be. And that should be a great motivator for you to keep up investing, and not get tempted to start spending more.?

During stage 3 you should:

1) Start reinvesting your dividend income

2) Continue to work on increasing your income

3) Persist with your monthly investments

4) Keep on using milestones to track your progress

5) Review your investment portfolio and perform any changes if needed

The final stretch or the last 4th phase of Performing

As the final stretch of this 20-year marathon comes, you should not stop, you should push the hardest. Your habits should be well set up by now, and that should further propel you into success.?

At this time, you should be seeing the biggest returns on the time you invested, as your money continues to compound at a quicker and quicker rate.??

Hopefully, by the end of this marathon, you would have succeeded and achieved the goal. In fact, some of us would probably achieve it quicker than the 20 years. Still, there will be some people who will not manage to do so, regardless of their best efforts.?

During this final stage, you should:

1) Keep on pushing until the end of the goal

2) Start preparing for your final retrospective and for your next goal

3) Keep up with your milestones

4) Reap the benefits of your success

5) Embrace what you achieved

Retrospective:

No plan, project or any type of effort should be concluded without a good retrospective. It will allow you to understand what went well, what went bad and how to improve for the next time. That is gold dust, because it will give you all the shortcuts you need for the next round, but it will also tell you if you need to do something differently.

Here are some guiding questions that can help you get your retrospective done correctly.

If you were extremely successful and got to your goal earlier, you should definitely ask yourself:

Was my goal too small?

What else could I have done and how far away could have I pushed it in the case of stretching and rebalancing my goal?

What did I do well?

What went really wrong that I shouldn’t do again?

If you did succeed, but just in time, then definitely ask yourself:

What made it possible?

What did I do that enabled this success?

What can I do better next time?

What should I avoid doing next time?

If you didn’t complete your goal you can ask yourself questions along the lines of:

How far along would you have been if you didn’t try?

Why did you not succeed?

Was it self-sabotage or did you pick a huge goal that was almost impossible?

Was there something external that stopped you?

Remember to remain disciplined, consistent and optimistic throughout your investment journey, and you'll be on your way to financial success.

Failing to prepare, is preparing to fail. That is why, setting up a great action plan will help you maximise your chance for success. But just planning by itself will not do it, you would need to take action. So now that you have your plan "Just do it"!

Next week, we’ll look at 10 psychological approaches to how to stick to your action plans. Because the biggest problem with goals is that people just don't stick to them.

Thank you for reading! All comments and topic suggestions are highly appreciated. Post #34 in the series CFO of Life?

#si #personalfinance #CFOofLife

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DISCLAIMER:

This doesn't constitute financial advice. This is my personal approach and you should not take it as straight advice, but as an example of a strategy I have developed for myself. Develop an investment strategy that aligns with your investment goals, risk tolerance and time horizon. Consider diversifying your investments across different asset classes and investing in dividend-paying stocks with a history of consistent dividend payouts.