What we should change
The 2nd part of our financial plan – Understanding our activity
Identify Alternative Courses of Action
So far in the planning process, you have evaluated your current financial situation and established some SMART short-term, intermediate, and long-term goals. But your goals won’t be accomplished simply by creating them. You will have to devise strategies to help you bridge the gap from where you are today to where you would like to be. Just as there is more than one way to get from campus to your favorite ice cream shop in town, there is more than one route you can take to achieve financial success as you have defined it. The next step of the financial planning process involves identifying alternative courses of action that can lead you to your goals.
Let’s suppose you’re planning to study abroad next year. You’d like to be able to make the most of your experience while overseas and have enough financial resources to travel while abroad. You have decided you would like to have saved $4,000 by the time you depart in 15 months, specifically for your travel endeavors. Maybe your financial situation is such that, so long as it persists in its current form, you will be financially prepared for your travel adventures while abroad. But if you are like most college students, that is not likely.
So what are your options for changing your current situation to make this goal a reality? We’ll say you currently have an extra $1,000 in savings from the last summer job that you are willing to shift into your semester abroad travel fund. This leaves you with $3,000 to generate over the next 15 months, or $200 dollars a month you will need to deposit into your travel fund to reach your goal.
Thinking back to the budgeting and saving exercises from the previous chapter, perhaps you could decrease allocations to various expenses and shift more of your monthly income to save for your travel fund.
Recall the budget you created in chapter one. Maybe by limiting unnecessary travel and carpooling whenever possible, you could decrease your transportation expenditures by $75 per month. Perhaps by making more meals at home and limiting your new clothes purchases, you could cut your food and discretionary allowance allocations by $50 each.
Going to discount movie theaters could help you decrease your expenditures on entertainment by $25 per month. By implementing good savings habits, you may be able to free up enough of your current income to deposit in your travel savings so that in 15 months you will have reached your goal.
But maybe you have already applied the principles of the saving activity from chapter one to your current budget and it is little for you to cut. Adding a new job or hours to an existing job may help you increase your monthly expendable income so you can contribute the needed amount to your travel savings. At a minimum wage of $7.25 per hour, about 7 hours per week would help you earn your monthly $200 contribution you need to be making to your study abroad travel fund.
Generally, your alternative courses of action will fall into one of two categories:
reallocating existing resources, or generating new ones.
Existing resources can be utilized by earmarking current savings or shifting current allocations as in the example above. Generating new resources may require changing jobs to improve your wage outlook, taking on additional hours or investing your savings more aggressively to generate higher rates of return.
Select one of your short-term, intermediate, and long-term goals you established earlier. Consider the target date for accomplishing the goal and the monthly cost associated with the objective. Brainstorm three different strategies for reaching each goal, making use of a strategy from both categories discussed above.
Evaluate Your Alternatives
Once you have given serious thought to the options available that could lead you to your goals, you may begin to realize just how many options there are.
So, which courses of action should you take to achieve your desired goals?
The answer is: that depends. While the Declaration of Independence tells us all men are created equal, the same may not be said for the various financial strategies available to aid you in accomplishing your dreams. Therefore, before you can select strategies to complete your financial plan, you’ll have to thoroughly evaluate and weigh your options.
When assessing your options consider the pros and cons of each option. An option you are considering to increase your income may be moving income you are saving from a savings account to a stock portfolio. The change in investment methods may increase your rate of return received on your savings, helping you generate new revenue without having to work more hours. However, the stocks your savings are now invested in may also carry substantially more risk than did the savings account in which you previously deposited your savings. When evaluating your alternatives, also be sure to consider the opportunity costs of what you will forego to pursue your goal through each course of action.
Adequately evaluating each of your options can help to ensure you select the best course of action to accomplish your financial goals. Using the chart below, consider one of your goals from above and weigh two strategies you identified that could lead you to success.